Press Metal has secured 500MW of new electricity supply from Syarikat Sesco Berhad (SESCO) through a 15-year Power Purchase Agreement (PPA). With the new source of electricity, the group plans to expand its aluminium smelting capacity by 42% to 1.08m MT. We believe this is positive for the group as the new capacity will boost the group revenue and earnings in 2021E. However, this will be partially offset by weak aluminium prices due to concern over a global economic slow down. As such, we cut our 2019-20E earnings by 5- 13%, while we raise our 2021E earnings by 28%. In view of this positive development, we increase our PER multiple to 31x from 27x, and raise our 12-month TP to RM4.80 based on 2020E EPS. However, due to limited upside, we maintain our HOLD rating.

Secures 500MW of Electricity

Press Metal has secured 500MW of electricity through a 15-year power purchase agreement (PPA) with Syarikat SESCO Berhad (SESCO), a wholly-owned subsidiary of Sarawak Energy Berhad. The power is expected to be drawn in 2 stages, with 300MW in October 2020, while the balance of 200MW as and when it is made available, on a reasonable basis, by SESCO. With the new sustainable source of electricity, Press Metal plans to increase its aluminium smelting capacity in Samalaju by 320,000MT per annum to 1,080,000 MT.

Capacity Expansion by 2020

We believe this is positive for the group as it will boost the group’s revenue and earnings in 2021E. The construction of the plant is expected to start in August 2019, and the plant is scheduled to commence in October 2020. We gather that it takes 4-5 months for the plant to ramp up to full capacity. Hence, we expect additional aluminium production of 30,000MT and 270,000MT for the financial year 2020 and 2021, respectively. Meanwhile, take-up rate is expected at 100% given the group’s track record.

Cut 2019-20E Earnings by 5-13% and Raise 2021E Earnings by 27%

We reduce our aluminium price assumptions to US$1,900-2,000//MT for 2019-21E given ongoing concern over the global economy slow down and US-China trade dispute. But, we lower our alumina price assumptions to US$300-340/MT as global alumina supply improves. As such, we cut our 2019-20E earnings by 5-13%. However, we raise our 2021E earnings by 28% on the back of increased revenue from the capacity expansion.

Source: Affin Hwang Research - 1 Aug 2019