Current weaknesses in aluminium prices are likely temporary as Rusal sanction removal does not alter the supply landscape. Alumina prices could retrace if Alunorte restarts production this year. Earnings growth in FY19 is supported by higher composition of value-added products and 9-month earnings contribution from JAA. However, we lower FY19E CNP by 17% as we tone down our previously optimistic aluminium price by 5%; while maintaining FY18E CNP. Maintain MARKET PERFORM with a lower TP of RM4.00.

Rusal relief deludes aluminium market. Aluminium prices have been under pressure since the US Treasury lifted sanctions on Rusal, the world’s second largest aluminium company. However, we understand that Rusal was allowed to continue supplying to its existing customers even during the sanction, which means the relief should have an inconsequential impact on the aluminium supply landscape. As such, we believe the recent weakness in aluminium prices is temporary, and hence could recover from the current level of USD1,847/MT. Also fortunately, the group has managed to hedge c.40% of its FY19 aluminium sales volumes at USD2,000-2,100/MT. Nevertheless, we are cutting our FY19E ASP assumption from USD2,100/MT to USD2,000/MT (flat from FY18E ASP), as the former may have been too optimistic of a target.

Feedstock prices to normalise. Prices of alumina, a raw material for aluminium, have risen 7% since the beginning of 2018. Fortunately, we believe alumina prices could retrace in the near future, if Alunorte restarts production at full capacity. From our check, the bulk of PMETAL’s FY19 alumina requirements remain largely unhedged, likely awaiting favourable prices. Therefore, we maintain our FY19E alumina price assumption of USD370/MT (vs. USD405/MT currently), flat from FY18E level.

Better product mix and JAA consolidation to lift earnings. The group expanded billet capacity by 60k MT (to 240k MT) and wire rod capacity by 50k MT (to 200k MT) in October 2018, which should lift the sales composition of high-value products to 60-70% in FY19 from 40- 50% in FY18. Billets and wire rods command a mark-up/premium of USD120-150/MT and generate additional profit of USD60-80/MT. As such, we believe the new capacities would improve earnings by c.5%. In addition, the completion of Japan Alumina Associates (JAA) acquisition by end-1Q19 should provide a 9-month earnings contribution to the group in FY19, improving earnings by c.3% after considering financing costs.

Trim FY19E CNP by 17% to RM806m as we cut FY19E aluminium price assumption by 5% to USD2,000/MT from USD2,100/MT; while maintaining FY18E CNP.

Maintain MARKET PERFORM with a lower TP of RM4.00 (previously RM4.80) based on 19.4x Fwd PER on reduced FY19E EPS of 20.6 sen. Our Fwd. PER of 19.4x reflects mean valuation basis, premised on its earnings growth of 27% assuming aluminium ASP average USD2,000/MT in FY19. We continue to like PMETAL for its long-term positive operating outlook and earnings growth potential. However, we expect substantial volatility in both aluminium and raw materials prices to cloud earnings visibility in the near-term.

Risks to our call include a sharp rise/drop in aluminium prices and major plant disruptions/closure.

Source: Kenanga Research - 30 Jan 2019