Journey to Wealth
Press Metal - Stepping up to the plate BUY
- With greater conviction, we maintain our BUY call on PressMetal with an unchanged fair value of RM2.63/share (target PE: 13x). We hosteda luncheon for Press Metal, and came away from the meeting feeling moreconvinced about the group's rising prospects as an integrated producer of aluminium products.
- We draw comfort from the fact that the roll-out of Phase2A of its new aluminium smelter in Samalaju, Sarawak is still on track to goonline by end-3QFY12, followed by Phase 2B (end-2Q13). When fully completed,this should triple the group's smelting capacity to 360,000 tonnes.
- While there have been several proposals for new aluminiumsmelters in Sarawak and Indonesia, Press Metal already has a head-start via:-(i) the long-term supply of power from Sarawak Energy Bhd (~680MW); and (ii)while Phase 2 is due to be completed by mid-2013.
- This puts the group in a sweet spot to tap into rising aluminiumdemand ' as it has one of only two smelters operating within the ASEAN regionfor a combined capacity of ~580,000 tonnes. This compares with a base demand of~5 million tonnes for ASEAN and other keyAsian countries (Japan, Taiwan,Korea).
- To keep up with growing demand, the group is targeting to sell100% of its aluminium ingots/billets produced at its Samalaju plant comparedwith 70% for Mukah, which is almost running at full capacity now.Conservatively, we also expect its manufacturing EBIT margin to improve to 9.6%in FY12F from ~8.4% in FY11.
- As for the balance of funding needs under Phase 2 (~RM1bil),a few options are being considered: (i) Newdebt; (ii) Forward sales to trading houses/financial institutions; and (iii)Conversion of warrants.
- We do not discount the possibility of seeing renewed interestfrom strategic investors when Phase 2 kicks off. Notably, Japan's Sumitomo hasthe right of first refusal to take up a 20% stake in Phase 2, after having asimilar stake in Phase 1.
- We project Press Metal's core earnings at RM112mil for FY12F, rising to RM170mil-RM217mil forFY12F-14F. This is backed by the staggered commissioning of Phase 2A and 2B.The stock offers attractive PE valuations of 6x-10x on FD FY12-14F EPS vs EPSCAGR of 23%.
- Management sees minimal impact from the country's recentlyrevised minimum wage policy of RM700, as its salary scale is already above thethreshold. Wage cost accounts for < 10% of the group's operating cost.
Source: AmeSecurities
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