3QFY19 results matched expectations with earnings rising 29% sequentially to RM137.5m on lower raw material costs. With the normalisation of alumina prices, upcoming 4QFY19 is likely to accelerate further. In addition, the 42% smelting capacity expansion by 2HFY20 will act as earnings catalyst going forth. We keep our OP call and TP of RM5.50 for its expansion story.

3QFY19 results matched expectations, with core profit rising 29% sequentially to RM137.5m totalling 9MFY19 core profit to RM354.7m which accounted for 67%/66% of house/street’s FY19 estimates as we expect a stronger ending in 4QFY19 given the falling alumina prices. It declared 3rd interim NDPS of 1.25 sen in 3QFY19 which is the same as 2QFY19 but lower than 2.0 sen paid in 3QFY18. This brought 9MFY19 NDPS to 3.75 sen against 5.0 sen paid in 9MFY18.

Lower raw material costs boosted sequential results… Despite revenue dipping 1% to RM2.12b from RM2.13b, 3QFY19 core earnings leapt 29% QoQ to RM137.5m from RM106.5m due to the stabilisation of alumina and carbon anode prices, especially as alumina prices normalised to the norm of 16%-17% of aluminium LME price currently from above 20% since 2QFY18. On the other hand, the slight decline in revenue was primarily due to lower aluminium market price which fell 1.3% QoQ to USD1,872.8/MT.

…but lower aluminium price hit bottom-line. On a YoY comparison, 3QFY19 core profit plummeted by 25% from RM183.2m to RM137.5m while revenue declined 11% from RM2.38b, largely attributed to lower aluminium market price sharply by 14.3% from USD2,186.2/MT in 3QFY18 while the lower earnings were partly cushioned by lower raw material costs. 9MFY19 core profit contracted 28% to RM354.7m from RM490.0m previously on the back of 7% decline in revenue, owing to the same reason as aluminium market price fell 15.5% to USD1,923.8/MT from USD2,278.8/MT in 9MFY18.

Earnings likely to pick up as alumina price normalises. While alumina prices have normalised to 16%-17% of aluminium LME price which is now at c.USD285/MT from above USD300/MT level in 3QFY19, the benefit of the drop in alumina prices should be fully felt from 4QFY19 onwards. Looking beyond FY19, we expect sturdy earnings growth in FY20 and FY21 on the back of 42% smelting capacity expansion, cheaper alumina prices and rising sales composition of high-value products, i.e., billet and wire rod.

OUTPERFORM maintained, with unchanged target price of RM5.50 based on +0.5SD mean FY20 PER of 25.4x. The 0.5SD above its mean valuation is justified by sturdy earnings growth prospects of 24% in FY21 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 - 29 Nov 2019