PMETAL’s 9M18 CNP* at RM464m is below consensus at 63% and our forecast at 64%, due to higher-than-expected alumina prices. A 2.0 sen dividend was announced, above expectation, leading to upward revision from 6.5 sen to 7.0 sen. FY19E is expected to be a better year on better product mix and cheaper alumina. Trim FY18E/19E CNP by 12%/4% to RM635m/969m as we adjust our alumina price assumption by 6%/3%. Maintain MARKET PERFORM with a lower TP of RM4.80 (from RM5.00).

Below expectations. 9M18 Core Net Profit (CNP*) of RM464m came in below consensus estimate (RM732m) at 63% and our forecast (RM720m) at 64%, mainly due to higher-than-expected raw material costs, particularly alumina. Note that, among others, we have excluded a net insurance claim of RM33m (after tax and minority interests), and an earn-out payment of RM25m. An interim dividend of 2.0 sen was announced, bringing YTD dividend to 5.0 sen, slightly above our expectation. As such, we have revised our FY18E dividend upwards from 6.5 sen to 7.0 sen.

Higher raw material cost. YoY, 9M18 CNP climbed 5% as revenue expanded 15%, underpinned by a 12% increase in average aluminium price to USD2,156/MT in 9M18. However, the bottom-line growth was dampened by a surge in the average price of alumina (+47%). Thanks to the group’s practice to hedge >60% of its alumina requirement one year ahead, CNP margin eroded only by 0.7ppt to 6.7%. QoQ, revenue inched down 3% to RM2.37b as average aluminium price dipped 9% to USD2,054/MT, while CNP dropped by a larger quantum (-15%) due to higher alumina prices as noted. These were partially cushioned by better product mix, as the composition of high-value products (e.g. wire rods and billets) was higher at c.49% vs. 41% in the previous quarter.

Brighter outlook. Going into FY19, we believe earnings would pick up on moderating raw material prices and better product mix. The group expanded billet capacity by 60k MT (to 240k MT) and wire rod capacity by 50k MT (to 200k MT) in October. This should lift the composition of high-value products to c.60% and underpin profit margins in FY19. In addition, we believe alumina prices would moderate from the current level (USD450/MT) in the likely case that Norsk Hydro’s Alunorte plant fully restarts its production facility. Recall that half of Alunorte’s capacity was shut down in March. On another positive note, PMETAL is in the midst of acquiring a 50% equity stake in Japan Alumina Associates (Australia) Pty. Ltd. (JAA). The acquisition, which is slated for completion by 1Q19, will allow PMETAL to access 230k MT of alumina (c.15% of annual requirements), giving the group better control over its supply chain and certainty of securing its feedstocks amid supply tightness in the current alumina market. In addition, the acquisition is expected to improve earnings by c.2% (after considering financing costs).

Trim FY18E/19E CNP by 12%/4% to RM635m/969m as we adjust our alumina price assumption from USD350/MT to USD370/MT for FY18E and USD360/MT to USD370/MT for FY19E.

Maintain MARKET PERFORM with a lower TP of RM4.80 (from RM5.00), based on an unchanged Fwd. PER of 19.4x (implying +1.0 SD) applied to FY19E FD EPS of 24.7 sen. The Fwd. PER reflects earnings growth of 52% on the basis of aluminium ASP averaging USD2,100/MT in FY19. While we continue to like PMETAL for its long- term positive operating outlook and earnings growth potential, we see limited upside on the stock from this level and expect substantial volatility in both aluminium and raw materials prices.

Risks to our call include sharp rises/falls in aluminium prices and raw material prices as well as major plant disruptions/closure.

Source: Kenanga Research - 23 Nov 2018