We are keeping Press Metal at NEUTRAL, but with a higher MYR2.19 TP(7% downside). While the weak aluminium price is offset by the frailMYR, the overall commodity market remains depressed. That said, we like the company’s long-term fundamental value. This is from its low cost smelter model and medium-term production growth from its Phase 3 expansion. Any uptick in aluminium price may justify a re-rating.

• Expecting a weaker 3Q15. Press Metal is scheduled to release its 3Q15 results next week. London Metal Exchange (LME) aluminium prices and the physical premium paid on top of the LME rate are plunging, with the all-in aluminium price averaging USD1,721/tonne in 2Q15, or -19.9% QoQ. While the weak MYR may partly compensate for the poor aluminium price (which is denominated in USD), there arepotential non-operational losses from the recent fire incident and marked-to-market losses from the frail domestic currency. Therefore, we expect a poor 3Q15 showing before slight recovery in 4Q15.
• Look beyond the present aluminium price weakness? We believe lower cost producers tend to stand out during challenging times. Press Metal is operating successful aluminium smelters in Sarawak that are in the first quartile of the global production cost curve. The company’s expansion not only solidifies its presence in the aluminium industry but also helps to cushion any potential drop in earnings. The repair work at its Phase 2 smelter, which caught fire in May, is almost completed. Therefore, we still project record earnings for the company in the coming years, as its proven low-cost model may enable it to weather challenging times.
• NEUTRAL, with higher MYR2.19 TP. Meanwhile, we cut our all-inaluminium price assumptions by USD25 for FY15 and USD75 each for FY16 and FY17. Together with weaker MYR assumption, our earnings estimates are lowered by 4.9% for FY15. However, FY16 and FY17 estimates are raised by 0.9% and 12.1% respectively. This results in a higher DCF-based TP of MYR2.19 (vs MYR1.93) as we maintain our discount at 50% on a fully-diluted basis. We reiterate NEUTRAL onPress Metal on the back of the near-term commodity market risk. That said, any bottoming of the metal price would be a positive re -rating catalyst.

Watching Aluminium Price Movements Depressed aluminium prices. The LME aluminium cash price continues to drop. It is now hovering just below the USD1,500 per tonne level, which was last seen in early 2009, during the period of the global financial crisis. Apart from that, the premium charged on top of the LME price has been on a downtrend since early 2015. Meanwhile, the Main Japan Port (MJP) quarterly premium for 3Q15/4Q15 has dropped to USD90/USD95 respectively. This was from USD425/USD380 a tonne for 1Q15/2Q15 respectively. The present level of the all-in aluminium price of less than USD1,600 has certainly broken way below its past 10-year average of USD2,312 pertonne.

Another downward adjustment on aluminium price assumptions. The looming interest rate increase by the US Federal Reserve (Fed) is likely to result in the continued strength of the USD. In turn, this may prolong the negative sentiment on commodity prices (inclusive of aluminium prices), as both factors are negatively correlated. Thus, we trim our LME cash price assumption for 2015 to USD1,675 per tonne (from USD1,700). Our LME base price – which starts from 2016 – is at USD1,700 per tonne and, growing by a marginal 1.5% per year thereafter, is lowered accordingly to USD1,675 per tonne. We also cut our long-term physical premium assumptions from 2016 onwards flat – at USD100 per tonne (vs USD150) – but keep our 2015 physical premium assumptions at USD250 per tonne. We believe our all-in aluminium price assumption is conservative. This is because this is way below its 10-year average of USD2,312 per tonne (Figure 1). Separately, we also revised our USD/MYR assumption to 3.91/4.00/3.90 for FY15/FY16/FY17 and thereafter respectively. This is from a USD/MYR FY15/FY16/FY17 assumption of 3.75/3.70/3.60 respectively. That said, considering that wild moves in aluminium prices and forex can quickly affect Press Metal’s profitability, we also enclosed its sensitivity (Figure 3) for your easy reference.

Tweaking earnings estimates. Meanwhile, the additional volume in FY16/FY17 and weaker MYR would generally help to more than cushion the impact of the lower all-in aluminium prices. Therefore, we derived higher earnings for FY16/FY17 by +0.9%/+12.1% to MYR384m/MYR490m respectively. However, our FY15 estimates are lowered 4.9%, to MYR270m. For now, we continue to exclude the potential losses arising from the fire incident at the Samalaju Smelter, as Press Metal is adequately insured. We also eliminate the temporary impact of the quarter-to-quarter marked-to-market value of the company’s USD-denominated borrowings. We deem these as exceptional items from now on.

NEUTRAL with a higher TP of MYR2.19. Taking into consideration: i) potentially poor 3Q15 results, ii) that the realisation of earnings from Phase 3 is expected only in FY16, and iii) that the company’s share price has bounced back a lot from its recent low of MYR1.40 (which limits the potential upside), we decided to keep our recommendation on Press Metal at NEUTRAL. Post the fine tuning of our key assumption, we arrive at a new TP of MYR2.19 (from MYR1.93) that is based on the stock’s fully-diluted DCF valuation at a 50% discount. That said, our new TP implies FY15F-17F P/Es of 10.5x/7.4x/5.8x respectively. As such, we are going to keep a close eye on aluminium price movements, as any sustained uptick would be a key rerating catalyst.