We expect PMETAL to register a net profit of between RM365-RM415m (-1% to -13% QoQ, +43-46% YoY) in 2Q22. If met, we would deem the results to be slightly below expectations as: (i) aluminium spot prices have retraced significantly from an average of USD3,248/tonne in 1Q22 to USD2,896/tonne in 2Q22; and (ii) higher than expected carbon anode prices. However, we are still forecasting PMETAL’s profits to grow at a robust 87% and 20% for FY22 -23f respectively (based on our updated projections) due to: (i) elevated aluminium prices; (ii) full commissioning of its Phase 3 Samalaju 3 expansion; and (iii) further contribution from its 25%-owned PT Bintan alumina refinery. Overall, we maintain BUY on PMETAL with a lower TP of RM5.44 (20x P/E on FY23f EPS).

A decent upcoming 2Q22. PMETAL’s 2Q22 results are tentatively scheduled for release on 25 Aug 2022. We expect core earnings for the quarter to come in within the range of RM365-415m (-1% to -13% QoQ, +43-46% YoY), barring any unforeseen swings in cost structure. This will be driven by the following reasons: (i) LME aluminium spot prices averaged at USD2,896/tonne in 2Q22 (vs. the average of USD3,248/tonne in 1Q22 and USD2,414/tonne in 2Q21); and (ii) significantly higher carbon anode prices..

A significant uptick in carbon anode prices. From Bloomberg data, we noticed a significant uptick in carbon anode prices – averaging at RMB7,116/tonne in 2Q22 (vs. RMB5,170/tonne in 1Q22). We highlight that carbon anode serves as a catalyst in the production of aluminium and is part of the production cost of PMETAL. With that, we are expecting some profit margin squeeze in 2Q-3Q22 earnings, coupled with lower revenues due to the recent dip in aluminium spot prices.

1H22 earnings growth would still be robust YoY. Our 2Q22 core earnings estimate indicates that 1H22’s cumulative profits would range from RM786m to RM836m, signalling a 70-81% YoY growth from RM461m SPLY. This would make up about 36- 38% of our FY22f full-year forecast and 41-43% of full-year consensus estimates.

Enters FTSE4Good Bursa Malaysia Index. On 9 June 2022, Bursa Malaysia announced the addition of PMETAL into the FTSE4Good Bursa Malaysia Index.

Forecast. We cut our FY22-24f net profit forecasts by 15%, 25% and 21% respectively to account for lower average aluminium spot price assumptions of US$2,550/tonne, US$2,600/tonne and US$2,650/tonne for all three forward years (from US$3,150/tonne and US$3,200/tonne previously) to reflect the recent dip in global aluminium prices recently. Our hedging assumptions are as follows: FY22f: hedged 60% at US$2,400 (our average spot price assumption is US$2,550) FY23f: hedged 60% at US$2,500 (our average spot price assumption is US$2,600) FY24f: hedged 60% at US$2,600 (our average spot price assumption is US$2,650)

Maintain BUY, TP of RM5.44. We maintain our BUY recommendation on PMETAL with a lower TP of RM5.44/share (from RM7.28 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 and to the 8x average forward P/E of its global peers (see Figure#1). 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 - 4 Aug 2022