PMETAL’s FY17 CNP of RM611m is within expectations making up 99% of both consensus and our forecast. An interim dividend of 1.5 sen was announced, for full-year dividend of 6.0 sen which we deem within our 6.5 sen estimate. We adjust down our FY18E CNP by 3% after housekeeping, and introduce our FY19E CNP of RM1.18b. Maintain MARKET PERFORM with higher TP of RM5.85 (from RM5.00).

FY17 meets expectations. Press Metal Aluminum Holdings Berhad (PMETAL) recorded FY17 CNP of RM611m which came in line with consensus’ RM616m and our RM618m forecast at 99%. An interim dividend of 1.5 sen was announced making up full-year dividend of 6.0 sen, which we deem in line with our forecasted 6.5 sen.

Full-year production effect. YoY, FY17 CNP jumped 43% on stronger production volume, with full-year production seen in the second Samalaju plant, combined with higher average aluminium prices by 23% to USD1,967/metric ton (MT) although we note that the bulk of received prices are hedged due to forward selling policies. Note that 9M16 reported 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, 4Q17 CNP rose 11% on lower tax expense (-38%) and improvement in aluminium prices (+5%).

Acquiring aluminium rod manufacturer. The company also announced that its 80%-owned subsidiary Press Metal Bintulu Sdn. Bhd. (Bintulu) has entered into a Share Purchase Agreement (SPA) to acquire 27m shares constituting 100% of Leader Universal Aluminum Sdn. Bhd (Leader) for RM96.0m. We gather that Leader is a manufacturer of aluminium rods and other aluminium products in plants located in Nilai (Negeri Sembilan) and Tampoi (Johor). Valuation-wise, the implied valuation of 6.2x appears inexpensive in comparison to aluminium processing peers’ average of 9.3x. We expect the deal to slightly increase FY18E net gearing to 0.8x (from 0.7x), while earningswise, the acquisition should contribute positively to FY19E earnings.

Adjusting FY18E CNP by -3% to RM934m as we introduce F19E CNP of RM1.18b. We tweak our FY18E CNP by 3% to RM934m after minor housekeeping after accounting for the acquisition and adjusting our cost and exchange rate assumptions. We also introduce our FY19E CNP of RM1.18b implying earnings growth of 42%, driven by new acquisitions and continued streamlining of efficiency in tandem with topline growth from expansion into higher margin downstream products.

Maintain MARKET PERFORM with higher TP of RM5.85 (from RM5.00) based on unchanged Fwd. PER of 19x as we roll forward our valuation base year to FY19E (from FY18E). Our Fwd. PER of 19x imputes for the recent entry of PMETAL into the FBMKLCI, in combination with the continued strength of aluminum prices. We maintain our positive operating outlook on PMETAL in view of its strong pipeline of upgrades, supportive aluminum prices, superior margins vs. other global players and strong management team. However, with the share prices fairly reflecting current operational strengths, we maintain our MARKET PERFORM call on PMETAL for now.

Risks to our call include stronger-than-expected commodity prices and higher-than-expected raw material price increase.

Source: Kenanga Research - 28 Feb 2018