PMETAL had an impressive run last year and was the best performer for a non-glove index stock, attributable to the commodities rally on economies reopening-led pent-up demand. There is still upside based on aluminium price up- cycle premised on supply-demand dynamic mismatching. In addition, FY21 will be a record year with its 42% new capacity boosting earnings. We reaffirm our OUTPERFORM rating with a higher target price of RM9.75.

Ending 2020 on a high note. Share price of PMETAL rallied 63% in 4QCY20 to close at RM8.39 last Thursday, off its all-time-high of RM8.53 (intraday), largely driven by a 12% jump in LME aluminium price over the same period. This was largely driven by the commodities rally on the back of pent-up demand anticipation led by economies reopening. The stock was not spared from the meltdown in mid-Mar 2020 where share price plunged 48% from the beginning of the year to RM2.74 but it had since rebounded strongly by 205% from the low. In 2020, the stock had risen 80%, the best non-glove performer for an index-stock.

Aluminium prices are at 3-year high. LME aluminium price closed off its recent high of USD2,059/MT at USD1,973/MT last Thursday to end the year of 2020. The solid price movement was also in line with other commodities rally of late on the back of upbeat sentiment driven by economies reopening-led demand. Meanwhile, supply of aluminium is not expected to match robust demand especially in China where the authority there had directed old environment-unfriendly plants to shut down which worsened the supply-demand dynamic. As such, this could be the early stage of price up-cycle and furthermore the current price is only c.4% above at its 10-year mean of USD1,897/MT.

42% new capacity to fuel earnings growth. We have learnt that its Phase 3 expansion at Samalaju smelting plant had its first pot commissioning last week, which will bring up total installed capacity to 1.08m. We have assumed this new plant to achieve 70% utilisation in FY21 before hitting an optimal level of 98% in FY22. With this expansion, its borrowing is expected to peak by FY20 at net debts of RM3.89b before gradually declining to RM3.36b and RM2.46b over the next two years due to its strong cash flows generating ability with operating cash flows to quickly overcome capital outlay as soon as the new capacity is commissioned.

Record earnings in FY21. Although alumina prices have risen in tandem with rising aluminium prices in 4QCY20, the raw material prices did not increase as much, at only 8% as compared to aluminium prices of 12%. As such, the cost of alumina only made up 15.4% to aluminium prices as opposed to 16.0% in 3QCY20. This implies that upcoming PMETAL’s 4QFY20 is likely to be stronger with improved margins. Going forth, with rising ASP, lower cost structure coupled with the 42% new capacity, FY21 will likely be a record-breaking year. We keep our FY20/FY21 estimates unchanged based on aluminium price assumption of USD1,730/USD1,950 per MT and alumina/aluminium ratio of 16.8%/16.5%. We introduced new FY22 estimates with 30% EPS growth with same key assumptions as FY21 and same dividend payout of 40%.

Reaffirm OP with higher TP of RM9.75 (from RM7.50), as we roll over valuation base-year to FY22 with unchanged +0.5SD to 5-year PER mean at 30.9x, implying +1.25 SD to FY21 5-year mean which is not excessive given reasonable FY22 aluminium price assumption. In addition, for an index stock to have a 30% YoY earnings growth is rare. Although the stock had an impressive run last year, we believe there is still upside given the bright aluminium price prospects. 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 - 4 Jan 2021