1Q16 core earnings of RM52.8m came in broadly within our (15%) and market (16%) expectations, as we expect stronger earnings in upcoming quarters. First interim dividend of 3.0 sen was declared as expected. FY16E earnings maintained but FY17E earnings upped by 13% on higher aluminium price assumption. Reiterate OUTPERFORM call with higher TP of RM3.65, based on higher Fwd PER of 11.0x, which is at a 23% discount to the FBM70’s Fwd. PER of 14.3x.

1Q16 core net profit (CNP) of RM52.8m came in broadly within expectation, making up 15% and 16% of consensus’ and our estimates, respectively, as we expected stronger earnings from higher production in upcoming quarters. Our core earnings excluded the insurance claim of RM40.0m and unrealised forex gain of RM1.8m. Proposed first interim dividend of 3.0 sen was within our expectation of 12.0 sen (4.1% yield).

Result Highlights. QoQ, 1Q16 CNP was up by 36.0%, mainly due to higher profit from its smelting and extrusion segment (+51.3%); hence, CNP margin improved by 1.3ppt. We believe this could be due to recovery in aluminium prices in 1Q16 (+1.4% QoQ). YoY, 1Q16 revenue increased by 22.2% on the back of higher production from Samalaju Phase 3 plants, which has been commissioning since Dec 2015. However, CNP plunged by 62.4% with CNP margin eroded by 9.2ppt, which we gather was due to weaker aluminium prices in 1Q16 (-15.9% YoY).

Outlook remains bright in the near-medium-term as we expect earnings growth from the new capacity (Samalaju Phase 3) to be fully operational from end-May 2016 onwards. Meanwhile, 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 and recovery in oil prices.

We upgraded FY17E earnings by 13%, after adjusting for: (i) lower USD/MYR exchange rate (-2.4%) to RM4.00/USD, and (ii) higher aluminium price assumption to USD1,700/MT (+USD100/MT). We opine that aluminium prices have bottomed out in 2015 and likely to rebound beyond current aluminium price of USD1,670/MT from FY17 onwards, supported by reduction in global surplus gap.

Reiterate OUTPERFORM call with higher TP of RM3.65 (from RM2.95), based on higher Fwd PER of 11.0x on FY17E FD EPS of 33.2 sen, which is at a 23% discount to the FBM70’s Fwd. PER of 14.3x. We believe the group deserves higher PER valuation, supported by recovery in aluminium prices. Meanwhile, we like PMETAL for: (i) its globally competitive EBIT margin of 7.5% vs. global industry peers’ 7.3%, and (ii) the stock’s deep value, i.e. trading at Fwd. PER of 10.4, significantly lower than FBM70’s Fwd. PER of 14.3x. Risk to our call include: (i) lower-than-expected aluminium prices, (ii) slower-than-expected aluminium demand, and (iii) interruption to power supply. 

Source: Kenanga Research - 4 May 2016