Press Metal is the largest integrated aluminium smelter and extruder in South East Asia. We like the company for its competitive cost advantage coupled with its potential expansion both upstream and downstream in the aluminium supply chain. We forecast a 2017-20E EPS CAGR of 7% on the back of better product mix and improved cost management. We initiate coverage on Press Metal with a HOLD rating and a 12-month TP of RM4.69, based on 27x 2019E PER.

Competitive Cost Advantage

Press Metal is placed in the first quartile for overall smelter costs globally mainly due to: i) competitive electricity costs from 25-year PPA agreements with Sarawak Energy since the commencement of its smelters and; ii) lower effective tax rate from an investment tax allowance (ITA) for its Mukah plant and 15-year tax holiday for its 80%-owned subsidiary, Press Metal Bintulu (PMB).

Upstream Acquisition Provides Natural Hedge Against Price Volatility

To weather volatility in its key raw materials, Press Metal aims to expand vertically in the supply chain. We think it is likely the company will acquire brownfield upstream assets to better manage the cost and supply of carbon anode and alumina, which contribute close to 50% of its total production costs. To date, it has formed a joint venture with Sunstone and acquired 50% of Japan Alumina Associates (JAA), securing 50% of carbon anode and 15% of alumina current requirements respectively.

Better Margin From Value-added Products Capacity Expansion

In our view, capacity expansion is limited in the near future given limited energy availability. Hence, earnings growth will likely come from better product mix. Press Metal is targeting to raise value-added aluminium products capacity to 60% of total capacity in 2019. This should contribute positively to the bottom line as value-added aluminium products enjoy better margins compared to standard P1020 ingots.

Initiate Coverage With a HOLD Rating and TP of RM4.69

We initiate coverage with a HOLD rating and 12-month TP of RM4.69 based on a 2019E PER of 27x (close to its 3-year mean +1SD level). We believe our PER valuation is justified by its low-cost advantage, stable profit margin reflecting its strong execution, and strong management team led by its founder and CEO Tan Sri Koon Poh Keong. Its inclusion in the MSCI and KLCI indices since late-2017 is expected to support the share price. Key risks to our call include volatility in aluminium prices and its key raw materials, namely alumina and carbon anode prices.

Source: Affin Hwang Research - 14 Jan 2019