Press Metal reported core net profit of RM471m (-24% yoy) which was largely within expectations. The decline in core net profit was mainly due to lower revenue (-7% yoy) from weaker aluminium prices, coupled with higher alumina costs. We expect the challenging global economic outlook to continue to weigh down aluminium prices. In view of this, we cut our FY20-21E earnings by 3-6%. As such, we cut our TP to RM5.00 and downgrade our call to HOLD.

Within Expectations

Press Metal’s 2019 net profit declined by 24% yoy to RM471m. Revenue declined by 7% yoy on the back of weaker aluminium selling prices. EBIT margin was lower at 9.6% (vs. 11.3% in 2018) mainly due to higher alumina costs caused by the disruption in global alumina supply. Excluding one-off items, core net profit came in at RM492m (-18% yoy). The results are largely within consensus and our previous expectations. Press Metal announced DPS of 1.25sen for 4Q19, bringing the 2019 DPS to 5.0sen (vs. 6.5sen in 2018).

Core Net Profit Improved by 10% Qoq

On a qoq basis, Press Metal’s 4Q19 core net profit improved by 10% to RM142.5m. While revenue was marginally higher by 1% qoq, core net profit improved on the back of lower operating costs (-6% qoq) from lower alumina costs. As a result, EBIT margin improved by 0.7ppts to 11.2% in 4Q19.

Cut FY20E-21E Earnings by 3-6%

Year-to-date, LME aluminium prices averaged at US$1,785/MT, while the MJP premium hovers around US$80-86/MT. The coronavirus outbreak since January 2020 has caused a temporary disruption to global economic activity and put downward pressure on aluminium prices. However, we expect prices to recover once the situation improves. Having said that, we cut our 2020E aluminium price assumption to US$1,850/MT, while we maintain our 2021E aluminium ASPs at US$1,900/MT. We also factor in lower associates’ contribution given a more cautious outlook for global economic growth. As such, we cut our 2020-21E earnings by 3-6%.

Downgrade to HOLD

In tandem with our earnings cut, we cut our 12-month TP to RM5.00 based on an unchanged 2020E PER target of 33x. Due to limited upside on our TP, we downgrade the stock to HOLD from Buy. While we believe its capacity expansion will drive the group’s earnings growth in 2020-21E, the uncertainties in the global aluminium market will continue to weigh down aluminium prices, posing downside risk to the group’s earnings.

Source: Affin Hwang Research - 25 Feb 2020