The Official Kenanga Warrants Blog

PMETAL: Kenanga Research maintain MARKET PERFORM with TP of RM4.60.(Source: Kenanga Research)

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Publish date: Tue, 28 May 2019, 10:20 AM
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Following Message

As of 28 May 2019, If you wish to gain exposure on PMETAL, we have

- PMETAL-C24 Effective Gearing of 5.69x & 9 Ticks Sensitivity 

- PMETAL-C28 Effective Gearing of 3.96x & 5 Ticks Sensitivity 

For more information about these warrants, visit our website www.nagawarrants.com

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News: Low metal price and high input cost drag on Press Metal quarterly earnings

 

PMETAL’s 1Q19 core net profit (CNP*) came in below expectations at RM111m (-22% YoY; -27% QoQ), accounting for only 14% of both consensus and our full-year estimates. We attribute the earnings miss to: (i) higher-than-expected alumina costs, and (ii) lower aluminium prices. An interim dividend of 1.25 sen was declared, below our expectation. Cut FY19-20E CNPs to RM685-810m and lower dividend forecast from 7.0- 7.5 sen to 6.0-7.0 sen. Maintain MP with TP of RM4.50.
 
Below expectations. Press Metal Aluminium Holdings Berhad (PMETAL)’s 1Q19 core net profit (CNP*) came in below expectations at RM111m (-22% YoY; -27% QoQ), accounting for only 14% of both consensus and our full-year estimates. An interim dividend of 1.25 sen was declared, below expectation at ~20% of our FY19E full-year estimate.
 
Double whammy of higher alumina and lower aluminium prices. YoY, 1Q19 CNP declined 22% on a double whammy of heightened alumina costs and lower aluminium prices. Recall that PMETAL had hedged its alumina purchases for the whole of FY18 at prices based on 16-17% of aluminium price (translating into unit cost of c.USD340- 360/MT). As such, we estimate that PMETAL’s alumina costs went up by 13-19% to c.USD406/MT in 1Q19, while the average aluminium price fell 13% to USD1,862/MT during the same period. As a result, EBIT margin waned 2.9ppt to 9.0% in 1Q19. QoQ, CNP dived 27% on the
same reasons.
 
Alumina prices to moderate. We believe alumina prices will moderate from 1Q19 average of USD406/MT to USD360-380/MT in coming months as production restrictions at Norsk Hydro’s Alunorte plant has recently been lifted, while Emirates Global Aluminium (EGA)’s Al Taweelah alumina refinery with 2m MT/year capacity (c.3% of ex-China alumina supplies) has also commenced operations in April. However, we are aware of Xinfa Group’s move to shut down all of its production lines (with 2.8m MT/year capacity) in Shanxi, China amid an environmental dispute; it could dampen the moderating alumina price although theoretically the impact should be localised.
 
Better product mix and JAA to lift earnings. We believe the group’s sales composition of high-value products will increase to 60-70% in FY19 from 40-50% in FY18 after expanding billet capacity by 60k MT (to 240k MT) and wire rod capacity by 50k MT (to 200k MT) in October 2018. Billets and wire rods command a mark-up/premium of USD120- 150/MT and generate additional profit of USD60-80/MT. As such, we believe the new capacities would underpin profit margins and improve earnings by c.5% in FY19. In addition, the completion of Japan Alumina Associates (JAA) acquisition in end-Feb 2019 should provide a 10- month earnings contribution to the group in FY19, improving earnings by c.3% after considering financing costs.
 
Cut FY19-20E CNP by 15-5% to RM685-810m as we raise our alumina cost assumptions from USD370-360/MT to USD390-370/MT. As such, we have lowered our dividend forecast from 7.0-7.5 sen to 6.0-7.0 sen in tandem with our earnings downgrade.
 
Maintain MARKET PERFORM with an unchanged TP of RM4.50, based on FY20E PER of 21.8x (rolled forward from FY19E), implying - 0.5SD valuation basis. Despite its long-term positive operating outlook and earnings growth potential, volatility in the aluminium and alumina markets could continue to disrupt earnings’ visibility in the near-term.
 
Risks to our call include sharp rises/falls in aluminium prices and raw material prices as well as major plant disruptions/closure. 
 
 

 

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