We returned from our visit to Press Metal Berhad (PMETAL)?s Samalaju plant with our POSITIVE outlook intact. Continuous plant upgrades for high-margin product capacity and better cost efficiency will lead to margin improvement in 2H17, while outlook is positive in the short-term as well, thanks to strong aluminium prices. No change to our FY17-18E CNP of RM648-783m. Reiterate OUTPERFORM with unchanged TP of RM3.15.

Site visit to Press Metal Bintulu. We recently returned from a site visit to PMETAL?s Samalaju aluminum smelting plant, which reaffirming our POSITIVE outlook on the company. We expect ongoing plant upgrades to improve both selling prices and production cost, for better group margins. Meanwhile, the added boost of firm aluminum prices should see FY17-18E PBT margin rising to 14-16%, from 10% in FY16.

The smelting process. PMETAL?s Samalaju and Mukah smelting plants produce primary aluminum from alumina via an electrolysis process, with additional key cost inputs of electricity and carbon anodes. Liquid aluminum is formed in the smelting pot, which is then tapped out and cast into semi-finished forms such as ingots and billets. The Samalaju plant currently has a liquid aluminum production capacity of 640k metric tons (MT) per year (group capacity: 760k MT) and produces London Metals Exchange (LME) registered aluminum ingots.

Upgrading billet production capacity. We gathered that with the completion of the second Samalaju smelting plant, PMETAL is currently constructing its second cast house for the production of aluminum billets, which fetch a premium of 5-10% above the aluminum commodity price, on top of the existing delivery premium. The billet cast house is expected to begin operations in 2H17.

Samalaju Port expansion to trim logistics cost. With the Samalaju deep sea port slated to start operations in 2Q17, we expect to see logistics cost savings and better production efficiency, as raw materials are currently shipped daily from Bintulu Port overland. In preparation for the new port, PMETAL is constructing a conveyor belt to directly transport alumina into the smelting plant. We believe PMETAL will start to see cost savings upon commencement of the Samalaju port, translating into slight margin improvement in 2Q17 and further expansion in 2H17, assuming prices remain stable.

Bullish price outlook. We remain bullish on aluminum prices as China has recently ordered a 30% aluminum production cut. Meanwhile, countries like India, Australia and USA are exploring or have implemented anti-dumping duties on Chinese aluminum, leveling the playing field for other manufacturers. Furthermore, with limited US production due to high manufacturing costs, premiums are on the rise with forward premium reaching c.USD200/MT from a low of USD160/MT in Oct-2015.

Maintain FY17-18E CNP at RM648-783m as ongoing expansions are already factored into our forecast.

Maintain OUTPERFORM with unchanged TP of RM3.15 based on Fwd. PER of 17x on unchanged FY17-18E FD EPS of 18.5 sen. We are still OUTPERFORM on the stock, given the bullish price environment, continued increase in cost efficiency and rising proportion of high-margin products.

Source: Kenanga Research - 31 Mar 2017