PMETAL’s 1HFY22 results disappointed on weak ASP realised. While ASP may continue to ease in 2HFY22, the downside will be capped given the supply constraints in the global market amidst the sky-rocketing gas prices in Europe. PMETAL’s new plant dubbed P3 will drive its volume growth. We cut our FY22F and FY23F net profit by 18% and 17% respectively, lower our TP by 6% to RM5.62 (WACC: 7.5%; TG: 5%) from RM5.95. Maintain OUTPERFORM.

Its 1HFY22 core profit of RM840.8m came in at only 42%/44% of house/street’s FY22 forecasts. The variance against our forecast came largely from weaker-than-expected realised ASP in 2QFY22 while 2HFY22 ASP is expected to be weaker than 1HFY22.

Lower ASP affected earnings. 1HFY22 core profit jumped 80% YoY to RM840.8m as ASP soared. LME aluminium price which peaked at USD3,849/MT in early-April, started to trend lower to c.USD2,400/MT currently, impacted earnings. 2QFY22 core profit was 2% QoQ lower at RM416.3m despite revenue rising higher by 2% largely owing to higher volume as P1 and P2 were back to 97% utilisation rate (P3: 97%) from 93% in 1QFY22 due to maintenance activities previously. Besides, raw materials namely alumina and carbon anode spot prices stayed high in 2QFY22 but actual costs were lower due to old inventories.

Cut FY22F and FY23F earnings by 18% and 17% to account for lower aluminium price assumption of USD2,400/MT and USD2,500/MT from USD2,550/MT and USD2,650/MT, respectively, while other key assumptions remained unchanged. On the other hand, our dividend forecasts are also adjusted proportionally based on unchanged 40% payout.

Downside to ASP will be capped. Despite the earnings cut, the YTD average LME spot price of USD2,919/MT is still 18% higher than USD2,476/MT recorded in 2021. In addition, P3 which was fully commissioned last October has boosted its capacity by 42%. Meanwhile, spot LME aluminium price is off the recent peak, it is still solid as compared to pre-pandemic level of USD1,728/MT in 2019. With news of European smelters cutting production due to skyrocketing fuel costs, ASP is unlikely to retrace back to pre-COVID-19 levels in the near term.

Reiterate OUTPERFORM. Post earnings revision we also trim our DCF-driven TP by 6% to RM5.62 from RM5.95 based on unchanged WACC of 7.5% and TG of 5%. There is no adjustment to our TP based on ESG for which it is given a 3- star rating as appraised by us. We continue to like the stock for its earnings growth which is supported by solid ASP and new capacity from P3. Maintain OUTPERFORM.

Risk to our recommendation: (i) A global recession resulting in a sharp fall in the demand for aluminium, hurting prices, (ii) an escalation of raw material prices, and (iii) major plant disruptions/closure.

Source: Kenanga Research - 26 Aug 2022