YTD, aluminium prices have risen 6% to above USD2,500/MT, buoyed by the reopening of China which is the largest global aluminium consumer. While maintaining our FY22 forecasts (average aluminium price assumption of USD2,400/MT), we raise our FY23F earnings by 7%, imputing higher average aluminium price assumption of USD2,550/MT (from USD2,500/MT previously). Hence, we also lift our TP by 15% to RM6.30 (from RM5.50). Maintain OUTPERFORM.

YTD, aluminium prices have risen 6% to above USD2,500/MT currently, following the reopening of China which is the largest global aluminium consumer. The demand there will be underpinned by the normalisation of economic activities, especially, recovery in the property sector which is supported by measures from the Chinese government.

On the other hand, “green” requirements that have become more stringent, especially in China, will see the shutdown of smelters fueled by fossil energy (especially coal), further tightening the global aluminium supply.

As fuel, coal powers up to 81% of China’s aluminium production in 2020. To achieve carbon neutrality by 2060, China has and will continue to cut coal-fired aluminium production capacity. The supply dynamics is also impacted by the Russia-Ukraine war with Western countries avoiding trade with Russia which produces up to c.6% of global aluminium supply. These factors will keep aluminium prices elevated.

Meanwhile, on the cost side of the equation, prices of alumina and carbon anode have fallen 2% and 13%, respectively, over the same period. This should help to at least sustain the alumina cost to aluminium price ratio at about 14% (since 2021), which is below the historical average of 16%-17%. A low alumina cost to aluminium price ratio translates to strong margins for aluminium smelters.

While maintaining our FY22 forecasts (average aluminium price assumption of USD2,400/MT), we raise our FY23F earnings by 7% on a higher average aluminium price assumption of USD2,550/MT (from USD2,500/MT previously). We also raise our long-term aluminium price assumption to USD2,300/MT (from USD2,150/MT).

We continue to like PMETAL for its: (i) structural cost advantage over international peers given its access to low-cost hydro-power secured under four long-term PPA contracts ending between 2023 and 2040, (ii) strongly secured alumina supply with stakes in two alumina miners, i.e. Japan Alumina Associate (40%) and PT Bintan (25%) which supply 80% of its requirements, and (iii) green investment appeal as a clean energy source producer.

We lift our DCF-driven TP by 15% to RM6.30 (from RM5.50) based on an unchanged WACC of 8.6% and a TG of 5%. Our TP imputes a 5% premium to reflect a 4-star ESG rating as appraised by us (see Page 4). Maintain OUTPERFORM.

Risks to our recommendation include: (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 - 14 Feb 2023