We are positive with its just proposed bonus issue exercise which helps to enhance shares liquidity and affordability. Meanwhile, aluminium prices have continued rising, which we believe have yet to peak, with upcoming supply trailing behind high demand on economies reopening. New capacity from Samalaju Phase 3, higher aluminum prices and strong earnings growth are catalysts to propel the stock higher. OP maintained with higher TP of RM13.00.

1-for-1 bonus issue. Yesterday, PMETAL announced that it has proposed the issuance of 4.038b bonus shares on the basis of one bonus share for every one existing PMETAL share; thereby increasing its issued share base to 8.076b shares. While the entitlement date has yet to be determined, the bonus issue exercise is expected to be completed by next month. Fundamentally, it has no impact on its financials but we are positive as it helps to improve the stock’s liquidity and marketability. Furthermore, as its share price had rallied 80% in 2020 and another 20% YTD in 2021 to above RM10 currently, the bonus issue would make the stock seems affordable.

Aluminium prices continued to rise higher. After a strong and swift recovery from the low of USD1,425/MT in early April last year, the LME aluminium price has soared 51% from the low and 9% YTD so far. 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 has worsened the supply-demand dynamic. As such, this could be the early stage of a price up-cycle. The current price is c.13% above its 10-year mean of USD1,900/MT and in the recent peak, LME went above USD2,500/MT in April 2018.

New capacity and logistic cost savings to fuel earnings growth. The Phase 3 of Samalaju smelting plant was commissioned in end-Dec 2020 which added 42% new installed capacity to the group at 1.08m MT. This new phase should hit full capacity in 2HFY21; reaching 70% utilisation in FY21 before hitting an optimal level of 98% in FY22. Meanwhile, PMETAL expects the first alumina shipment in 2QFY21 from its 25%-owned alumina refinery PT Bintan’s Phase 1 (1m MT installed capacity) in Indonesia while the Phase 2 of another 1m MT installed capacity should be commissioning in early 2022. PMETAL has a 25% or 0.5m MT capacity access from these two phases plus another 1m MT off-take. Besides locking in material procurement, PMETAL is also able to benefit from logistic cost savings, estimated c. USD13.5m/year, as Bintan island is near to Semalaju as opposed to the current supply source in Australia.

FY21 earnings to triple; OP reaffirmed. We raised our aluminium price assumption to USD2,050-2,100/MT from USD2,000/MT each for FY21/FY22 while other key assumptions remained unchanged. We believe our new assumption is not unreasonable given current spot price of USD2,150/MT and future end-2022 price of USD2,200/MT. This led to 10%/17% upgrade in our FY21/FY22 earnings, as well as dividend forecasts. With unchanged +0.5SD to its 5-year PER mean at FY22E PER of 32x, our new target price is raised to RM13.00 (ex- bonus target price of RM6.50) from RM11.15 previously. We remain upbeat on the stock 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 - 11 Mar 2021