Period  3Q14/9M14

Actual vs. Expectations PMETAL’s 9M14 Core Net Profit (CNP*) at RM187.0m met consensus expectation at 74% and exceeded ours at 87% of full-year estimate.

 The variance against our expectation is due to better-thanexpected aluminium prices. Aluminium prices saw a strong recovery in 3Q14, averaging USD1988/metric ton (MT) compared to USD1801/MT QoQ (+10%), and USD1782/MT YoY (+12%).

Dividends  The company announced a third interim tax-exempt dividend of 6.0 sen which was above our expectation. Year-to-date, the company has paid out 16 sen in total.

Key Results Highlights YoY, PMETAL reported a threefold CNP increase to RM187.0m in 9M14 due to improved aluminium selling prices. The company also saw higher production at its Samalaju smelting plant after the rollout of its final phase, and full production was restored at its Mukah plant after a temporary shutdown in 3Q13 due to a state-wide power outage.

 QoQ, 3Q14 CNP rose 85% on the aforementioned aluminium selling price improvement as well as favourable raw material prices. Petroleum coke prices averaged USD55/MT in 3Q14 (-14% YoY, -9% QoQ) which resulted in lower production costs.

Outlook  We expect aluminium prices to continue strengthening in 4Q14 and FY15 towards the 8-year historical average of USD2200/MT due to the growing usage of aluminium in the auto sector and narrowing available supply as global consumption outstrips existing production levels. Hence, we agree with management that PMETAL “should achieve significant improvement” in FY14E CNP.

Change to Forecasts  The improved aluminium price performance in 3Q14 prompts us to revise our FY14E aluminium spot price estimate to USD1,890/MT from USD1,860/MT previously. We maintain our USD2,100/MT aluminium price estimate in FY15E, which already takes into account potential production deficits in the coming year.

 Accordingly, we increase our FY14E CNP to RM235.8m (+10%) and maintain our FY15E CNP at RM322.2m.

 Supported by strong free cash flow of RM435.5m-RM800.9m in FY14E-FY15E, we expect PMETAL to maintain its quarterly dividend payout schedule. Hence, we raise our FY14E-FY15E dividend expectation to 21-29 sen (from 13-19 sen previously) which implies a dividend payout ratio of 45% compared to 30% previously.

Rating Maintain OUTPERFORM

 We continue to favour PMETAL due to its solid earnings growth potential and globally competitive margins at 9.8% vs industry peers of 5.8%.

Valuation  Maintain our current TP of RM8.87 (ex-bonus issue TP of RM4.43), based on a Fwd. PE of 14x FY15E EPS of 63.4 sen. Our Fwd. PE is based on the FBM Mid 70 Index Fwd. FY15E PE of 14x. We believe our benchmark is justified by PMETAL’s strong earnings growth prospects at 86%-37% in FY14E-FY15E.

Risks to Our Call

 Lower-than-expected aluminium prices

 Stability of power supply

Source: Kenanga