PMETAL has inked an MoU for the intention to subscribe for a 25% stake in PT BAI. The subscription would entitle PMETAL to 250-500k MT of alumina supply, satisfying 16-33% of PMETAL’s annual alumina requirements. No changes in FY19- 20E CNPs of RM685-810m. Maintain MP with TP of RM4.50.

More alumina availability. Press Metal Aluminium Holdings (PMETAL) has inked a memorandum of understanding (MoU) with PT Bintan Alumina Indonesia (PT BAI), which entails a proposed share subscription by PMETAL for a 25% stake in PT BAI. We gather that PT BAI does not generate any earnings at the moment, but is in the midst of constructing a 1m MT (annual capacity) alumina refinery plant in Galang Batang, with plans for a second phase – perhaps another 1m MT capacity as implied by news sources, subject to regulatory approval. The subscription, if materialises, would entitle PMETAL to 250k MT (or 500k MT on potential full 2m MT capacity) of alumina supply, satisfying c.16% (or 33% on 2m MT capacity) of PMETAL’s annual alumina requirements. Recall that the recent stake acquisition of Japan Alumina Associates (Australia) Pty. Ltd. (JAA) already entitles PMETAL to 230k MT of alumina supply – implying that one-third to half of its annual requirements inputs are sealed should the PT BAI subscription materialise.

Gearing to remain manageable. We expect the subscription consideration to fall in the range of RM1.26-1.47b (assuming construction of 2m MT plant eventually) based on valuation of USD600- 700 per MT of alumina capacity and USD/MYR of 4.20. This represents a 13-25% discount to the recent stake purchase in JAA at c.USD800 per MT as JAA also owns a Bauxite facility. Based on our purchase price estimation as well as assuming the subscription is to be fully funded by debt, gearing should increase from 0.8x as at 31 Mar 2019 to 1.1x post exercise (if any). We deem this manageable given PMETAL’s excellent cash flow generation capabilities – as demonstrated by how rapidly the group pared down its gearing from 1.9x in FY13 to 0.7x in FY18.

Earnings contribution only in FY21. Management expects the plant construction to be completed by end of next year, implying that earnings contribution would only kick in from FY21 onwards. Hence, we are not overly excited by the development for the near term, although we acknowledge its long-term potential as the subscription could generate share of associates’ profit of c.RM63m (or 126m on 2m-MT capacity) based on industry alumina margin of USD60/MT, representing 10-20% of PMETAL’s current profit levels.

No change to FY19-20E CNP of RM685-810m as the development is only at MoU stage and, even if it materialises, there would likely be no earnings contribution before FY21.

Maintain MARKET PERFORM with an unchanged Target Price of RM4.50, based on FY20E PER of 21.8x, 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 aluminum prices and raw material prices as well as major plant disruptions/closure.

Source: Kenanga Research - 3 Jun 2019