Press Metal Berhad’s (PMETAL) 1Q17 Core Net Profit (CNP*) of RM149m was in line with both ours and consensus expectations at 23% and 24% respectively. An interim dividend of 1.5 sen was announced, as expected. No change to our FY17-18E CNP of RM648-783m. Reiterate OUTPERFORM with unchanged TP of RM3.15.

Within expectations. PMETAL’s 1Q17 CNP* of RM149m came within expectations, at 23% of our RM648m full-year forecast, and 24% of consensus’ RM783m estimate. An interim dividend of 1.5 sen was announced, slightly below expectations as it made up 14% of our 11.0 sen estimate and 17% of consensus’ 9.0 sen.

Capacity jump. YoY, 3M17 CNP soared 1.8x on the back of higher production volume, as the second Samalaju plant reached full capacity. At the same time aluminum cash prices rose 22% to USD1,850/metric ton (MT). Note that 1Q16 net profit included insurance claims of RM50.0m due to a 2015 fire at the first Samalaju plant. However, this is excluded from our CNP calculation due to its one-off nature. QoQ, 1Q17 CNP was flat (-1%) against 4Q17, given limited capacity changes. Operating margins were relatively similar at 12.1%, versus 12.8% previously. While aluminum cash prices were slightly higher (+8%) we expect the movement to be reflected in later quarters, due to PMETAL’s forward selling policies of >50% of production.

Polishing up margins. We remain positive on earnings growth prospects (+51% YoY) thanks to higher effective full-year capacity (+27% to 760k MT) coupled with stronger price expectations (+9% to USD1,750/MT). Management also noted that China’s move to curb aluminum production capacity should tilt the market towards a “deficit situation”, which bodes well for price sustainability. Recall also that PMETAL aimed to improve its margins on the topline by upgrading its billet production capacity, which offers better premiums, and at the same time streamlining production cost through the Samalaju Port expansion, as well as constructing a conveyor belt to directly transport alumina into its smelting plant. All-in, we expect the upgrades to improve PMETAL’s FY17-18E operating margins to 15.7-17.4%, from 12.9% in FY16A.

Maintain FY17-18E CNP at RM648-783m as operating performance came within our expectations. However, we trim our FY17-18E dividend payout estimate to 50% (from 64%), reflecting the 10-year average payout ratio of 50%. As a result, our FY17-18E DPS is lowered by 18-21% to 9.0-11.0 sen.

Reiterate OUTPERFORM with unchanged TP of RM3.15. Our TP of RM3.15 is based on an unchanged Fwd. PER of 17.0x applied to average FY17-18E fully diluted (FD) EPS of 18.5 sen. We remain OUTPERFORM on PMETAL in view of the bullish price environment, higher productivity, and continued margin expansion efforts by the management.

Source: Kenanga Research - 19 May 2017