Period

3Q15/9M15

Actual vs. Expectations

PMETAL’s 9M15 core net profit (CNP*) of RM237.0m came in above expectations, at 88% and 91% of our and market estimates, respectively. The positive variance is mainly attributable to the better-than-expected margin arising from leaner administrative and other overheads expenses.

We derived the CNP after excluding one-off items, namely: (i) unrealised forex gain on derivatives of RM2.1m, (ii) assets impairment loss of RM29.5m for the Samalaju smelting plant, and (iii) exceptional insurance claim of RM20.0m, which is attributable to the fire incident in Samalaju plant in May 2015.

Dividends

Third interim dividend of 1.5 sen was declared, which totalled up to 6.0 sen YTD which is below our FY15E dividend of 9.0 sen (4.3% yield).

Key Results Highlights

QoQ, despite sales volume retreating slightly, 3Q15 revenue rose 7.3% to RM1.02b, mainly due to: (i) stable sales value in MYR due to stronger USD, and (ii) partial mitigation in lower production volume via sourcing of metal from the open market to fulfil existing customer orders. CNP slumped 38.5% to RM36.9m, due to: (i) lower production volume from Samalaju smelting plant, (ii) lower aluminium price, and (iii) higher effective tax rate (+4.8ppt to 29.0%).

YoY, 9M15 CNP rose 26.8% to RM237.0m, on the back of higher revenue (+3.2% to RM3.02b), thanks to margin expansion by 1.5ppt to 7.9%. We believe this is due to the stronger USD against MYR (+16.5% to average of RM3.78/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.

As we believe the downtrend in aluminium price has bottomed out, we maintained our aluminium price assumption at USD1,700/MT. We expect aluminium prices to recover from FY16 onwards when demand is expected to recover, driven by growing usage of aluminium in the auto sector.

Change to Forecasts

After upgrading our EBITDA margin by 2ppt to 19% (in line with 9M15 EBITDA margin), we raise our FY15E CNP forecasts by 13.0% to RM304.8m (from RM269.2m previously). However, our FY16E earnings remain unchanged.

Rating

Maintain OUTPERFORM

Valuation

We maintain our TP at RM2.59, based on an unchanged PER of 10.0x, which is at a 20% discount to the FBM70’s Fwd. PER of 12.5x.

We like PMETAL for: (i) its globally competitive EBIT margin of 14.1% vs. global industry peers’ 7.3%, (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 7.7x, significantly lower than 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.

Unfavorable forex fluctuation.

Source: Kenanga Research - 27 Nov 2015