PMETAL’s FY18 CNP* of RM617m (+0.9% YoY) came within consensus at 95% and our forecast at 97%. A 1.5 sen dividend brought full-year dividend to 6.5 sen, in line with expectation. Going into FY19, we believe earnings would pick up on moderating raw material prices and better product mix. Finetune FY19E CNP by 0.1% to RM805m due to housekeeping reasons; while introducing FY20E CNP of RM855m. Maintain MARKET PERFORM with an unchanged TP of RM4.00.

Within expectations. Press Metal Aluminium Holdings Berhad (PMETAL)’s FY18 Core Net Profit (CNP*) of RM617m (+0.9% YoY) came in within consensus estimate at 95% and our forecast at 97%. We have excluded a net insurance claim of RM33m (after tax and minority interests), an earn-out payment of RM25m and an unrealised forex gain of RM6m. An interim dividend of 1.5 sen was announced, bringing fullyear dividends to 6.5 sen, in line with our 7.0 sen expectation.

Higher raw material cost. YoY, FY18 CNP was flat despite revenue growing 12% likely due to the weaker USD/MYR (-6% to 4.04 in FY18 from 4.30 in FY17) and higher alumina costs. The average alumina price trended 38% higher to USD463/MT in FY18, outpacing a 7% increase in the average all-in aluminium price (including premium for delivery to main Japanese ports) to USD2,225/MT. Thanks to the group’s practice to hedge >60% of its alumina requirements one year ahead, CNP margin eroded only by 0.8 ppt to 6.7%. Raw material aside, the group also registered a higher effective tax rate of 10% vs. 8% in FY17. QoQ, despite a 1% dip in the average all-in aluminium price to USD2,069/MT, 4Q18 CNP improved 3% as the average alumina price in 4Q18 edged 12% lower at USD466/MT. In addition, the average USD/MYR appreciated by 2% to 4.17 in 4Q18 vs. 4.09 in 3Q18. The quarter also saw a lower effective tax rate of 8% vs. 14% in 3Q18.

Better product mix and JAA to lift earnings. 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 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 underpin profit margins and improve earnings by c.5% in FY19. 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. We also believe alumina prices would moderate from the current level of USD405/MT (vs. our assumption of USD370/MT for FY19) in the likely case that Norsk Hydro’s Alunorte plant fully restarts its production facility, lowering PMETAL’s feedstock costs.

Fine-tune FY19E CNP by 0.1% to RM805m due to housekeeping reasons; and introduce FY20E CNP of RM855m.

Maintain MARKET PERFORM with an unchanged TP of RM4.00, based on an unchanged Fwd. PER of 19.4x (implying +1.0 SD) applied to FY19E EPS of 20.6 sen. The Fwd. PER reflects earnings growth of 27% assuming aluminium ASP of USD2,000/MT in FY19. We continue to like PMETAL for its long-term positive operating outlook and earnings growth potential. However, we believe most of the positives have been priced-in at this juncture.

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 - 27 Feb 2019