PMETAL’s FY23 results met expectations. Its FY23 core profit fell 13% due to a weaker ASP. However, we believe aluminium prices will hold up given supply constraints globally. We cut our FY24F net profit forecast by 4%, reduce our TP by 2% to RM4.90 (from RM5.00) and maintain our MARKET PERFORM rating.

PMETAL’s FY23 core profit of RM1.25b met expectations. It declared a 4th interim NDPS of 1.75 (ex-date: 13 Mar; payment date: 29 Mar), tallying FY23 NDPS to 7.0 sen, which is a tad higher than our FY23 NDPS assumption of 6.1 sen.

YoY. Its FY23 revenue contracted by 12% owing to the weakening of ASP as average LME aluminium spot price fell 17% to USD2,255/MT on average as opposed to USD2,702/MT last year. Similarly, its core profit also declined by 13% to RM1.25b. Meanwhile, the spot prices of input alumina fell by 9%. On the other hand, its share of associate incomes rose 3% due to the full commissioning of PT Bintan’s entire 2m MT capacity per annum in 2QFY23, partly mitigated by a weaker ASP.

QoQ. Its 4QFY23 revenue rose 3% thanks to higher ASP as the average LME aluminium spot price improved slightly by 2% to USD2,195/MT from USD2,155/MT. Correspondently, its core profit grew 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 are signs of a pickup in 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.

Forecasts. We reduce our FY24F net profit forecast by 7% to reflect: (i) lower aluminium price assumptions of USD2,350/MT (from USD2,450/MT) with USD/MYR at 4.40 (from 4.20). We also introduce our FY25F forecasts with earnings projected to grow at 15% on the back of aluminium price assumption of USD2,400/MT with USD/MYR of 4.40.

Valuations. We reduce our DCF-derived TP to RM4.90 from RM5.00 as we roll over our valuation base year to FY25F from FY24F with an unchanged WACC of 8.7% and TG of 2%. Our TP reflect a 5% premium to its DCF valuation of RM4.67, by virtue of its 4-star ESG rating as appraised by us (see Page 4).

Investment case. 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 2034 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 Feb 2024