There were no major surprises from Press Metal’s briefing. Management reiterated its focus on gaining economies of scale through ongoing expansion in Samalaju and Indonesia. Coupled with stable alumina and carbon costs, the expansion will strengthen the group’s low-cost model and help the group weather the challenging outlook in the current low aluminium price environment. Given the ample liquidity in the market, scarcity premium for a well-run company, and 2021E earnings growth of 53.6%, we assign a higher PER multiple of 34x on its 2021E EPS (in line with past-3-year mean PER). We upgrade the stock to a HOLD with a higher TP of RM4.73.

A Recap of 1Q20 Earnings

To recap, Press Metal’s 1Q20 core net profit fell by 10.1% yoy to RM104m, largely due to lower revenue (-15.7%) in tandem with weaker aluminium selling prices. The Covid-19 outbreak has resulted in contraction in global aluminium demand, causing weakness in LME aluminium prices. LME aluminium prices averaged at US$1,697/MT in 1Q20, 8.7% yoy lower. Apart from that, the lower revenue was also partly due to lower value-added products (VAP) sales at 48% of total sales, compared to 52% in 1Q19. Despite the lower core net profit, EBITDA margin improved by 2.5ppt, mainly due to lower alumina costs.

Banking on Economies of Scale Gain

Press Metal has 2 major ongoing expansions which are:

i) The Phase 3 expansion in Samalaju that will increase its smelting capacity by 42% to 1.08m MT. The construction of the plant was disrupted following the travel restrictions and Movement Control Order (MCO) to curb the Covid-19 outbreak. As a result, the commencement of the plant is expected to be delayed to January 2020 instead of October 2019.

ii) The PT Bintan Alumina (PT BAI) acquisition is expected to provide up to 75% of its annual alumina requirement (from Phase 1 & 2). The project is under construction and is said to be on schedule. The Phase 1, with 1m MT alumina capacity, is expected to commence by end-2020. Assuming 75% of alumina take-up rate from Phase 1, the group can secure additional 750k MT alumina supply in addition to its current alumina take-up of 230k MT from Japan Alumina Association. Together, this makes up of 64% of its current annual alumina requirement.

Upon completion of these expansions, the group will gain economies of scale, which will further strengthen its low-cost business structure. This, in turn, will support the group’s earnings amidst the uncertainties in the global aluminium market.

Source: Affin Hwang Research - 10 Jun 2020