We expect PMETAL’s 4Q21 results to come in at a record high with a net profit of between RM330m (+16% QoQ, +100% YoY) and RM370m (+31% QoQ, +125% YoY). If met, this would bring FY21’s sum to RM1.07-1.11bn, which is more than double vs. a core net profit of RM479m in FY20. We are expecting a further QoQ spike in 1Q22 earnings, due to soaring LME aluminium spot prices. We highlight that aluminium spot prices have breached the USD3,000/MT level. Maintain BUY with an unchanged TP of RM7.25 (25x P/E on FY22F EPS).

A strong 4Q21. PMETAL’s 4Q21 results are tentatively scheduled for release on 25 Feb. We expect core earnings for the quarter to come in at a record high – between RM330m (+16% QoQ, +100% YoY) and RM370m (+31% QoQ, +125% YoY), barring any unforeseen swings in cost structure. This will be driven by the following reasons: (i) higher LME aluminium spot prices, averaging at USD2,760/tonne in 4Q21 (vs. the average of US$1,931/tonne in 4Q20 and US$2,652/tonne in 3Q21); and (ii) full commissioning of the Phase 3 Samalaju project – resulting in increased sales tonnage in 4Q21.

FY21 earnings growth would be more than double YoY. Our 4Q21 core earnings estimate indicates that FY21’s cumulative profits would range from RM1.07bn to RM1.11bn, signalling a 124-132% YoY growth from FY20’s profits of RM479m. This would make up about 97-101% of our FY21F full-year forecast and 98-102% of full year consensus estimates. We expect a strong 4Q as PMETAL would benefit from: (i) the full-commissioning of Phase 3 Samalaju project would start in Oct 2021; (ii) higher LME aluminium spot prices; and (iii) earnings boost from its 25%-owned Phase 1 PT Bintan project.

ESG Framework. We highlight a few of PMETAL’s ESG framework: 
1) PMETAL’s smelters are mainly hydro powered.
2) PMETAL has pledged to be carbon neutral by 2050.
3) PMETAL targets a 15% reduction in greenhouse gas (GHG) emissions by 2025.
4) PMETAL targets a 30% reduction in greenhouse gas (GHG) emissions by 2030.
5) PMETAL aims a 10% water withdrawal reduction by 2030.

Forecast. Unchanged. Our earnings forecast is based on an average LME aluminium selling price per tonne of US$2,550, US$3,150 and USD3,250 for FY21-23 respectively. We have imputed these few key hedging assumptions: (i) 65% hedged at US$2,050 for FY21; (ii) 50% hedged at US$2,300 for FY22F; and (iii) 35% hedged at US$2,300 for FY23F. Our alumina cost per tonne assumption remains unchanged at a steady 16% of PMETAL’s aluminium realised base price forecasts in FY21-23.

Monumental future growth prospects. We are projecting PMETAL’s core PATMI to grow massively by 130% and 111% to RM1.1bn and RM2.3bn for FY21-22F respectively. This would represent a CAGR of 121%, which we reckon is a pretty scarce phenomenon for a large-cap company, in our view.

Maintain BUY with TP of RM7.25. Our TP is based on FY22F EPS pegged to a P/E multiple of 25x, which is in line with its 3-year historical mean P/E. We may increase our ascribed P/E multiple for PMETAL as we note that the group deserves a premium in its valuations to reflect: (i) the group’s favourable cost structure as bulk of its energy costs are locked in via 15-25 year power purchase agreement (PPA) with Sarawak Energy Bhd; (ii) the scarcity premium of a growing large-cap, investible aluminium proxy in Malaysia; and (iii) its low carbon footprint as its smelters are hydro powered, making its ESG profile more favourable to investors.

Source: Hong Leong Investment Bank Research - 4 Feb 2022