We remain cautious on Press Metal’s earnings outlook in 2020-21. While the group has locked in sales for at least 90% of its 2020 capacity, the weakness in aluminium prices poses downside risk to its earnings in 2020-21E. Year to date (YTD), the LME aluminium price has dropped by 21% yoy to US$1,425/MT, and we expect it to remain depressed in 2020. We maintain our SELL call with a higher target price (TP) of RM3.20, based on a 2021E PER of 23x.

Aluminium Prices Likely to Remain Weak in the Near Term

Global aluminium demand is expected to be weak in the wake of the Covid-19 pandemic and the global economic downturn. However, on the supply side, aluminium smelters continue to operate to avoid the high cost of shutdowns and restarts. The anticipated imbalance in the supplydemand of aluminium has resulted in a sharp decline in global aluminium prices (-21% ytd). We believe aluminium prices will remain weak in the near term before gradually improving in 2H20 on expected capacity closure by struggling smelters, which will likely ease the surplus in supply.

Phase 3 Expansion Expected to be Delayed

We gather that the planned commissioning of Press Metal’s Phase 3 aluminium smelter in Samalaju in October 2020 may be delayed to 1Q21. Construction works on the new plant have stopped due to the government’s Movement Control Order (MCO) and this is likely to delay the completion of the plant. Separately, while the group’s extrusion plant (less than 5% contribution to earnings) has to stop operating due to the MCO, its smelting operations in Sarawak remain in operation.

Cutting Earnings Forecasts by 8-18%

We cut our 2020-21 earnings forecasts by 8-18%, mainly to account for the delay in the completion of the Phase 3 smelter and expected prolonged weak global demand. We had cut the earnings forecasts by 9- 17% in our strategy report entitled When a recession matters no more on 31 March 2020, to reflect lower aluminium average selling prices (ASPs), partially offset by a weaker RM/US$ assumption and lower alumina costs.

Maintain SELL Call With a Higher TP of RM3.20

We reiterate our SELL call on Press Metal with a higher 12-month TP of RM3.20, based on the same target PER of 23x and as we roll forward our valuation to 2021E. We peg our target 2021E PER at 1SD below its 3-year mean PER level in view of heightened uncertainties in the global market and increased volatility in aluminium prices.

Source: Affin Hwang Research - 10 Apr 2020