We returned from PMETAL’s 1Q18 Results Briefing with our long-term positive outlook intact, in view of its capacity expansion track and improving cost outlook. However, active volatility and short-term cost pressure may limit earnings growth in 1H18. No change to our FY18-19E CNP of RM720m-1.01b. Maintain MARKET PERFORM with unchanged TP of RM5.00.

Expanding product mix. From Press Metal Aluminum Holdings Berhad (PMETAL) 1Q18 Analysts Briefing, we gather that despite a challenging market outlook, long-term earnings prospects remain positive in view of continued expansion and better cost stability towards 2H18. Based on our recent plant visit to the Samalaju smelting complex, we understand that PMETAL has recently added new casting lines for wire rods and billets, expanding wire rod production capacity to 48k MT (from 24k MT in 2017) and billet production capacity to 240k MT (previously 120k in the Mukah plant). By year-end, management hopes to raise wire rod capacity to 200k MT, inclusive of 80k MT from the Feb-18 bolt-on acquisition of Leader Universal Aluminum (Leader).

Logistics streamlined. Aside from the value-add upgrades, PMETAL has also streamlined its logistics flow, with the completion of its new conveyor belt that directly transports alumina from bulk transports berthed at the Samalaju Port directly into its own silos. Management had previously estimated USD8-10/MT savings with the use of the conveyor belt (previously bulk alumina was trucked to Samalaju from Bintulu Port) which, with PMETAL’s port throughput of c.2m MT/year, should result in cost savings of c.RM16-20m annually directly benefiting the bottom line from 2Q18 onwards.

Smoothing out alumina risks. Management noted that recent supply shocks in Brazil and sanctions on Rusal have led to volatility in alumina prices, a key raw material. However, given that the alumina supply restrictions were ‘artificially’ imposed, rather than structural (i.e. no lack of bauxite scarcity), we would expect to see a pullback once these restrictions are lifted, restoring the raw material supply/demand balance. With alumina price to stabilise, the cost impact is likely to be short-term, although this will be partly mitigated by PMETAL’s cost hedging policy and measures to improve product margins. As alumina and carbon anode prices pull back, we expect PMETAL to see margin improvement in 2H18 and beyond.

Maintain FY18-19E CNP at RM720m-1.01b as we anticipate better earnings contribution in 2H18.

Reiterate MARKET PERFORM with unchanged TP of RM5.00 as we expect short-term volatility to hit 2Q18 margins. However, incoming capacity upgrades and a more stable 2H18 cost outlook should provide comfort to long-term investors. Our TP of RM5.00 is based on unchanged Fwd. PER of 19.0x applied to FY19E EPS of 27.0 sen. This reflects earnings growth of 18-40% on the basis of conservative aluminium ASP averaging USD2,000-2,100/MT in FY18-19E (Year-todate average: USD2,198/MT). With protracted aluminum price volatility on the horizon, we continue to advocate a trading view for the short-term based on news flow with a broad trading range of 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). However, earnings outlook remains stable thanks to ASP and raw material hedging (c.40% of ASP and c.70% of alumina) albeit with stronger 2H18 prospects once its cost base stabilizes. Risks to our call include weaker-than-expected commodity prices and higher-than-expected raw material price increase.

Source: Kenanga Research - 25 May 2018