PMETAL posted a record high 1Q22 core net profit of RM421m (+47% QoQ, +105% YoY), which came in at 19% and 20% of ours and consensus full-year estimates respectively. We deem the results to be within expectations as we expect subsequent quarters to show improved performance with increased sales volume post-completion of P1 and P2 Samalaju’s planned maintenance. Also, we believe that PMETAL is on track to more-than-double its profits YoY in FY22 due to: (i) elevated aluminium prices; (ii) full commissioning of its Phase 3 Samalaju expansion; and (iii) further contribution from its 25%-owned PT Bintan alumina refinery. All-in, we maintain BUY with a marginally lower TP of RM7.28, based on a P/E of 20x on revised FY23f earnings.

A record high quarter – within expectations. PMETAL posted a record high 1Q22 core net profit of RM421m (+47% QoQ, +105% YoY), which came in at 19% and 20% of ours and consensus full-year estimates respectively. We deem the results to be within expectations as we expect subsequent quarters to show improved performance with: (i) the completion of P1 and P2 Samalaju’s planned maintenance; and (ii) completion of 25%-owned Phase 2 PT-Bintan alumina refinery expansion, which will add another 1.0m of refining capacity which is slated for completion in 2H22.

Dividends. First interim dividend of 1.5 sen was declared in 1Q22. Ex-date: 14 June 2022, payment date: 27 June 2022.

QoQ. Core net profit was up 47% QoQ, driven by: (i) higher LME aluminium spot prices, averaging at USD3,248/tonne in 1Q22 (vs. USD2,760/tonne in 4Q21); and (ii) full commissioning of the Phase 3 Samalaju project, resulting in full sales tonnage contribution in 1Q22.

YoY. Core net profit more than doubled YoY (+105%), driven by: (i) significantly higher LME spot prices, averaging at USD3,248/tonne in 1Q22 (vs. USD2,104/tonne in 1Q21); and ii) extra sales tonnage from the full commissioning of Phase 3 Samalaju expansion project.

Outlook. We believe that the best has yet to come for PMETAL. We expect profits to more than double again in FY22, on the back of: (i) elevated aluminium spot prices; (ii) increased aluminium sales tonnage YoY, boosted by the full commissioning of the group’s Phase 3 Samalaju expansion project; and (iii) additional earnings boost from its 25%-owned Phase 1 and 2 PT Bintan alumina refinery business.

Forecast. Despite results coming inline, we reduce FY22-23f earnings slightly by 4% and 6% respectively to account for structurally higher carbon anode price assumptions. Based on guidance, our hedging assumptions are as follows: FY22f: hedged 60% at USD2,400 (our average spot price assumption is USD3,150) FY23f: hedged 35% at USD2,500 (our average spot price assumption is USD3,200) FY24f: hedged 25% at USD2,600 (our average spot price assumption is USD3,200)

Maintain BUY with TP of RM7.28. We maintain our BUY recommendation on PMETAL with a marginally lower TP of RM7.28/share (from RM7.59/share previously) based on a P/E multiple of 20x on revised FY23f earnings, which is at a slight premium to both its 7-year historical mean P/E of 15x and to the 10x average forward P/E of its global peers. However, we believe that valuations are justified due to: (i) its 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, boosting its ESG profile.

Source: Hong Leong Investment Bank Research - 31 May 2022