PMETAL’s 9MFY23 results met our forecast but disappointed the market. Its 9MFY23 core net profit fell 22% YoY due to a weak ASP, worsened by input costs that were sticky to the downside, crimping margins. We believe aluminium prices will hold up given the supply constraints globally. We maintain our forecasts, TP of RM5.00 and MARKET PERFORM call.

PMETAL’s 9MFY23 core net profit came in within our expectations at 73% of our full-year forecast but disappointed the market at only 70% of the full-year consensus estimate.

It declared a 3rd interim NDPS of 1.75 sen (ex-date: 15 Dec; payment date: 29 Dec), tallying 9MFY23 NDPS to 5.25 sen which is higher than the 5.0 sen paid in 9MFY22.

YoY. Its 9MFY23 revenue declined 13% due to the weakening of ASP as average LME aluminium spot price fell 20% to USD2,274/MT on average in 9MFY23 as opposed to USD2,853/MT. Its core profit contracted by a larger 22% to RM910.4m as the spot prices of input alumina only fell 12% over the same period. Meanwhile, its share of associate incomes fell 18% due to lower ASP, partly mitigated by the full commissioning of PT Bintan’s entire 2m MT capacity per annum in 2QFY23.

QoQ. Its 3QFY23 turnover fell 8% due to lower ASP as the average LME aluminium spot price dipped 5% to USD2,155/MT from USD2,260/MT. Nonetheless, its core profit rose 4% largely due to higher associate incomes (+82% or RM28.5m) with PT Bintan operating at its full 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 USD2,200/MT.

We also keep our DCF-derived TP of RM5.00 WACC: 8.7%; TG: 2%). Our TP reflect a 5% premium to its DCF valuation of RM4.76, 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, there is improved sign of recovering from the solar sector, EVs and transmission infrastructure in China.

Meanwhile, 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.

However, the upside to its earnings is capped by subdued aluminium prices against a backdrop of a weak global economy. Maintain MARKET PERFORM.

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 closures.

Source: Kenanga Research - 29 Nov 2023