PMETAL is poised to rise again on an explosive earnings growth story, despite the current market weakness, as its new 42% capacity at Samalaju Phase 3, better alumina price coupled with shipping cost savings derived from supply access via its 25% equity stake in PT Bintan, would propel earnings higher. More importantly, aluminium prices, now near 3-year low, are set to recover from 2HCY20. As such, keep the stock OP with unchanged TP of RM5.50.

Aluminium prices affected by virus-driven sentiment. The LME aluminium price fell 9% to 3-year low of USD1,658/MT within 10 days after the Covid-19 infection turned severe but has since recovered to above the USD1,700/MT-level. We expect prices to bottom in 2QCY20 with a recovery in 2HCY20 as we see the virus impact as transitory in nature. Nonetheless, PMETAL’s share prices have remained resilient over this period, firmly hovering at the RM5.00 level. We believe investors should look beyond the virus scare and instead focus on its explosive earnings growth next year.

Normalising alumina prices to enhance margin. PMETAL profit margins were shrinking in the past two years as supply disruption issue pushed alumina prices to more than double the usual price while the price to percentage of aluminium price shot up to >30% as opposed to the benchmark level of 16-17%. It has since normalised in 2HCY19 to 16% recently. Meanwhile, the upstream acquisition of two supply chain refineries will ensure raw material supply certainty while the acquisition of PT Bintan enabled transportation cost savings.

42% new capacity to fuel earnings growth from FY21 onward. It is constructing a Phase 3 expansion at Samalaju smelting plant which will bring up 42% of total installed capacity to 1.08m when the plant is commissioned in Oct this year. We are not overly concerned pertaining to its ballooning borrowings seen to peak at RM3.38b by FY20 from RM2.79b in FY18, which are mainly for the Samalaju expansion coupled with it taking up stakes in two alumina refineries, due to its strong cashflow generating ability with operating cash flows to quickly overcome capital outlay as soon as new plant is commissioned.

Look pass FY20 earnings as 2021 is the key focus. We trimmed FY19E forecast by 6% given a slight dip in aluminium price and the strengthening of MYR in 4QCY19. We also cut FY20E net profit by 27% as our aluminium assumption of USD2,000/MT has been too optimistic given the current Covid-19 outbreak which have affected business activities. As such, we lowered our aluminium price assumption to USD1,880/MT. Nonetheless, focus should be on FY21 when the Samalaju Phase 3 contribute its full-year impact and we expect FY21E earnings to jump 45% YoY to RM902m on the back of a higher aluminum price assumption of USD1,900/MT.

Reiterate OUTPERFORM for its expansion story. In our opinion, we expect aluminium prices to recover in 2HCY20 which should enhance earnings. Furthermore, for an index stock to have a 45% YoY earnings jump is rare. As such, we continue to rate PMETAL an OUTPERFORM at unchanged target price of RM5.50, based on 24.6x FY21 PER which is +0.25 SD of 5-year mean. Key risks to our recommendation are a sharp fall in aluminium prices, an escalation of raw material prices as well as major plant disruptions/closure.

Source: Kenanga Research - 17 Feb 2020