The solid 3QFY20 set of results with core profit surging 72% QoQ to RM126m, is just the start of an earnings up- cycle as the recent aluminium price rally has yet to peak with upcoming supply trailing the high demand, in our view. The new additional 42% capacity from Samalaju Phase 3 which is on track to come on-stream next January will drive FY21 to chart record-earnings. We raised FY20/FY21 earnings estimates by 4%/29% on higher ASP with lower cost to sales ratio. It remains as OP with a higher TP of RM7.50.

A solid 3QFY20 result. 3QFY20 core profit, which jumped 72% QoQ to RM126.0m, met expectations which brought 9MFY20 core earnings to RM305.0m that made up 72%/74% of house/street FY20 estimates. It declared 3rd interim NDPS of 1.0 sen (ex-date: 11 Dec 2020; payment date: 06 Jan 2021) in 3QFY20, bringing 9MFY20 NDPS to 3.0 sen which is lower than the 3.75 sen paid in 9MFY19.

Strong boost from rising aluminium prices… Sequentially, 3QFY20 core profit soared 72% from RM73.2m, with revenue rising 8% over the quarter, mainly attributable to the swift recovery in aluminium price where LME average price leapt 14% to USD1,706/MT from USD1,501/MT. In addition, it also benefited from the slower pace of increase in raw material alumina prices as the reported average spot alumina price grew 11% to USD274/MT in 3QFY20 which made up 16.0% of aluminium price from USD246/MT or 16.4% in the preceding quarter.

…but prices still lower than last year. However, 3QFY20 and 9MFY20 core profits fell 8% YoY and 14% YoY from RM137.5m and RM354.7m from the previous corresponding period largely as despite the recovery of aluminium prices, they were still lower than that of last year. 3QFY20 and 9MFY20 aluminium prices were 14% and 11% lower than last year, respectively. However, raw material as a percentage to aluminium was in favour in current period as the alumina price only made up 16.0% of aluminium price in 3QFY20 vs. 19.4% in 3QFY19 and 16.4% in 9MFY20 as opposed to 21.0% last year. On the other hand, as JAA is reclassified from associate income to JV accounting, depreciation charges rose 17% in 3QFY20 and 14% in YTD 9MFY20. With that, 9MFY20 associate income also fell 33%.

2021 is the year; solid ASP + 42% new capacity. A solid earnings recovery in 3QFY20 is highly anticipated as aluminium prices have recovered swiftly after collapsing to as low as USD1,425/MT in early Apr. It trades near USD2,000/MT currently. However, the recovery of alumina has been lagging, still tracking closely at c.15% of aluminium prices (currently at 16.3% YTD vs. our FY20 assumption of 17%). As such, we raised FY20 earnings estimate by 4% as we lowered alumina- to-aluminium price ratio to 16.8%. We also upgraded FY21 forecast by 29% on higher aluminium price to USD1,950/MT from USD1,850/MT, against Dec 2021 futures price of >USD2,000/MT, on the back of 42% new capacity next Jan with unchanged alumina-to-aluminium price ratio of 16.5%. NDPS is also raised proportionally based on unchanged pay- out of 40%.

Buy on price up-cycle. Since our upgrading call three months ago, its share price has risen 35% but we still see upside on the stock given the strong aluminium price rally and we believe our FY21 assumption of USD1,950/MT is not excessive. As such, we continue to rate the stock an OP with a higher TP of RM7.50 from RM5.95, based on +0.5 SD on its 5-year FY21 PER moving average of 30.9x from 31.5x. Risk to our upgrade is a sharp decline in aluminium prices if the recovery of the economy is delayed further.

Source: Kenanga Research - 27 Nov 2020