PMETAL has proposed to acquire a 50% equity stake in Japan Alumina Associates (Australia) Pty. Ltd. (JAA) via its 80%-owned Press Metal Bintulu (PMBintulu), for a total cash consideration of AUD250m (c.RM739m). The acquisition is expected to be earnings accretive and improve earnings by c.2% after financing costs. No change in FY18-19E CNPs of RM720m-1.01b as earnings impact from the acquisition is minimal. Maintain MARKET PERFORM and TP of RM5.00.

Moving up the value chain. Press Metal Aluminium Holdings (PMETAL) has proposed to acquire a 50% equity stake in Japan Alumina Associates (Australia) Pty. Ltd. (JAA) from ITOCHU Minerals & Energy of Australia Pty. Ltd. via its 80%-owned Press Metal Bintulu (PMBintulu), for a total cash consideration of AUD250m (c.RM739m). JAA is an investment holding company which has 10% interest in the Worsley Alumina Unincorporated Joint Venture (Worsley). Worsley is one of the world's largest and lowest-cost alumina producers with 4.6m MT annual capacity, of which 5% or 230k MT would be attributable to PMETAL. This would satisfy c.15% of PMETAL’s annual alumina requirements of c.1.5m MT, giving PMETAL better control over its supply chain and certainty of securing its feedstocks amid supply tightness in the current alumina market. The acquisition is slated for completion in 1Q19.

Accretive acquisition. From our back-of-the-envelope calculations, the acquisition translates to an FY18 PE of c.11x, which we deem fair as other alumina producers such as Norsk Hydro and Alcoa Corp are trading at 10-13x. Additionally, the acquisition is accretive given that PMETAL is trading at an FY19E PE of 19x, and it would be fully funded via external borrowings in lieu of equity issuance. The drawdown of borrowings would increase PMETAL’s net gearing to 0.7x from 0.4x in FY19E. Overall, the acquisition is expected to improve earnings by c.2% after considering additional financing costs.

No change in FY18-FY19E CNPs of RM720m-1.01b as earnings impact from the acquisition is minimal at c.2%. Our FY18E aluminium price assumption of USD2,000/MT (vs. YTD USD2,158/MT) remains unchanged as we see potential pullbacks in aluminium prices to USD1,800-1,900/MT levels from current price of USD2,034/MT. This is because the US Treasury has in mid-Sep relaxed the sanction on Rusal to allow the company to sign new contracts with existing customers, allaying concerns of a supply disruption in the aluminium market. This is unfavourable to aluminium prices as the restored supply adds to the current production surplus condition globally.

Maintain MARKET PERFORM with an unchanged TP of RM5.00 based on a PE of 19.4x, applied to FY19E FD EPS of 25.8 sen. This reflects earnings growth of 20-40% on the basis of aluminium ASP averaging USD2,000-2,100/MT in FY18-19. We continue to like PMETAL given its long-term positive operating outlook and earnings growth potential. However, at recent prices, we see limited upside on the stock and we expect substantial volatility in both aluminium and raw materials prices.

Risks to our call include sharp rises/declines in aluminium prices and major plant disruptions/closure.

Source: Kenanga Research - 18 Oct 2018