Press Metal reported a core net profit of RM106.9m (-16% yoy) in 1Q19, which was below market and our expectations. Despite the 2.2% yoy improvement in 1Q19 revenue, core net profit was down mainly due to higher raw materials costs. On a qoq basis, core net profit was flat. Moving forward, we expect earnings to improve on the back of easing raw material costs and a better product mix, supported by higher contribution from its associates. Due to the lower-than-expected 1Q19 earnings, we cut our 2019-21E core EPS by 6-10%. Maintain HOLD with a lower TP of RM4.41, based on a 27x 2020E PER.

Below Expectations

Press Metal’s 1Q19 net profit declined by 24% yoy to RM115.1m, despite a marginal revenue improvement of 2% yoy to RM2,171.3m. This was mainly due to higher raw material costs, namely for alumina and carbon anode. Excluding one-off items, core net profit came in at RM106.9m, down 16% yoy. This accounts for 13% and 16% of the consensus and our previous forecasts, respectively. Press Metal announced a DPS of 1.25sen for 1Q19 (vs. 1Q18 DPS of 1.5 sen).

Core Net Profit Was Flat Qoq

Sequentially, 1Q19 revenue was down by 3% on the back of lower aluminium selling prices. However, core net profit was flat at RM106.9m as alumina and carbon costs eased. For the subsequent quarters in 2019, we expect global aluminium prices to remain weak, given the uncertainties from the US-China trade dispute and weak sentiment arising from expectations of a global economic slowdown. However, in terms of cost, we expect global alumina prices to ease on the back of the resumption of full production capacity at Alunorte (the biggest alumina producer ex-China) and new alumina supply coming online. Apart from that, we believe Press Metal’s earnings will be better supported by contribution from its associates, namely Japan Alumina Associate (JAA) and Sunstone. For 1Q19, associate contribution improved by 4x to RM2.7m, due mainly to JAA.

Maintain HOLD With Lower TP of RM4.41

Due to the lower-than-expected 1Q19 earnings, we cut our 2019-20E core EPS by 6-10%. We reduce our 12-month TP to RM4.41 (from RM4.48), based on an unchanged target PER of 27x on our 2020E EPS (rolled forward from 2019E). Nonetheless, we maintain our HOLD call on the stock as we like the group’s strong management team and its focus on improving profit margins.

Source: Affin Hwang Research - 28 May 2019