• We turn more positive on Press Metal (PMETAL) as its capacity expansion coincides with the pick-up in global demand while margins are likely to improve from logistics cost savings on the commissioning of PT Bintan (PT BAI).
• We lift the 2021/22E earnings by 9.2/1.4% to take into account better margins and after inputting a higher aluminium price assumption for 2021 to be driven by a global economic recovery
• We upgrade our call on PMETAL to BUY from Hold with a higher TP of RM5.92 based on a target 2021E PER of 34x (in line with its 3-year mean).

New Capacity Poised to Boost Earnings From 2021 Onwards

We believe PMETAL is poised to benefit from the timing of commissioning of the Phase 3 expansion in Samalaju which should coincide with a global aluminium demand recovery. Commissioning of the PT Bintan Alumina (PT BAI) alumina plant should translate to better margins as PMETAL would benefit from logistics cost savings due to Indonesia’s closer proximity to Malaysia than Australia. Both plants are set to be commissioned in Jan 2021 (versus previous estimate of October 2020).

Consequent to global demand recovery, aluminium price has trended upwards

In April, the London Metal Exchange’s (LME) aluminium price bottomed at US$1,422/MT amidst global aluminium demand disruption. This was due to a halt in global economies as governments imposed movement restrictions and limited business/production activities in an effort to contain the spread of the virus. Since then, the LME aluminium price has bounced back and is trading at US$1,600- US$1,780/MT level (inching closer to end-2019 price of US$1,800/MT). Moving into 2021, we expect global economies to recover from the 2020 lows and consumption to normalise as the public adapts to the new normal, translating to a global aluminium demand recovery and hence the LME aluminium price. As such, we raise our FY21E aluminium price assumption to US$1,820 (from US$1,780 previously).

Upgrade to BUY With a Higher 12-month Target Price of RM5.92

We upgrade PMETAL to BUY with a higher target price (TP) of RM5.92 based on a 34x PER (in line with its 3-year mean). The TP upgrade takes into account better margins from the commissioning of PT BAI and as we raise our FY21 ASP assumption. Key downside risks to our rating include a sharp decline in the aluminium price, higher raw material costs and a slower recovery in global aluminium demand.

Source: Affin Hwang Research - 28 Sept 2020