PMETAL has inked a PPA with SESCO to purchase up to 500MW of electricity. With this, the group now plans a third aluminium smelter plant with 320k MT annual capacity at Samalaju. We estimate this would lift earnings by RM39m in FY20 and by c.RM240m from FY21 onwards. Raise FY20E CNP by 5% to RM849m but maintain FY19E CNP of RM685m. Upgrade to OUTPERFORM with a higher TP of RM5.50.

More power... Press Metal Aluminium Holdings (PMETAL) has inked a power purchase agreement (PPA) with Syarikat SESCO Bhd (SESCO), which entails the group purchasing up to 500MW of electricity. The drawdown is divided into 2 stages – 300MW by October 2020, which will last for 15 years and the balance 200MW to be made available on a reasonable endeavour basis by SESCO. Regardless of the division of drawdown stages, we believe the group will be able to fully utilise the full 500MW electricity from October 2020 onwards.

…paves the way for capacity expansion. With the availability of additional electricity, the group is now planning a third aluminium smelter plant with 320k MT annual capacity at Samalaju Industrial Park, Sarawak. The plant’s construction should begin as soon as next month, and take about 11 months to complete, meaning that the plant is likely to be ready before the drawdown of power in October 2020. The plant is expected to incur capex of c.RM1.5b, which would be fully financed by debt. The new debt should raise gearing to 0.8x in FY20 from our previous estimate of 0.5x in the same forecast year. 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.

Meaningful earnings contribution from FY21 onwards. The new plant is estimated to lift FY20 earnings by RM39m assuming a 50k MT output (2-month production), while an estimated full-year contribution of c.RM240m is expected to kick in from FY21 onwards. This is assuming an average aluminium price of USD2,000/MT, additional depreciation expense of c.RM150m and finance costs of c.RM80m. We gather that the cost for the additional electricity is only slightly higher than those of the previous PPAs.

Raise FY20E CNP by 5% to RM849m while maintaining FY19E CNP of RM685m as earnings contribution is only expected to kick in from 4Q20 onwards.

Upgrade to OUTPERFORM with a higher Target Price of RM5.50 (previously RM4.50), based on a higher FY20E PER of 25.4x. The Fwd. PER implies +0.5SD vs. mean valuation previously, justified by sturdy earnings growth prospects in FY21 (+24% CNP growth) on the back of capacity expansion. Independent of the expansion, PMETAL’s operating outlook is already looking positive with increasing contribution from value-added products and a series of upstream acquisitions in the pipeline.

Risks to our call include a sharp fall in aluminium prices, an escalation of raw material prices as well as major plant disruptions/closure.

Source: Kenanga Research - 1 Aug 2019