1H16 CNP* at RM158.4m was within our/market forecasts at 46%/47%. Interim dividend of 3.0 sen declared, as expected. FY16-17E earnings maintained with stronger 2H as Phase 3 expansion is fully commissioned. Maintain OUTPERFORM with higher TP of RM5.00 (ex-bonus/split TP: RM1.79) based on higher Fwd. PER of 15.0x, unchanged FY17E EPS of 33.4 sen as we expect continued re-rating post-expansion.

1H16 within expectations. 1H16 core net profit (CNP*) at RM158.4m was within expectations at 46% and 47% of our (RM343.0m) and consensus (RM338.0m) forecasts, respectively. Note that our FY16 core earnings estimate excludes year-to-date insurance claims of RM76.0m (RM95.0m less 20% minority portion) and unrealised forex gains of RM7.5m. In 3Q16, we expect the release of third and final tranche of insurance compensation of RM45.0m for a full-year total claim of RM115.0m. A second interim dividend of 3.0 sen was proposed, for year-to-date DPS of 6.0 sen, within our expectation of 12.0 sen (2.8% yield).

Volume growth driving improvement. Against 1Q16, 2Q16 CNP doubled to RM106.1m as revenue jumped 23% on initial production from the Phase 3 expansion at its Samalaju plant. Excluding one-offs, core PBT rose by 67% to RM196.8m as margins improved on higher utilisation and economies of scale due to the expansion. Meanwhile, against 1H15, despite higher 1H16 revenue growth of +44%, 1H16 CNP weakened 20.9% on 81% higher depreciation cost and 17% higher finance cost after the expansion. We also note that aluminium prices declined 2.5% in ringgit terms, as USD aluminium prices fell 13.5% to USD1544/metric ton (MT) and USD/MYR strengthened by 12.7% to MYR4.10 in the same period.

Bright 2H16 outlook as we expect results to continue improving in 3Q16 with the new Samalaju plant fully operational in Jun 2016. Meanwhile, we note that quarter-to-date (3Q16) aluminium prices are on an uptrend with a QTD average of USD1,630/MT, or 3.9% higher QoQ and 1.4% higher YoY. In the longer term, we expect aluminium prices to continue its recovery as global capacity cuts lead to inventory drawdowns, while Asia ex-China production remains consistently lower than Asia ex-China demand.

Maintain FY16-17E earnings as 1H16 CNP is within our forecasts.

Reiterate OUTPERFORM on PMETAL with higher TP of RM5.00 (from RM4.21). We maintain our positive view on the company with a higher TP of RM5.00 (ex-bonus/split TP: RM1.79) as we upgrade our Fwd. PER to 15.0x (from 12.7x) applied to unchanged FY17E FD EPS of 33.4 sen. Our Fwd. PER of 15.0x is based on an ex-capacity PER-to-aluminum price ratio of 0.50x (when aluminium prices range between USD1,600-1,800/MT). Based on our FY17E aluminium price forecast of USD1,700/MT and the 73% capacity growth from Samalaju Phase 3, we derive a Fwd. PER of 15.0x. We also reiterate our OUTPERFORM call on PMETAL, as we believe the group deserves a re-rating in view of aluminium price recovery, higher effective capacity, and rising operational efficiencies.

Source: Kenanga Research - 17 Aug 2016