Press Metal has entered into a Memorandum of Understanding (MOU) with PT Bintan Alumina Indonesia (PT BAI) for its proposed acquisition of approximately 25% of PT BAI shares. PT BAI is currently considering to build a 1m MT p.a. alumina refinery plant with plans for a second phase expansion. We are positive on this news as it can secure more alumina supply, and hence further hedge itself against volatility in alumina costs and supply. We expect the acquisition to be fully funded through borrowings, which will lead to an increase in its net gearing. But, we believe its gearing will be manageable given the progressive nature of the investment and the group’s strong cash flow generation. At this juncture, we maintain our earnings forecast and HOLD rating with an unchanged target price (TP) of RM4.41.

MOU With PT BAI

Press Metal has entered into a MOU with PT BAI, setting out principles for further discussions on the proposed acquisition of approximately 25% of PT BAI shares by Press Metal. The acquisition is subject to completion by due diligence and agreement on the final terms and conditions of the acquisition. PT BAI is principally involved in the production of non-ferrous metals, and is currently considering to build a 1m MT p.a. alumina refinery plant with the necessary facilities in Galang Batang, Indonesia. There are plans for a second phase expansion at a later stage.

Positive for the Group

We are positive on this news. The move is in line with the group’s strategy to acquire alumina assets to better manage its supply and cost of alumina, which made up more than 30% of its aluminium manufacturing cost. If the deal materialises, Press Metal will secure at least 250,000MT p.a. of alumina (depending on the final terms), which is equivalent to 17% of its annual alumina requirement. This will potentially bring its total alumina secured from related parties to 32%, including the supply from its stake in Japan Alumina Associate (JAA).

Source: Affin Hwang Research - 3 Jun 2019