Press Metal posted 3Q14 earnings of MYR82.7m from a loss in 3Q13 on higher aluminium prices. Maintain BUY, with a higher MYR9.45 DCF TP (38%  upside).  We  continue  to  like  the  company,  as  it  is  a  world-class low-cost  aluminium  smelter  that  can  leverage  on  the  bottoming  out  of aluminium prices. We lift our FY15F earnings by 11.3% after accounting for a lower effective tax rate and higher value-added sales.  
 
Profits soar. Press Metal’s 3Q14 net profit of MYR82.7m (+37.7% QoQ)  was  a  sharp  swing  from  the  preceding  year’s  headline  loss.  If  not  for 3Q’s  MYR22.6m  unrealised  forex  loss  (marked-to-market  of  its  USD-denominated borrowings following a weaker MYR), its results could have been better. That said, we deem them in line with our but ahead of street estimates.  Considering  both  the  company’s  smelters  reached  full operation as at April, the surge in profit was mainly due to the higher all-in aluminium prices, which rose 8% QoQ and 15.5% YoY to an average of  USD2,342/tonne  in  3Q14.  Press  Metal  also  declared  a  third  interim dividend of 6 sen/share (YTD: 16 sen/share).

Earnings  set  to  advance  further. We  also  realised  that Press Metal’s effective  tax  rate  was  way  lower  than  our  estimates.  Its  CFO confirmed that  our  deferred  tax  liability  assumption  was  way  too  high.  We  also learnt  that  the  company  has  forward  sold  most  of  its  2015  quantity,  of which sales of A356 ingots are twice 2014’s numbers. While we continue to  see  aluminium  prices  moving  higher  on  projected  supply  deficit  from 2014  onwards,  we  prefer  to  keep  our  conservative  assumptions.  That said,  we  revise  FY15F  earnings  by  11.3%  but  keep  our  FY14  numbers almost  intact,  as  offset  by  the  potential  unrealised  forex  loss.  We  also introduce  our  FY16  numbers. Meanwhile,  we  project  a  4Q14  core  profit of MYR90m with quarterly profits to normalise to ~MYR105m in FY15.

Reiterate BUY. We continue to like Press Metal, a world-class low-cost smelter in the first quartile of the global cost curve that is set to leverage on the bottoming out of aluminium prices. Together with the prospect of improved  share  liquidity  post  bonus  issue,  we  keep  our  BUY  call  but raise  our  TP  accordingly  to  MYR9.45  (from  MYR8.30)  following  our upward  earnings  revision  and  removal  of  a  10%  discount  previously applied  to  our  fully-diluted  DCF.  Our  new  TP  implies  reasonable 19.8x/12.4x/ 11.9x P/Es on FY14F/FY15F/FY16F numbers respectively.

Financial Exhibits

We expect Press Metal’s FY14 earnings to surge as its Mukah smelter has resumed full operations while its Samalaju smelter reached optimum utilisation from April

We see significant cash flow improvement from 2Q14 onwards, as proceeds from the disposal of a 20% stake in Press Metal Bintulu (PMB) were collected on 1 Apr

Its balance sheet is set to improve substantially from FY14 as its Sarawak smelters return to full operations, while 
receiving proceeds from the disposal of a 20% stake in PMB

Key ratios are set to improve significantly from FY14 onwards

Our key assumptions are based on relatively conservative aluminium prices and premiums vs the significantly-improved fundamentals of the aluminium industry

SWOT Analysis

Company Profile

Press  Metal  is  a  Malaysian-based  aluminium  company  with  an  extensive  global  presence.  Today,  the  group  has  a  downstream extrusion operation that is integrated with its greenfield aluminium smelting plants in Mukah and Samalaju in Sarawak, which  have an annual combined capacity of 440,000 tonnes. It also operates aluminium extrusion plants in Selangor, Malaysia, and Guangdong and Hubei, both in China.

Recommendation Chart

Source: RHB