News

Press Metal Berhad (PMETAL) announced yesterday that the group decided to temporarily halt its operations at the Samalaju plant pending a clean-up and to carry out repair work for the damaged pots and perform necessary testing before commissioning. The company estimates to restart operations within one month from now.

According to the announcement, although electricity supply to other smelting pots was disrupted, no molten aluminium was solidified before the electricity supply was subsequently restored.

Comments

We were negatively surprised. Recall, on 20-May-15 (title: Fundamentals Remain Intact), we issued a note mentioning that the fire incident affects only a minimal part of the factory. However, we now understand that there are additional complications in the factory which resulted in the temporary shutdown of the plant. The management view that this is a prudent decision to prevent more potential damage to the factory and is confident that it will be operational again in a month’s time.

A hit in FY15E earnings by 11%. Based on our estimates, since Samalaju plant is the group’s biggest smelting plant (73% of total production), a one-month temporary shutdown could hit its FY15E revenue by -5% and earnings by -11%. The higher reduction in earnings is due to higher fixed cost per unit of production as production volume reduces.

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 the later part of 2H15 when demand is expected to recover, driven by growing usage of aluminium in the auto sector.

Forecast

Pursuant to the shutdown, we trimmed our FY15E CNP by 11% after taking out one month of production contribution from Samalaju plant. No changes were made for FY16E as we expect the plant to recover this year. Hence, we expect a weaker 2Q15 due to this shutdown.

Rating

Maintain OUTPERFORM

Valuation

We expect sentiment to be affected in the near-term given the said operational risks (the fire incident). Hence, we have decided to ascribe discounted valuation on the stock. Our TP is now reduced to RM4.65 (from RM5.41 previously) after lowering our target PER to12.9x from 15.0x previously. The ascribed PER of 12.9x is at a 10% discount to FBM70’s Fwd. PER of 14.3x.

However, PMETAL’s core fundamentals remain intact. While we understand that there is an operational risk, we reiterate our view that the group’s fundamentals remain intact as: (i) PMETAL has superior margins of 17.7% as compared to their global competitors’ average of 13.1%, (ii) we expect aluminium prices to recover in the near-medium term, and (iii) there is a high possibility that the stock may be included into the Shariah-compliant universe during the upcoming review in mid-2015, which should garner some support from Shariah funds.

Nonetheless, at current price level, due to the slide in share prices, the stock is attractively cheap, trading at only 7.5x, still significantly lower than our applied FY16E PER of 12.9x.

Risks to Our Call

Lower-than-expected aluminium prices

Interruption to power supply

Slower-than-expected aluminium demand

Source: Kenanga Research - 22 May 2015