The strong 1QFY22 core profit of RM424.5m was highly expected given solid aluminium prices. Although aluminium price currently is off its recent peak, it is still >10% higher than the average price recorded in 2021. As such, we remain upbeat on its earnings prospects given aluminium prices are expected to stay high in the near term while its fully commissioned P3 Plant will lead volume growth. Keeping OP rating with lower revised TP of RM6.68.

1QFY22 within expectations… 1QFY22 is another record quarter with core profit surging 49% sequentially to RM424.5m, driven mainly by rising aluminium prices, making up 20% of house/street’s FY22 estimates. It declared 1st interim NDPS of 1.5 sen (ex-date: 14 Jun; payment date: 27 Jun) which is doubled from 0.75 sen paid in 1QFY21, and 1.0 sen paid in 4QFY21.

Higher aluminium price led earnings growth... As mentioned above, 1QFY22 core profit soared 49% QoQ to RM424.5m from RM284.8m as revenue leapt 16% to RM3.92b on the back of rising aluminium prices coupled with 3% production growth. The average LME aluminium spot price jumped 18% to USD3,261/MT in 1QFY22 from USD2,754/MT in 4QFY22. However, raw materials alumina and carbon anode saw declining prices by 5% and 1%, respectively, over the quarter. On the other hand, logistic cost remained steep which is similar to the preceding quarter. Overall operating margin improved to 16% from 11%. Meanwhile, share of associate profits inched up slightly by 2% to RM52.2m as earnings from PMB Tech and PT Bintan remained high.

…and on a higher capacity too. YoY, 1QFY22 core profit almost doubled to RM424.5m from RM220.5m with revenue jumping 87% from RM2.10b in 1QFY21. This was largely due to higher aluminium price by 56% from USD2,094/MT previously coupled with additional production output following the full commissioning of P3 smelting plant in Oct last year. In addition, share of associate profits jumped to RM52.2m from RM2.8m as PMB Tech benefited from silicon prices while PT Bintan started contributing from 3QFY21. Nonetheless, it also faced elevated logistic cost and raw material prices where alumina spot prices jumped 31% over the year while carbon anode spot price also soared 47% from last year.

FY22 to be another record year given the strong aluminium prices coupled with the new P3 capacity. Although prices are off the peak of USD3,849/MT in early April, aluminium price remains solid hovering at USD2,800/MT which is still higher than FY21 average of USD2,477/MT. As such, the high aluminium price will continue to benefit PMETAL. However, we believe our previous aluminium assumption of USD2,600-2,800/MT for FY22-FY23 is too optimistic. Thus, we lower our assumption to USD2,550-2,650/MT, and coupled with RM26.7m final settlement with IRB’s tax assessment dispute to be paid in FY22, we cut our FY22-FY23 earnings estimates by 6-14% while dividend forecast are also adjusted proportionally with unchanged dividend payout of 40%.

OUTPERFORM retained. Post earnings revision, we also cut our TP to RM6.68 from RM8.63 as we lowered our targeted earnings multiplier to 26x FY23 PER (-0.5 SD 5-year mean) from 33x FY22 PER (+0.5SD 5- year mean) as aluminium prices are unlikely to hit the recent high in the near future. Despite cutting estimates and valuation, we still like the stock given its earnings prospect. Thus, we continue to rate the stock an OP but with a lower TP of RM6.68. 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 - 31 May 2022