2QFY21 core profit of RM247.5m is another record high on the back of robust aluminium prices. We believe the best is yet to come given the current elevated aluminium prices coupled with favourable alumina costing. Aluminium prices are expected to stay high in the near term on tightening supply trailing behind high demand as economies reopen. We are still optimistic on its new capacity-driven earnings outlook. Thus, PMETAL remains an OP with unchanged TP of RM6.50.

2QFY21 on track. PMETAL posted yet another record in 2QFY21 with core profit rising 12% QoQ to RM247.5m, bringing 1HFY21 core income to RM468.0m which jumped 161% from RM179.1m in 1HFY20. This 1HFY21 core profit accounted for 38%/37% of house/street’s FY21 estimates which we deem to be in line as we expect stronger 2HFY21 results especially in 4QFY21 given that aluminium prices remain highly elevated. Meanwhile, it declared 2nd interim NDPS of 1.0 sen (ex-date: 10 Sep; payment date: 29 Sep), tallied 1HFY21 NDPS to 1.75 sen which is higher than 1.0 sen paid in 1hFY20.

Another record quarterly earnings… 2QFY21 core profit rose 12% QoQ to RM247.5m on the back of 26% jump in revenue to RM2.64b due largely to higher realised aluminium price as well as some improvement in volume on production from the new P3 plant. The average LME aluminium cash price in 2QFY21 jumped 15% to USD2,401/MT from USD2,095/MT in 1QFY21. However, despite alumina spot price declining 4%, we have learnt that PMETAL’s cost of alumina were higher due to inventory backlog coupled with higher logistic costs that compressed profit margin from going higher despite higher volume. As such, operating margin is maintained at 15%.

… attributable to higher aluminium prices. YoY, 2QFY21 and 1HFY21 core profits surged 238% and 161% to RM247.5m and RM468.0m, respectively, as revenue soared 53% and 33% from last year, due largely to same reason as aluminium prices skyrocketed as mentioned above. The average LME aluminium cash prices jumped 60% and 41% in 2QFY21 and 1HFY21 to USD2,401/MT and USD2,246/MT from USD1,501/MT and USD1,598/MT last year, respectively. In addition, the alumina spot prices only made up 12.3% and 13.5% of the aluminium spot prices in 2QFY21 and 1HFY21 as opposed to 16.5% and 16.6% in the same period last year. Thus, this led to margin expansion which helped to push profit higher.

Robust aluminium price and new capacity to lead growth further. Current aluminium price remains promising which is well above USD2,500/MT with quarter-to-date (QTD) average of USD2,530/MT for 3QFY21 and YTD average of USD2,308/MT. This is well above our FY21/FY22 price assumptions of USD2,050-2,100/MT. In addition, P3 is expected to fully commissioned next month and the first delivery of alumina from PT Bintan is expected soon, should help to enhance margins and boost earnings higher. Post earnings, we keep our forecast unchanged as we believe it is well on track.

Still underappreciated; OUTPERFORM maintained. We remain upbeat on the stock for the promising aluminium price prospects coupled with its new 42% additional capacity expansion which will lead to an explosive earnings growth this year. As such, we continue to rate the stock an OUTPERFORM with unchanged target price of RM6.50 based on +0.5SD to its 5-year mean at FY22E PER of 32x. Key risks to our recommendation are sharp falls in aluminium prices, an escalation of raw material prices as well as major plant disruptions/closure.

Source: Kenanga Research - 25 Aug 2021