Press Metal Berhad (PMETAL) FY16 CNP at RM430m beat our RM343m forecast on better-than-expected margins thanks to higher aluminium prices and stronger USD/MYR. A fourth interim dividend of 2.0 sen was declared for full- year DPS of 8.5 sen, above our expected 7.0 sen. We revise up FY17E CNP to RM595m on updated margin assumptions while introducing FY18E CNP of RM658m. Maintain OUTPERFORM with higher TP of RM2.60 (from RM2.15).

FY16 beats forecast. FY16 CNP at RM430m exceeded our RM343m forecast on the back of higher aluminium prices and better-than- expected margins upon the ramp-up of the Samalaju Phase 2 plant. A fourth interim dividend of 2.0 sen was announced for FY16 DPS of 8.5 sen, exceeding our 7.0 sen forecast.

Price & volume growth. YoY, CNP increased 58% to RM430m as EBIT margin expanded to 12.9% (from 7.6%) thanks to higher utilisation at Samalaju and improved production efficiency as the new Samalaju plant was fully ramped up. Furthermore, while aluminium prices were slightly lower (-3% YoY to USD1,605/metric ton (MT)), USDMYR rose (+5% to USDMYR4.12) which increased RM value of aluminium sold. QoQ, CNP rose 14% to RM150m on the back of higher aluminium prices (+6% QoQ to RM1,710/MT) coupled with stronger USD/MYR (+7% to USDMYR4.32) resulting in higher EBIT margins of 12.8% (from 11.6%).

Expect continued margin improvement. We are positive on 1Q17 prospect as aluminium prices have continued rising to a year-to-date (YTD) average of USD1,818/MT. Meanwhile, management noted the positive sentiment for commodities thanks to fiscal stimulus from China and potential limits on Chinese smelting activity in the winter. Looking ahead, we are confident on long-term margin expansion on continued measures to improve cost efficiency (i.e. Samalaju Port, scheduled for 2Q17) and streamline raw material sources. Top-line should continue to see growth on increased share of high-value alloy production. Meanwhile, structural advantages such as lower-than-average electricity cost and pioneer tax benefits should ensure above-average production cost structure compared to other global players.

Upgrade FY17E CNP to RM595m as we introduce FY18E CNP of RM658m. We revise up our FY17E CNP by 15% as we update our margin assumptions to reflect improved production efficiency due to better utilisation and cost synergies with the opening of new port facilities. We also introduce FY18E CNP of RM658m which implies YoY earnings growth of 11%.

Maintain OUTPERFORM with higher TP of RM2.60 (from RM2.15) based on unchanged Fwd. PER of 16.0x as we roll forward our valuation base year to average FY17-18E for applied EPS of 16.2 sen. Our Fwd. PER of 16.0x is in line with previous trends of PER expansion due to capacity growth, implying a valuation basis of +1.0SD. We remain positive on PMETAL as short-term prospects are bright on higher aluminium prices, while long-term earnings should be sustained by efficiency improvements and highly competitive cost structure against its global peers. Hence, we reiterate our OUTPERFORM call on PMETAL.

Risks to our call include (i) lower-than-expected aluminium prices, (ii) weaker-than-expected USD/MYR, and (iii) higher-than-expected raw material cost.

Source: Kenanga Research - 28 Feb 2017