We expect PMETAL to register a net profit of between RM305-355m (-3% to +12% QoQ, +7-24% YoY) in 4Q22. If met, we would deem the results to be within expectations as: (i) LME aluminium spot prices averaged at USD2,352/tonne in 4Q22 (relatively flattish vs. the average of USD2,357/tonne in 3Q22); and (ii) still elevated carbon anode prices. The prospects of aluminium as a metal remains challenging in the near term due to recession woes and the general decline in the global real estate markets (due to the high interest rate environment). We highlight that PMETAL may still register mediocre quarters ahead due to subdued aluminium spot prices. We maintain HOLD on PMETAL with an unchanged TP of RM4.54 – based on a P/E multiple of 20x on FY23f profits.

Flattish QoQ. PMETAL’s 4Q22 results are tentatively scheduled for release at the end of Feb. We expect core earnings for the quarter to come in within the range of RM305-355m (-3% to +12% QoQ, +7-24% YoY) in 4Q22, barring any unforeseen swings in cost structure. This is estimated from LME aluminium spot prices which averaged at USD2,352/tonne in 4Q22 (vs. the average of USD2,357/tonne in 3Q22; and USD2,760/tonne in 4Q21).

Carbon anode prices still elevated. From Bloomberg data, we noticed a significant uptick in carbon anode prices – averaging at RMB6,717/tonne in FY22 (an increase of 47% from RMB4,583/tonne in FY21). We highlight that carbon anode serves as a catalyst in the production of aluminium and is a significant part of the production cost of the company.

Record high FY22 earnings. Our 4Q22 core earnings estimate indicates that FY22’s cumulative profits would range from RM1,451m to RM1,501m, signalling a 41-46% YoY growth from RM1,030m SPLY. This would make up about 94-97% of our FY22f full-year forecast and 95-98% of full-year consensus estimates.

Aluminium surplus expected in 2023-2025. Bloomberg Intelligence expects global aluminium output to increase by 2% in 2023 and would exceed the demand growth of 1% and bring the market to a surplus of 156k tonnes vs. a deficit of 560k tonnes in 2022. It also estimates that the market will sustain a surplus of 238k tonnes and 156k tonnes in 2024-2025. China’s output growth will slow to 2% in 2024 vs 3% in 2022-2023 due to the capacity cap at 45m tonnes and the tightness of hydropower while output overseas could grow at 5% in 2024 from new capacities commissioned in Canada, Indonesia and India.

China’s demand to recover slightly by 2% in 2023. Bloomberg Intelligence also expects China's aluminium demand to grow 2% in 2023, improving modestly from 2022's 1% growth. China's 16-point property rescue package could fuel property completions and sales, yet an imminent boom is unlikely to happen as homebuyer concerns around developers' liquidity pressure and lacklustre investment demand remains a drag.

Outlook. While the prospects of aluminium as a metal remains challenging in the near term due to recession woes and the general decline in the global real estate markets (due to the high interest rate environment), 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 still register mediocre quarters ahead due to subdued aluminium spot prices.

Forecast. Unchanged. Our hedging assumptions as below: 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$2,400) FY24f: hedged 25% at US$2,600 (our average spot price assumption is US$2,450)

Maintain HOLD, TP of RM4.54. We maintain HOLD on PMETAL with an unchanged TP of RM4.54 – 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 - 10 Jan 2023