Press Metal Berhad (PMETAL) announced a 20:80 joint venture (JV) with Sunstone Development Co. Ltd (Sunstone) to establish a pre-baked carbon anode manufacturing facility in China for RMB264.0m (RM163.5m). We are positive on the news as the joint venture will secure stable raw material supply for PMETAL and streamline operating margins from FY18E onwards. Maintain earnings and OUTPERFORM call with an unchanged TP of RM5.00 based on Fwd. PER of 15.0x.

Establishes JV for raw materials manufacture. PMETAL announced that it has entered into a Joint Venture Agreement (JVA) with Sunstone Development Co. Ltd (Sunstone) to establish and operate a joint venture company (JV), Shandong Sunstone & PMB Carbon Ltd., Co (SSPC) to manufacture pre-baked carbon anodes. SSPC will be incorporated in China with an initial issued and paid-up share capital of RMB1.0m which will be increased to RMB264.0m (USD39.5m, or RM163.5m). PMETAL will own 20% of SSPC, while Sunstone will own the remaining 80%. We gather that Sunstone specializes in the production and marketing of pre-baked carbon anodes for both for the local Chinese and export markets.

Positive for margins. We are long-term positive on the announcement as pre-baked carbon anodes are a major raw material used in smelting aluminium, making up c.10% of operating cost. The move upstream should secure a stable supply of raw materials for PMETAL’s smelters in Mukah and Bintulu. We understand that the plant will have more than sufficient capacity to cover PMETAL’s own pre-baked carbon anode requirements. Hence, we are optimistic that SSPC will be able to stabilise raw material costs and improve operating margins once the plant is fully operational from FY18E onwards. We expect minimal net gearing impact (<0.1x) given the low investment cost of cRM32.7m.

Maintain FY16-17E earnings as we expect full benefits to be felt from FY18E onwards, while the investment cost will have a minimal impact in gearing.

Reiterate OUTPERFORM on PMETAL with unchanged TP of RM5.00 (ex-bonus/share split TP: RM1.79) based on FY17E Fully Diluted (FD) EPS of 33.4 sen and an unchanged Fwd. PER of 15.0x. Our Fwd. PER of 15.0x is based on an ex-capacity PER-to-aluminium 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 maintain our OUTPERFORM call on PMETAL as we are positive on aluminium price prospects and its improving operational efficiencies with the full commissioning of its new Samalaju plant.

Source: Kenanga Research - 21 Sep 2016