PRESS’ major shareholders’ move to convert all of their RCSLS early is a  testament of their commitment to  the company,  or possibly  an early sign  that  smelting earnings are  about to  surge.  We are  also  upbeat on its  recent  strategic  asset  swap,  PMB’s  commissioning, recommissioning  of the  Mukah plant, and its  recent  landmark deal with Sumitomo. Maintain BUY and MYR3.79 FV.

• Notice of  RCSLS conversion.  Press Metal (PRESS)  has been notified by  Alpha  Milestone  SB  (AMSB)  and  persons  acting-in-concert  (PACs), namely  Dato’  Paul  Koon,  Koon  Poh  Ming  and  their  spouses,  of  their intention  to  convert  MYR233.9m  (in  nominal  value)  of  their  2011/19 redeemable convertible secured loan stocks (RCSLS). This may result in AMSB and PACs’ aggregate shareholding rising to a minimum 46.9%, or up  to  a  maximum  52.7%,  from  42.9%.  As  such,  both  parties  will  be seeking  an  exemption  from  the  Securities  Commission  to  undertake  a mandatory general offer (MGO) for PRESS’ remaining shares.
• A  vote  of  confidence.  The  early  conversion  of  the  loan  stocks  by PRESS’  major  shareholders  is  testament  of  their  commitment  to  the company, or possibly an early sign that its smelting profit is about to heat up.  Indeed,  news  flow  on  the  company  seems  to  be  improving  after  it hived  off  its  loss-making  Hubei  smelter  and  acquired  a  profitable extrusion unit via an asset swap in Sept 2013. PRESS’ Samalaju smelter resumed  full  operation  in  Oct  2013  while  the  Mukah  smelter  is  being recommissioned  in  stages,  with  ~60%  of  its  pots  now  back  in  action. Elsewhere, we are  also upbeat  on  PRESS’  recent  MYR444m  landmark deal with Sumitomo Corp (8053 JP, NR), which saw the latter taking up a 20% stake in Press Metal Bintulu SB (PMB)’s smelter.
• Reiterate  BUY.  Although  the  London  Metal  Exchange’s  new warehousing  policy  has  put  more  pressure  on  already-distressed aluminium  prices,  the  latest  move  by  PRESS’  major  shareholders certainly suggests that they believe  the  company  can  withstand a sharp price  drop  better  than  its  peers  that  have  higher  costs.  Our  DCF valuation  already  factors  in  the  share  dilution.  With  a  25%  discount already  applied  to  our  conservative  valuation,  our  FV  remains  at MYR3.79 FV, implying an  undemanding 1.1x P/BV and 9.1x FY14 EPS.
• Conversion  of  RCSLS  and  warrants  may result  in  an  EPS  dilution  on  the  back  of estimated  ROE  in  the  mid-teens,  compared with a  6% coupon rate for the RCSLS and an average interest cost of 5%
• The  company  was  originally  scheduled  to redeem  the  RCSLS  on  a  staggered  basis from  2014  onwards,  in  accordance  with  the schedule as per Figure 2

EPS  may  be  diluted,  but  gearing  concerns  may  be  assuaged.  We  reckon  the conversion of the loan stocks by PRESS’ major shareholders may potentially enlarge the company’s share base to 615.78m from 509.4m currently. Based on an estimated ROE  in  the mid-teens  versus  the  RCSLS’  6% coupon  rate,  the conversion  is  EPS dilutive. For illustration  purposes, we also  draw up a hypothesis that  assumes all the other RCSLS and warrant holders also convert  their instruments  at the same time. This may result in the  company’s  share base ballooning  to 692.8m shares.  Although this  scenario is highly unlikely,  particularly in relation to  PRESS’ long-dated warrants that  are  currently out of the money,  the  projected EPS for FY14/15 will be  pared  to 33.4/43.1  sen  from  the  original  41.6/54.0 sen  respectively.  That  said,  we  welcome AMSB and PACs’  move  as this may  further  reduce PRESS’ gearing  to 81.3%  even though the  proceeds  from  the sale of its  20% stake in  PMB to  Sumitomo  is  already 
expected to cut its gearing to a manageable 100.6%  by end-FY14.  All said, a  lower gearing may address some quarters’  concerns  on  the group’s  high leverage, as  net gearing stood at 169.7% as at 30 Sept 2013.

Recommendation Chart

Source: RHB