PMETAL posted 2Q22 core net profit of RM409m (-3% QoQ, +60% YoY), bringing 1H22 core earnings to RM830m (+80% YoY). We deem the results to be slightly below expectations – at 44% of both ours and consensus full-year estimates respectively. We believe that the QoQ decline was mainly due to: (i) lower aluminium spot prices in 2Q22, averaging USD2,896/tonne (vs. USD3,238/tonne in 1Q22); and (ii) significantly higher carbon anode prices (+38% QoQ). However, we are still forecasting PMETAL’s profits to grow at a robust 54% and 41% for FY22-23f respectively on the back of: (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. Overall, we maintain BUY on PMETAL with lower TP of RM5.28/share (20x FY23 PE).

2Q22 and 1H22 slightly below expectations. PMETAL posted 2Q22 core net profit of RM409m (-3% QoQ, +60% YoY), bringing 1H22 core earnings to RM830m (+80% YoY). We deem the results to be slightly below expectations, at 44% of both ours and consensus full-year estimates. Key variance against our forecast was mainly due to higher opex, which we believe stems from significantly higher carbon anode prices in 2Q22.

Dividends. Second interim dividend of 1.75 sen was declared in 2Q22. Ex-date: 14 Sep. 1H22 total dividends: 3.25 sen.

QoQ. 2Q22 core net profit was down marginally 3% QoQ (vs. 1Q21), driven by: (i) lower LME aluminium spot prices, averaging at USD2,896/tonne in 2Q22 (vs. USD3,238/tonne in 1Q22); and (ii) significantly higher carbon anode prices in 2Q22 (+38% QoQ).

YoY. 2Q22 core net profit was up 60% YoY (vs. 2Q21), driven by: (i) significantly higher LME spot prices, averaging at USD2,896/tonne in 2Q22 (vs. USD2,414/tonne in 2Q21); and (ii) extra sales tonnage from the full commissioning of Phase 3 Samalaju expansion project.

YTD. 1H22 core net profit was up 80% YoY, driven by: (i) significantly higher LME spot prices, averaging at USD3,078/tonne in 1H22 (vs. USD2,255/tonne in 1H21); and (ii) extra sales tonnage from the full commissioning of Phase 3 Samalaju expansion project.

Outlook. While the prospects of aluminium as a metal remains challenging in the near term due to recession woes and the general decline in global real estate markets, we continue to see bright spots in aluminium in the mid-long term as it serves as the preferred metal to the ultra-fast growing electric vehicle and solar PV sectors. We see PMETAL as an indirect beneficiary of the global decarbonisation movement and increasing ESG policies across the world. However, we highlight that PMETAL may register weaker quarters ahead due to lower aluminium spot prices.

Forecast. We reduce FY22-23f earnings by 17% and 3% respectively to account for structurally higher carbon anode price assumptions and some minor tweaks. Based on guidance, our hedging assumptions are as follows: FY22f: hedged 60% at USD2,400 (our average spot price assumption is USD2,550) FY23f: hedged 35% at USD2,500 (our average spot price assumption is USD2,600) FY24f: hedged 25% at USD2,600 (our average spot price assumption is USD2,650)

Maintain BUY – TP of RM5.28. We maintain our BUY recommendation on PMETAL with a marginally lower TP of RM5.28/share (from RM5.44/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 8x 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 - 26 Aug 2022