Press Metal reported a core net profit of RM219m (-31% yoy) which was below market and our expectations. This is mainly due to weaker aluminium prices, coupled with higher alumina costs. However, we expect earnings to improve in 2H19 as the alumina price has trended down from an improving global alumina supply. Due to lower-thanexpected 1H19 earnings, we cut our 2019E core EPS by 10%. Maintain HOLD with an unchanged TP of RM4.80 based on FY20E PER of 31x.

Below Expectations

Press Metal’s 6M19 net profit declined by 30% yoy to RM218m on the back of lower revenue (-6% yoy) of RM4.3bn. Revenue was lower due to weaker aluminium selling prices. Its EBIT margin contracted to 12.6%, mainly attributable to higher alumina costs. Excluding one-off items, core net profit came in at RM219m, down 31% yoy. This accounts for 34% and 40% of the consensus and our previous forecasts, respectively. The variance was mainly due to higher-than-expected alumina costs. Press Metal announced a DPS of 1.25 sen for 2Q19, bringing the 6M19 DPS of 2.5 sen. (vs. 3 sen for 1H18).

Expect Better Earnings in 2H19

Sequentially, 2Q19 net profit was lower by 10% qoq on the back of lower revenue due to lower aluminium selling prices, coupled with higher alumina costs. This was partially offset by higher contribution from its associate (+97% qoq) and a lower effective tax rate (-4.3ppt qoq). For 2H19, we expect earnings to improve on the back of lower alumina costs, which will improve the profit margin. In August, the alumina price dropped below US$300/MT compared to US$368/MT in 2Q19. We expect the alumina price to hover around US$300- 330/MT for the rest of 2019.

Acquisition of PT Bintan Alumina Indonesia (PT BAI)

Press Metal is finalizing the terms of its proposed acquisition of a 25% stake in PT BAI. We gather that the deal is expected to be completed by end-3Q19. With the acquisition, Press Metal will potentially secure at least 250k MT of alumina supply, equivalent to 17% of its total annual alumina requirement.

Maintain HOLD

Due to the lower-than-expected 6M19 earnings, we cut our 2019E core EPS by 10%. We reaffirm our HOLD call with an unchanged 12-month TP of RM4.80, based on an unchanged 2020E PER of 31x. We believe the medium to longterm earnings outlook has improved with its planned capacity expansion.

Key Risks

Key risks to our call include volatility in aluminium prices. Key downside risks are: 1) a global economic slowdown reducing aluminium demand; and 2) an increase in China aluminium exports putting pressure on aluminium prices. Key upside risks are: 1) a trade deal between China and the US potentially easing competition for aluminium smelters in the AsiaPacific region; and 2) lower alumina and carbon prices lifting Press Metal’s earnings.

Source: Affin Hwang Research - 21 Aug 2019