4QFY20 core profit which rose 11% sequentially to RM140.4m matched expectations. Aluminium price is currently above USD2,100/MT, a new high since Aug 2018 which we believe has yet to peak with upcoming tight supply trailing high demand on economies reopening. Together with new 42% capacity from Samalaju Phase 3, FY21 will be a record year. Thus, we keep our OP rating with higher TP of RM11.15.

4QFY20 met expectations, with core profit rising 11% sequentially to RM140.4m which brought FY20 core profit to RM445.4m making up 101%/100% of house/street’s estimates. Meanwhile, it declared 4th

interim NDPS of 1.25 sen (ex-date: 12 Mar; payment date: 31 Mar), totalling FY20 NDPS to 4.25m sen vs. 5.0 sen paid in FY19.

Rising aluminium prices lifted sequential results... 4QFY20 core profit leapt 11% QoQ to RM140.4m from RM126.0m in the preceding quarter on the back of 14% hike in revenue as aluminium prices continued to rise higher where LME average price jumped another 12% to USD1,916/MT from USD1,706/MT in 3QFY20. Besides, a slower pace of increase in raw material alumina prices also helped to inflate bottom-line higher where the reported average spot alumina price rose 8% to USD295/MT in 4QFY20 which made up only 15.4% of aluminium price from USD274/MT or 16.0% in 3QFY20. This was well below the normalised range of 16%-17%. Meanwhile, associate incomes jumped to RM11.m from RM1.4m partly due to higher earnings from PMB Tech.

…and prices recovered to above pre-COVID level. YoY, 4QFY20 core profit fell 3% from RM144.9m last year while revenue declined 4% which was due to lower extrusion products sales. The decline in earnings was primarily due to higher taxation where effective tax rate was lower at 6% previously vs. 13% currently. In fact, PBT jumped 16% which was due to lower raw material cost as alumina price only made up 15.4% of aluminium price as mentioned above as opposed to 16.7% previously while average LME price jumped 9% from USD1,756/MT. YTD, FY20 core profit fell 11%, while revenue contracted 13% which was affected by a 5% decline in LME price especially during the height of the pandemic in 1HFY20. On the other hand, due to the reclassification of JAA from associate income to JV accounting, depreciation charges jumped 16%. At EBITDA level, earnings rose 4% on lower raw material costs where alumina price only accounted for 16.2% of aluminium price from 19.9% previously.

Price up-cycle to elevate earnings prospects. The aluminium price remains solid which is above the USD2,100/MT level and YTD average price is USD2,023/MT which is 6% above 4QFY20 of USD1,916/MT. In addition, YTD alumina-to-aluminium price ratio was only 14.9%, well below 4QFY20 of 15.4%. This indicates potential margin expansion. In view of LME price rally on economies reopening-led pent-up demand, we raised our aluminium prices assumptions to USD2,000/MT for both FY21 and FY22 from USD1,950/MT with unchanged alumina-to aluminium price ratio of 16.5%. As such, our FY21/FY22 estimates are upgraded by 15%/10%. NDPS is also raised proportionally based on unchanged pay-out of 40%.

Maintain OP with higher TP of RM11.15 from RM9.75 post earnings upgrades with unchanged +0.5SD to 5-year PER mean, at FY22E PER of 32.0x. This is supported by explosive 154%/24% YoY earnings in the next two years on the back of 42% new capacity that came on-stream in Dec 2020. We believe our USD2,000/MT price assumption is not excessive given the current supply-demand dynamic mismatch. 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 - 25 Feb 2021