News

According to China Daily, the China government has announced that it will remove export taxes on bars and rods of primary aluminium and aluminium-alloy effective 1-May-15. The government also scrapped export fees on rare earth ores, tungsten and molybdenum alloys.

Comments

We are not overly concern on this news as: (i) despite the removal of export tax, Chinese aluminium is still less attractive in terms of pricing as compared to international aluminium prices, (ii) even though China is the world’s largest aluminium producer, most of their productions are for their local consumption, hence the supply dynamic is neutral on global players such as PMETAL, and (iii) the export tariff change only applies to a small number of aluminium products (rods and strips of certain dimensions), which accounted for a mere 14k/MT of exports in 2014. Hence, we believe this development will have a negligible impact on Chinese exports and aluminium premiums in Europe and US in the near-term.

China’s aluminium prices are less attractive than global prices. We gather that the 3-year average aluminium price is USD1,900/MT while the average Japan premium is USD293/MT. Thus, all-in international aluminium price is circa USD2,190/MT, 4.8% cheaper than that of China Shanghai 3-year average of USD2,300/MT. In terms of spot price comparison, we note that the international aluminium price is USD1,800/MT while the Japan premium is USD269/MT. The all-in international aluminium price is circa USD2,070/MT, still 1.4% cheaper than China Shanghai’s USD2,100/MT. We believe that the premium for Chinese aluminium prices is mainly due to higher transportation and energy costs. Hence, we do not think PMETAL’s global customers can simply switch to Chinese players given the latter’s premium pricing.

Strong China’s local demand limits exports. We have actually highlighted earlier that most of China’s aluminium supply is for its own consumption. The country’s maximum aluminium production was 24.4m MT almost matching its consumption of 24.1m MT. Hence, not leaving much room for export.

Outlook

Remain bright in the near-medium term as we expect earnings growth from the new capacity to start kicking-in from January 2016 onwards.

We also reaffirm our aluminium price assumption at USD1,900/MT, as we expect aluminium prices to stabilise in later part of 2H15 when demand is expected to recover, driven by growing usage of aluminium in the auto sector.

Forecast

Unchanged.

Rating

Maintain OUTPERFORM

Valuation

The negative sentiment from the news has impacted PMETAL’s share price, causing it to decline 10.5% last Friday. However, we see this as a temporary knee-jerk reaction as its fundamentals remain intact. Furthermore, note that there is a high possibility that the stock will be included into the Shariah-compliant universe during the upcoming review in mid-2015, which should garner some support from Shariah funds.

Hence, we advocate investors to take this opportunity to buy on weakness given that PMETAL’s fundamental and prospects remain intact. At this price level, the stock is relatively cheap, trading at only FY16E PER of 8.0x, lower than that of FBM70 fwd. PER of 14.5x.

All said, we reiterate our TP of RM5.41, based on unchanged fwd. PER of 15.0x on FY16E FD core EPS of 36.1 sen. PMETAL is our top pick due to its strong fundamentals such as: (i) industry-leading margins at 16.7% vs global average at 12.0%, and (ii) bright earnings outlook driven by capacity expansion.

Risks

to Our Call

Lower-than-expected aluminium prices

Interruption to power supply

Slower-than-expected aluminium demand

Higher-than-expected raw material prices

Forex fluctuation risks

Source: Kenanga Research - 27 Apr 2015