Findings  from  our  visit  to  Press  Metal’s  (Press)  Samalaju  smelter confirmed our view that the plant’s commissioning is well on track and its  production  volume  is  set  to  multiply.  The  current  distressed aluminium  price  infers  that  a  rebound  could  lift  Press’  FY13F/FY14F earnings  by  152.9%/77.8%.  We  reaffirm  our  BUY  rating,  with  an unchanged  MYR3.31  FV,  which  is  a  20%  discount  to  its  fully  diluted conservative DCF, implying 10.4x FY13F and 5.9x FY14F P/Es.

- The  making  of  an  aluminium  giant.  Our  hosts  CEO Dato’ Paul Koon and  head  of  corporate  affairs  Mr  David  Tan  briefed  us  on  the Group’s corporate  milestones  and  the  outlook  of  the  aluminium  industry.  Press has come a long way since its first 90k-tpy (tonnes per year) greenfield extrusion  plant  in  Guangdong  in  2005,  which  had  later  led  to  an investment  in  a  88k-tpy  smelter  plant  in  Hubei.  It  is  now  the  largest aluminium  smelter  in  Asia  ex-China  via  its  operations  in  Mukah  and Samalaju in Sarawak.

- Smelters  on  track.  In  Nov  2009,  80%-owned  Press  Metal  Sarawak (PMS)  commissioned  a  120k-tpy  aluminium  smelter  in  Mukah  to  focus on producing value-added billets. A quick tour of its new Samalaju plant confirmed that >80% of its 300 aluminium pots are already in operation. The remaining 20% will follow suit by the end of July. We also note that the entire 300-pot operation may require a few months to stabilise.    

- Competitive smelter. With renewed concerns over the global economy pushing  commodity  prices  down,  aluminium  prices  had  dropped  to <USD1,800  per  tonne.  This  may  dent  Press’  margin  but  it  stands  to benefit from: i) an advantageous 25-year power purchase agreement, ii) close  proximity  to  raw  materials,  and  iii)  its  factory  costs,  which fall  into the lower end of the industry average.   

- BUY.  As  aluminium  prices  would  be  depressed  for  only  a  short  period, we  advise  investors  to  look  beyond  the  near  term  fluctuation.  The Samalaju  smelter  will  triple  y-o-y  production  in  2013  and  its  utilisation rate  optimise  in  2014.  Along  with  a  potential  minimal  aluminium  price recovery,  this  could  propel  earnings  by  152.9%/77.8%  for  FY13/FY14. We value Press at a 20% discount to our fully-diluted conservative DCF at MYR3.31. Maintain BUY.

Source: RHB