PMETAL’s 1QFY23 results disappointed on weaker-than-expected ASP realised. China’s reopening has not significantly boosted demand for aluminium. However, the permanent shutdown of smelters powered by fossil fuels coupled with Western sanctions on Russia will keep global aluminium supply in check. We cut FY23-24F earnings forecasts by 26% and 19%, respectively, reduce our TP by 9% to RM5.74 (from RM6.30) but maintain our OUTPERFORM call.

1QFY23 core profit of RM284.8m disappointed, coming in at only 16% each of both our full-year forecast and the full-year consensus estimate. The variance against our forecast came largely from weaker than-expected ASP realised. Spot aluminium prices traded on London Metal Exchange (LME) averaged at USD2,401/MT in 1QFY23 vs. our full-year assumption of USD2,450/MT. It declared a first interim NDPS of 1.75 sen (ex-date: 14 Jun; payment date: 30 Jun) vs. 1.5 sen a year ago.

YoY. 1QFY23 revenue contracted 22% to RM3.07b due to the softening of ASP as average LME aluminium spot price declined 26% to USD2,401/MT from USD3,261/MT. Similarly, core profit fell 33% to RM284.8m as revenue declined. In addition, associate incomes were also lower (-73%) owing to a sharp decline of earnings contribution from 25%-owned (effective stake) alumina miner PT Bintan in Indonesia due to double whammy of lower ASP but higher input cost.

QoQ. 1QFY23 topline fell 22%, despite a higher ASP (LME spot price +3%), due to lower smelting volume sold and extrusion product prices. However, core profit rose 7% on the back of lower input costs as well as lower freight charges which declined 25% sequentially, partially offset by a 67% decline in associate incomes.

Forecasts. We cut FY23-24F earnings forecasts by 26% and 19%, respectively, as we cut: (i) aluminium price assumption to USD2,350/MT-USD2,450/MT from USD2,550/MT-USD2,600/MT previously, and (ii) associate incomes for FY23F. Our long-term aluminium price assumption is also reduced by 4% to USD2,200/MT from USD2,300/MT previously. Correspondingly, we also trimmed dividend forecasts based on an unchanged 40% payout ratio.

Consequently, we reduce our DCF-derived TP by 9% to RM5.74 (WACC: 8.6%; TG: 5%) from RM6.30. Our revised TP carries the same 5% premium by virtue of its 4-star ESG rating as appraised by us (see Page 4).

Outlook. We acknowledge that contrary to expectations, China’s reopening has not significantly boosted the demand for aluminium. While the Chinese government has introduced various measures to stabilise the property market, a meaningful recovery is still not quite on the horizon. Similarly, the roll-out of construction and infrastructure projects in China has not been as robust as anticipated.

However, on the supply side, more stringent “green” requirements, especially in China, will see the permanent shutdown of smelters powered by fossil fuels (especially coal), further tightening the global aluminium supply. Also, the Western countries will continue to avoid Russian aluminium that makes up c.6% of world aluminium production. All these factors should keep aluminium prices stable.

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. Maintain OUTPERFORM.

Risks to our call include: (i) a global recession resulting in a sharp fall in the demand for aluminium, hurting prices, (ii) escalation in the cost of key inputs such as alumina and carbon anode, and (iii) major plant disruptions or plant closure.

Source: Kenanga Research - 31 May 2023