Press Metal Aluminum Holdings Berhad (PMETAL) 1H17 Core Net Profit (CNP*) came in at RM290m, in line with both consensus and our forecast at 46% and 45%, respectively. An interim dividend of 1.5 sen was announced, missing estimates at 38% of consensus and 33% of our forecast. No change to FY17-18E CNPs of RM648-877m but FY17-18E DPS is lowered by 22-9% to 7.0-10.0 sen. Maintain OUTPERFORM with an unchanged TP of RM4.05.

1H17 within expectations. 1H17 CNP of RM290m met both consensus RM636m estimate at 46% and our RM648m forecast at 45%. An interim dividend of 1.5 sen was announced for 1H17 dividends of 3.0 sen, below expectations as it made up 33% of our 9.0 sen estimate and 38% of consensus 8.0 sen.

Economies of scale. YoY, 1H17 CNP jumped 83% on better production volume and higher ringgit aluminum prices (+30% to c.RM8,240/MT) as higher USD aluminum prices (+22% to c.USD1,880/MT) was boosted by stronger USD/MYR (+7% to 4.39). Note that 1H16 net profit included insurance claims of c.RM95m due to a 2015 fire at the first Samalaju plant. However, this is excluded from our CNP calculations due to its one-off nature. QoQ, CNP softened slightly (-5%) on higher tax charge (+31%), though PBT improved 5% on the back of slight EBIT margin improvement (an additional 0.2% to 12.3%) on efficiency improvement. Ringgit aluminum prices meanwhile were flat QoQ at c.RM8,250/MT, as USD aluminum price improvement (+3% to USD1,900/MT) was offset by a weaker USD/MYR (-3% to 4.33).

Bright price outlook. With the Chinese government proceeding with its production reforms, management expects slower Chinese smelting activity to tilt demand into a deficit, supporting long-term prices. We agree that tightening supply should support prices at least up to 2H18, with focus towards end-2017 due to China’s environmental deadline over the winter months. However, we expect the positive price benefits to be seen more clearly in FY18, given PMETAL’s forward selling policies of >50% of production.

Solid long-term operating prospects. Over the longer run, we expect continued margin expansion with several plant upgrades in the works, including higher billet production capacity and alumina conveyor belt, which are due for completion in 2H17. Logistics costs will also be streamlined with the recently launched Samalaju Port and road upgrades, shortening the distance between the Mukah plant and Bintulu Port. All-in, we expect stronger aluminum prices and productivity upgrades to improve FY17-18E core net margins to 8.3-10.3%, from 6.5% in FY16.

No change to FY17-18E CNPs of RM648-877m with earnings in line with our expectations. However, we trim our FY17-18E dividend pay-out estimates to 40% (from 50%), reflecting the average pay-out ratio since the previous share split three quarters ago. As a result, our FY17-18E DPS is lowered by 22-9% to 7.0-10.0 sen.

Maintain OUTPERFORM with unchanged TP of RM4.05 based on Fwd. PER of 18.0x applied to FY18E FD Core EPS of 22.5 sen. Our Fwd. PER of 18.0x is based on a 2.0x PER premium to our base calculated PER to reflect the re-rating of international aluminum counters thanks to the aluminum price surge to a 3-year high beyond USD2,000/MT. We remain positive on PMETAL in view of strong aluminum prices complemented by continued cost structure improvements and rising proportion of high-margin products.

Source: Kenanga Research - 17 Aug 2017