PMETAL’s 1Q19 core net profit (CNP*) came in below expectations at RM111m (-22% YoY; -27% QoQ), accounting for only 14% of both consensus and our full-year estimates. We attribute the earnings miss to: (i) higher-than-expected alumina costs, and (ii) lower aluminium prices. An interim dividend of 1.25 sen was declared, below our expectation. Cut FY19-20E CNPs to RM685-810m and lower dividend forecast from 7.0- 7.5 sen to 6.0-7.0 sen. Maintain MP with TP of RM4.50.

Below expectations. Press Metal Aluminium Holdings Berhad (PMETAL)’s 1Q19 core net profit (CNP*) came in below expectations at RM111m (-22% YoY; -27% QoQ), accounting for only 14% of both consensus and our full-year estimates. An interim dividend of 1.25 sen was declared, below expectation at ~20% of our FY19E full-year estimate.

Double whammy of higher alumina and lower aluminium prices. YoY, 1Q19 CNP declined 22% on a double whammy of heightened alumina costs and lower aluminium prices. Recall that PMETAL had hedged its alumina purchases for the whole of FY18 at prices based on 16-17% of aluminium price (translating into unit cost of c.USD340- 360/MT). As such, we estimate that PMETAL’s alumina costs went up by 13-19% to c.USD406/MT in 1Q19, while the average aluminium price fell 13% to USD1,862/MT during the same period. As a result, EBIT margin waned 2.9ppt to 9.0% in 1Q19. QoQ, CNP dived 27% on the same reasons.

Alumina prices to moderate. We believe alumina prices will moderate from 1Q19 average of USD406/MT to USD360-380/MT in coming months as production restrictions at Norsk Hydro’s Alunorte plant has recently been lifted, while Emirates Global Aluminium (EGA)’s Al Taweelah alumina refinery with 2m MT/year capacity (c.3% of ex-China alumina supplies) has also commenced operations in April. However, we are aware of Xinfa Group’s move to shut down all of its production lines (with 2.8m MT/year capacity) in Shanxi, China amid an environmental dispute; it could dampen the moderating alumina price although theoretically the impact should be localised.

Better product mix and JAA to lift earnings. We believe the group’s sales composition of high-value products will increase to 60-70% in FY19 from 40-50% in FY18 after expanding billet capacity by 60k MT (to 240k MT) and wire rod capacity by 50k MT (to 200k MT) in October 2018. 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 in end-Feb 2019 should provide a 10- month earnings contribution to the group in FY19, improving earnings by c.3% after considering financing costs.

Cut FY19-20E CNP by 15-5% to RM685-810m as we raise our alumina cost assumptions from USD370-360/MT to USD390-370/MT. As such, we have lowered our dividend forecast from 7.0-7.5 sen to 6.0-7.0 sen in tandem with our earnings downgrade.

Maintain MARKET PERFORM with an unchanged TP of RM4.50, based on FY20E PER of 21.8x (rolled forward from FY19E), implying - 0.5SD valuation basis. Despite its long-term positive operating outlook and earnings growth potential, volatility in the aluminium and alumina markets could continue to disrupt earnings’ visibility in the near-term.

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 May 2019