PMETAL’s 1HFY23 results met expectations. Its 1HFY23 core net profit fell 30% YoY due to weak aluminium prices, exacerbated by input costs that fell less than aluminium prices, crimping margins. We believe aluminium prices will hold up given supply constraints globally. We maintain our forecasts but raise our TP by 5% to RM6.00 (from RM5.74). Maintain OUTPERFORM.

Its 1HFY23 core net profit came in within our expectations at 47% of our full-year forecast but disappointed the market at only 39% of the full-year consensus estimate.

It declared a second interim NDPS of 1.75 sen (ex-date: 15 Sept; payment date: 29 Sept), tallying 1HFY23 NDPS to 3.5 sen which is higher than that of the 3.25 sen paid in 1HFY22.

YoY. Its 1HFY23 revenue fell 14% due to the weakening of ASP as average LME aluminium spot price contracted 24% to USD2,331/MT on average in 1HFY23 as opposed to USD3,067/MT. Its core profit fell by a larger 30% as the spot prices of inputs alumina and carbon anode only fell 16% and 6%, respectively, during the same period. Not helping either, its share of associates’ profits more than halved due to weak performance from 25%-owned alumina miner PT Bintan which is based in Indonesia due to the double whammy of lower ASP but higher input cost.

QoQ. Its 2QFY23 top line leapt 22% thanks to a higher volume as well as MYR’s weakness against the USD, partially offset by a lower ASP (-6%). However, its core net profit only grew 8% as the cost of input alumina (-4%) fell less than the ASP. This was partially mitigated by a sharply higher share of associates’ profits on the full commissioning of PT Bintan’s entire 2m MT capacity per annum.

Forecasts. Maintained. We keep our aluminium price assumptions at USD2,350/MT-USD2,450/MT in FY23-24, with a long-term assumption of US2,200/MT.

We raise DCF-derived TP by 5% to RM6.00 (from RM5.74) we roll forward our valuation base year to FY24F (from FY23F). Our valuation basis is unchanged - DCF based on a discount rate equivalent to its WACC of 8.6% and TG of 5%. Our TP reflect the same 5% premium by virtue of its 4-star ESG rating as appraised by us (see Page 4).

Outlook. We acknowledged 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 - 30 Aug 2023