1QFY20 core profit of RM105.9m came in weak but matched expectation. With aluminium prices hitting new lows, the upcoming 2QFY20 would be even weaker. However, aluminium prices should have bottomed out, and coupled with economic activities resumption, we should see a seasonally strong 2H. Nonetheless, we believe its recent strong share price performance has already priced in nearterm positives. Thus, we cut the stock to MP with revised TP of RM4.45.

1QFY20 results inline. 1QFY20 core profit of RM105.9m matched our expectation which accounted for 23% of our FY20 estimate but came below market expectation at 17% of FY20 consensus estimate which we believe imputed higher aluminium prices. Nonetheless, upcoming 2QFY20 will be a weak quarter given low aluminium prices of slightly above USD1,500/MT currently from average spot price of USD1,690/MT in 1QFY20. Meanwhile, it declared 1st interim NDPS of 1.0 sen (ex-date: 18 Jun; payment date: 03 Jul) which is lower than 1.25 sen paid in 4QFY19 and 1QFY19 each.

Low aluminium prices hit bottomline… 1QFY20 core profit declined 25% QoQ to RM105.9m from RM141.9m in 4QFY19 as revenue fell 14% to RM1.83b. This was largely due to the decline in aluminium price where the aluminium LME price fell 4% on average in the quarter to USD1,691/MT from USD1,756/MT. On raw material cost, alumina and carbon anode prices were fairly stable. The average alumina price dipped slightly to USD281/MT or 16.6% of aluminium LME price in 1QFY20 vs. USD289/MT or 16.5% in 4QFY19. Meanwhile, PMETAL posted refinery results for the first time with revenue of RM76.8m and RM14.9m operating profit due to JV accounting for JAA which was previously recognised in associate income. As a result, depreciation charges jumped 12% to RM102.2m from RM91.5m in 4QFY19.

…but stable raw material cost mitigated earnings hit. Despite revenue falling 16% YoY from RM2.17b due to 11% contraction in aluminium prices from USD1,892/MT, 1QFY20 core profit only declined 4% from RM110.7m in 1QFY19. This was largely attributable to a fairly favourable raw material cost environment where alumina prices fell sharply to USD281/MT or 16.6% of aluminium LME price from USD406/MT or 19.9%. Meanwhile, the 12% increment in depreciation was mainly due to the JV accounting for JAA as mentioned above.

A poor 2QFY20 result expected before recovering in 2HFY20.

Aluminium took a plunge to new low of USD1,425/MT in early Apr from slightly above USD1,800/MT in Jan just before COVID-19 turned into a pandemic. However, it has since recovered to above USD1,500/MT level. The quarter-to-date average aluminium price of USD1,466/MT has fallen >10% vs. USD1,691/MT while the quarter-to-date average alumina cost to aluminium price of 19.0% also indicated that upcoming 2QFY20 will be very weak. However, with anticipated business resumption, aluminium is likely to pick up in 2HFY20. In view of this, we cut our aluminium price assumption further to USD1,700/MT for FY20 from USD1,750/MT previously but maintained FY21 estimate at USD1,800/MT. This reduced our FY20 estimate by 18%.

Downgrade to MARKET PERFORM, given the strong price performance which has risen 51% since the recent low of RM2.85 as the weak aluminium price should have been priced in. However, as we believe that aluminium price have bottomed, we raised our target price to RM4.45 based on 3-year PBV mean of 1.37x from RM3.75 which was based on -1SD of 3-year PBV mean of 1.15x (having switched from PER valuation in our Building Materials Sector report: Keep Your Hard Hat On dated 03 Apr given the depressed market condition). Risk to our downgrade is a sharp rise in aluminium prices and a fast recovery of the economy if COVID-19 subsides faster than expected.

Source: Kenanga Research - 5 Jun 2020