PMETAL’s 1Q18 CNP at RM142m is below consensus forecast at 18% but within our expectations at 20%, likely on higher raw material cost. An interim dividend of 1.5 sen was declared, in line with our 6.5 sen forecast. No change to FY18-19E CNP. Update call to MARKET PERFORM with unchanged TP of RM5.00 in view of the substantial share price run-up following a correction in March 2018.

1Q18 meets our estimate. Press Metal Aluminum Holdings Berhad (PMETAL) Core Net Profit (CNP*) of RM142m came in within our RM720m forecast at 20%, but fell short of consensus’ RM770m estimate at 18%, likely as market underestimated the impact of higher raw material costs for the quarter. An interim dividend of 1.5 sen was announced, which we deem in line with our forecasted 6.5 sen. Note that our core net profit excludes unrealised forex gains of RM8.8m.

Cost pressure. YoY, 1Q18 CNP weakened 5% to RM142m despite revenue rising by 10% to RM2.13b on the back of higher aluminium prices (+17% to USD2,280/metric ton (MT)). This was largely due to increased raw material prices where alumina prices rose by 23% to USD382/MT and carbon cost (represented by pet coke) increased by 50% to CNY284/MT (RM176/MT). As a result, operating margin softened to 11.9% (from 12.6%). QoQ, CNP softened 16% on higher tax charges (+47% to RM18m) and flat revenue (-1%) since aluminium prices were minimally higher (+2% to USD2,155/MT). Otherwise, we observe flat EBIT (+2% to RM253m) as higher carbon cost (+11%) was offset by lower alumina (-4%) prices.

Swinging on external factors. Management acknowledged the recent volatility in aluminium prices as global markets react to the rash of material news, including on-and-off US sanctions, real and perceived disruptions to alumina supply, and Chinese production outlook upon the end of its winter season capacity cuts. With many unresolved issues in the global aluminium market, we continue to expect volatility through the year, which will require nimble action from a trading standpoint. However, we are positive on PMETAL’s operating prospects given the measures taken by management to hedge cost risks, improve efficiency and increase its value-added product mix.

Maintain FY18-19E at RM720-1.01b as earnings are in line with our projections.

Update to MARKET PERFORM with unchanged TP of RM5.00 based on Fwd. PER of 19.0x applied to FY19E EPS of 27.0 sen. This reflects earnings growth of 18-40% on the basis of aluminium ASP averaging USD2,000-2,100/MT in FY18-19E. We continue to like PMETAL given its positive operating outlook and good earnings growth potential. However, at current prices, we see limited upside on the stock and we expect substantial volatility in both aluminium and raw materials prices to result in major share price swings. This makes our PE-based valuation somewhat less meaningful, unless considered over the longer run. For the short term, investors may choose to adopt a trading view for the stock based on news flow. With significant price swings on both aluminium and alumina prices, we expect a very wide potential trading range for PMETAL’s share price between RM3.50 (assuming aluminium at USD1,900/MT, alumina at USD350/MT) up to RM5.60 (assuming aluminium at USD2,500/MT, alumina at USD525/MT). Nevertheless, we believe our earnings projections remain steady given that PMETAL’s hedging policy (c.40% of ASP and c.70% of alumina) should provide good earnings stability for at least for the next 6 months. Risks to our call include weaker-than-expected commodity prices and higher-than-expected raw material price increase.

Source: Kenanga Research - 18 May 2018