Last week’s power outage disrupted Press Metal’s (Press) operations in Mukah  and led to  the plant  being  closed  for reconstruction works.  The new income stream from its Samalaju smelter may partly  mitigate  this earnings  shortfall  while  insurance  will  cover  the  losses.  We  cut  our FY13  core  earnings  forecast  by  14.8%  as  we  assume  a  six-month operation  halt  but  keep  our  DCF  unchanged.  Re-iterate  BUY,  with  a lower MYR2.90 FV, based on a higher 30% discount vs 20% earlier.

- Sarawak blackout.  Sarawak recorded its worst ever power outage last week. Press told Bursa that the blackout lasted for almost six hours.

- Mukah smelter gets a jolt.  The blackout  abruptly  shut  down smelting operations  at  80%-owned  Press  Metal  Sarawak  SB  (PMS).  Despite round-the-clock rescue efforts, none of its pots could be salvaged as  of yesterday  evening  as  the  content  in  the  pots’  reduction  cells  had solidified following  the sharp  drop in temperature. Thankfully, operations at Press Metal Bintulu SB (PMB) in Samalaju were not affected.

- Adequate insurance coverage.  Press  is  still unable to assess the full impact  of  the  incident  but  will  be  closing  the  plant  to  facilitate  major reconstructions works.  Press’ board  said  PMS has  adequate insurance coverage  and  its  insurers  would  ascertain  the  damage.  As  we  are assuming  a six-month halt in  PMS’ operation, which  is likely to  wipe out its  FY13  earnings,  we  classify  its  fixed  and  overhead  costs  during  the period as exceptionals and cut our FY13 core profit forecast by 14.8%.

- Look beyond the  tragedy   and BUY. While this incident will dent Press’ earnings in the short term,  most of the shortfall will be  compensated by insurance,  which  will  then  lessen  the  impact  on  the  stock’s  long  term DCF. The ramping up of its Samalaju smelter – which is 2.66x larger and way more efficient than its Mukah operation – will also partly mitigate any immediate losses.  All  said, we  have  decided to  be  prudent in terms of valuations by  raising  the discount  to our fully diluted conservative DCF from 20% to 30%, from which we derive a new FV of MYR2.90. We urge investors to look beyond this temporary  blip and buy into any share price weakness.

Source: RHB