Press Metal’s 1Q20 result was below expectations. Its 1Q20 core net profit declined by 10% yoy to RM104m. This is mainly due to lower revenue (- 16% yoy), a result of lower aluminium selling prices. Similarly, on a qoq basis, core net profit dropped 27% on the back of lower revenue (-14% qoq). Moving forward, we expect earnings to be weaker in 2Q before recovering in 3Q, in view of weaker aluminium prices and lower valueadded products volume in 2Q. Due to the lower-than-expected 1Q20 earnings, we cut our 2020E core EPS by 13%. Maintain SELL with a higher TP of RM3.80, based on a higher 2021E PER target of 27x (vs. 23x previously).

Below Expectations

Press Metal’s 1Q20 net profit declined by 10.9% yoy to RM103m. Revenue dropped by 15.7% yoy to RM1.8bn due to lower aluminium prices, which was due to a decline in global aluminium demand in the wake of the Covid-19 outbreak. The impact of lower revenue was partially mitigated by lower alumina and carbon anode costs, which aided EBITDA margin improvement of 2.5ppt yoy to 15.7% in 1Q20. Excluding one-off items, core net profit came in at RM104m, down 10.1% yoy. We deem the result as below expectations, accounting for 25% of the consensus and our previous full-year forecasts. The variance against our forecast was due to lower-than-expected value-added products (VAP) sales volume. Press Metal announced a DPS of 1.0sen for 1Q20 (vs. 1Q19 DPS of 1.25 sen).

Core Net Profit Drop 27% Qoq

Sequentially, 1Q20 revenue fell 14% on the back of lower aluminium selling prices. As a result, core net profit declined by 27% qoq to RM104.4m. EBITDA margin was marginally improved by 0.2ppt qoq to 14.3% mainly due to the lower alumina costs. We expect 2Q earnings to be weaker before recovering in 3Q onwards, in view of lower aluminium selling prices and lower VAP volume in the 2Q, partially mitigated by lower alumina costs and weaker RM/US$.

Maintain SELL With Higher TP of RM3.80

Due to lower-than-expected 1Q20 earnings, we cut our 2020E EPS by 13% to account for lower VAP products mix and lower profit-margin assumptions. We maintain our 2021-22E earnings as we expect demand for VAP products and aluminium prices to improve in view of a global economic recovery. We maintain our SELL call but with a higher TP of RM3.80, based on a higher 2021E PER target of 27x which is slightly above its -1SD of its 3-year mean PER (vs. 23x 2021E PER previously). While we remain cautious on the company’s earnings outlook, we believe the strong management team, the group’s low cost structure and scarcity premium will support the stock’s high PER multiple.

Source: Affin Hwang Research - 5 Jun 2020