We expect PMETAL to register a net profit of between RM315-365m (-11% to -23% QoQ, +16-34% YoY) in 3Q22. If met, we would deem the results to be within expectations as: (i) LME aluminium spot prices averaged at USD2,357/tonne in 3Q22 (vs. the average of USD2,896/tonne in 2Q22); and (ii) elevated carbon anode prices. However, we are still forecasting PMETAL’s profits to grow at a robust 50% and 41% for FY22-23f respectively due to: (i) elevated aluminium prices vs. pre-war levels; (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 an unchanged TP of RM5.28 (20x P/E on FY23f EPS).

A QoQ decline in 3Q22. PMETAL’s 3Q22 results are tentatively scheduled for release on 29 Nov 2022. We expect core earnings for the quarter to come in within the range of RM315-365m (-11% to -23% QoQ, +16-34% YoY), barring any unforeseen swings in cost structure. This is estimated from LME aluminium spot prices which averaged at USD2,357/tonne in 3Q22 (vs. the average of USD2,896/tonne in 2Q22 and USD2,652/tonne in 3Q21).

A significant uptick in carbon anode prices. From Bloomberg data, we noticed a significant uptick in carbon anode prices – averaging at RMB6,532/tonne in 9M22 (which was a 66% increase from RMB3,943/tonne in 9M21). 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 3Q22 earnings QoQ, coupled with lower revenue due to the recent dip in aluminium spot prices.

9M22 earnings growth would still be robust YoY. Our 3Q22 core earnings estimate indicates that 9M22’s cumulative profits would range from RM1,145m to RM1,195m, signalling a 54-61% YoY growth from RM744m SPLY. This would make up about 74- 77% of our FY22f full-year forecast and 71-74% of full-year consensus estimates.

Inks a 10-year tolling agreement with Glencore. From Bloomberg news, we discovered that Press Metal has inked a 10-year deal with Glencore – where the latter will supply the former with alumina and off-take aluminium over 10 years. Glencore is an Anglo-Swiss multinational commodity trading and mining company with headquarters in Switzerland. Glencore is also the world’s largest aluminium trader with a footprint in over 35 countries. Glencore aims to increase its supply of green aluminium into the global market and is committed to supporting the transition to a low carbon economy. We are positive on this development as it further anchors Press Metal as one of the highly recognised low-carbon emitting smelters in the world.

Forecast. Unchanged. Our hedging assumptions are as follows: FY22f: hedged 60% at US$2,400 (our average spot price assumption is US$2,550) FY23f: hedged 35% at US$2,500 (our average spot price assumption is US$2,600) FY24f: hedged 25% at US$2,600 (our average spot price assumption is US$2,650)

Maintain BUY, TP of RM5.28. We maintain BUY on PMETAL with an unchanged TP of RM5.28/share – based on a P/E multiple of 20x on FY23f profits, 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. 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 Oct 2022