We came away from PMETAL’s 4Q18 results briefing reassured that its outlook remains positive, but likely already priced-in. The group has yet to lock in alumina for FY19 in anticipation of lower prices. Management shared market research data suggesting that the aluminium market could be in a net supply deficit in 2019. Better product mix and cheaper feedstock are main earnings drivers in FY19. No changes in FY19-20E CNPs of RM805-855m. Maintain MP with TP of RM4.00.

Yet to lock in alumina, not necessarily a bad thing. The group has yet to lock in its alumina requirements for FY19 in anticipation of lower prices. We concur with the decision, as we believe alumina prices could retrace in the near future, if Alunorte restarts production at full capacity. The Brazilian state of Pará has recently lifted a production embargo on Alunorte. The plant is now awaiting federal court’s approval to restart production. This aside, Emirates Global Aluminium (EGA)’s Al Taweelah alumina refinery with 2m MT/year capacity (c.3% of ex-China alumina supplies) is set to begin production by 1H19. EGA says its alumina production would go entirely to its own aluminium smelting operations. The firm currently sources alumina externally. As such, the new refinery is expected to increase the availability of alumina supply in the global ex-China market, potentially lowering PMETAL’s raw material costs.

Global primary aluminium market to be in net deficit in 2019. During the briefing, management shared the consensus estimates for China’s and global ex-China’s aluminium supply and demand, computed based on various third-party market research firms. The consensus data show that the global aluminium market is likely to run into a net deficit of 0.8m MT in 2019, as an estimated surplus of c.0.9m MT from China is expected to be more than offset by a deficit of c.1.7m MT in the global ex-China market. This bodes well for the price of primary aluminium, which is currently trading at c.USD1,870/MT vs. our USD2,000/MT assumption for FY19.

Better product mix and JAA to lift earnings. In FY19, we believe the main earnings drivers would be moderating raw material prices, particularly alumina, as well as 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 financing costs. We also believe alumina prices would moderate from the current YTD average of USD405/MT (vs. our FY19 assumption of USD370/MT) in the likely case that Norsk Hydro’s Alunorte plant fully restarts its production facility, lowering PMETAL’s feedstock costs.

No changes in FY19-20E CNPs of RM805-855m as updates are consistent with expectations.

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 - 28 Feb 2019