PMETAL posted a 4Q22 core net profit of RM278.6m (-13% QoQ, -4% YoY), bringing FY22 core earnings to RM1,432m (+38% YoY). The results were below expectations, accounting for 92.7% and 94.8% of our/consensus full-year forecasts. 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 downgrade PMETAL to SELL with a relatively unchanged TP of RM4.56 – based on an unchanged P/E multiple of 20x on FY23f profits as we think that PMETAL’s valuations are rich at current levels.

Missed expectations. PMETAL posted a 4Q22 core net profit of RM278.6m (-13% QoQ, -4% YoY), bringing FY22 core earnings to RM1,432m (+38% YoY) – having adjusted for: (i) RM0.7m gain on disposal of quoted or unquoted investment or properties; and (ii) RM7.1m PPE written off. The results were below expectations, accounting for 92.7% and 94.8% of our/consensus full-year forecasts. Key variance against our estimates was due to higher operating expenses in 4Q22, which we believe was caused by elevated input carbon anode prices throughout the quarter.

Dividends. Fourth interim dividend of 1.75 sen/share was declared in 4Q22. Ex-date: 10 March 2023. FY22 total dividends: 6.75 sen – falling short of our expectation of 7.6 sen.

QoQ. 4Q22 core net profit was down 13% QoQ mainly due to an increase in operating expenses caused by elevated input carbon anode prices throughout the quarter. We highlight that average LME spot prices were flattish throughout the quarter at USD2,352/tonne in 4Q22 (vs. the average of USD2,352/tonne in 3Q22).

YoY. 4Q22 core net profit was marginally down by 4% YoY due to: (i) lower average LME spot prices, at USD2,352/tonne in 4Q22 (vs. USD2,760/tonne in 4Q21) – which is a decline of 15% YoY; and (ii) a 22% increase in input carbon anode prices YoY. However, it was partially cushioned by higher sales tonnage from the group’s Phase 3 Samalaju expansion project.

YTD. FY22 core net profit was up 38% YoY due to: (i) higher average LME aluminium spot prices of USD2,711/tonne in FY22 (vs. USD2,484/tonne in FY21); and (ii) higher sales tonnage from the group’s Phase 3 Samalaju expansion project. However, earnings were partially mitigated by higher carbon anode prices, averaging at RMB6,832/tonne in FY22 (which was a 47% increase from RMB4,660/tonne in FY21). We highlight that carbon anode serves as a catalyst in the production of aluminium and is part of the production cost of PMETAL.

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. Relatively unchanged post minor tweaks. Our hedging assumptions as below:  

FY23f: Hedged 35% at US$2,500 (our Average Spot Price Assumption Is US$2,400)  

FY24f: Hedged 30% at US$2,600 (our Average Spot Price Assumption Is US$2,450)  

FY25f: Hedged 15% at US$2,700 (our Average Spot Price Assumption Is US$2,500)

Downgrade to SELL, relatively unchanged TP of RM4.56. We downgrade PMETAL to SELL with a relatively unchanged TP of RM4.56 – based on an unchanged 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. We think that PMETAL’s valuations are rich at current levels despite deserving a premium in valuation multiples due to: (i) its favourable cost structure as bulk of its energy costs is 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 - 27 Feb 2023