Period

2Q15/1H15

Actual vs. Expectations

Press Metal (PMETAL)’s 1H15 Core Net Profit (CNP*) of RM200.2m came in at 68% and 67% of our, and market, estimates but we deem this as broadly in-line as we expect a weaker 2H15 ahead.

We derived the CNP after excluding one-off items, namely: (i) unrealised forex loss of RM50.5m, and (ii) unrealised gain on derivatives of RM15.3m.

Dividends

Second interim dividend of 1.5 sen was declared, which totalled up to 4.5 sen YTD which is within our FY15E dividend of 10.0 sen (2.4% yield).

Key Results Highlights

QoQ, 2Q15 revenue declined by 10.3% to RM947.3m mainly attributable to lower output from Samalaju smelting plant, which had its operation shut down in May-15 for 3 weeks. 2Q15 CNP slumped by 57.2% to RM60.0m, due to: (i) lower revenue from Samalaju smelting plant, and (ii) partial machinery impairment loss of RM32.8m for the Samalaju smelting plant.

YoY, 1H15 revenue rose by 5.6% to RM2.0b, which we believe was due to slight increase in average aluminium prices (+1.7%). 1H15 CNP leaped by 145% to RM200.2m, thanks to margin expansion by 6.6% to 10.9%. We believe this is contributed by the strengthening of USD against MYR (+11% to average of RM3.64/USD).

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.

In view of softer aluminium price, we toned down our aluminium price assumption from USD1,800/MT to USD1,700/MT. 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.

Change to Forecasts

We lowered our FY15-16E earnings by 9-14% to RM269.2- 357.4m respectively, after adjusting our USD/MYR higher by 5% to RM3.88/USD but lowering our aluminium prices by 6% to USD1,700/MT.

Rating

Maintain OUTPERFORM

Valuation

We reduce our TP to RM2.59 (from RM3.88 previously), based on a lower target PER of 10.0x, which is at a 20% discount to the FBM70’s Fwd. PER of 12.5x (from PER of 14.3x previously).

Our applied PER is lowered due to the de-rating in the FBM70 Fwd PER from 14.3x to 12.5x a quarter ago, while we widen our discount rate to 20% (from 10% previously) on the FBM70 Fwd PER due to higher aluminium price volatility.

Nonetheless, we still like PMETAL for: (i) its globally competitive margins of 17.7% vs global industry peers’ 11.0%, (ii) superior earnings growth (FY16E: 33%) driven by capacity expansion at its Samalaju Phase 3 smelting plant, and (iii) the stock’s deep value, i.e. trading at Fwd. PER of 6.7x, significantly lower than that of FBM70’s Fwd. PER of 12.5x.

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 - 13 Aug 2015