• Maintain BUY, with a lower SOP-derived MYR7.53 TP from MYR7.90, 67% upside and c.2% yield. We recently visited Press Metal Bintulu’s (PMB) smelting plant in Samalaju Industrial Park and came away feeling upbeat. PMB benefits from long-term supply of electricity at favourable rates via the power purchase agreement with Sarawak Energy sourced from the Bakun Dam. Valuations are undemanding, as the stock is trading at a forward 2023F P/E of 15.4x, -1SD from its 5-year mean.

• Phase 3 smelting operations fully commenced in Oct 2021 with a capacity of 320k tonnes pa (tpa) backed by 300 pots (Figure 6), bringing PMB’s total capacity to 960k tpa. Utilisation rates for Phases 1 and 2 smelters at PMB inched higher to 94% vs 92% in May while Phase 3 is operating at 97% of capacity as its maintenance programme normalises further. We take comfort from PMB’s fume treatment system (FTS) whereby pot fume ducts are connected to the main fume duct, which directs the fumes to the FTS (Figures 7 and 8). Emission limits are also in place for gases like sulphur dioxide (capped at 100mg per cu m) with a continuous emission monitoring system linked to the Environment Department.

• Latest trends of commodity prices. On a YTD basis, aluminium prices have averaged USD2,990/tonne. However, lingering concerns of a global recession combined with fears from China’s lockdowns may drag the prices in the near to medium term. As such, aluminium prices could reach an average of USD2,850/tonne for FY22. Notwithstanding this, demand for aluminium should remain intact in the long run amid a gradual shift towards renewable energy adoption via solar panels and EVs.

• The price of alumina (a cost component for Press Metal) peaked in March at USD505/tonne, fuelled by geopolitical risks. Conversely, current alumina prices have dropped 33% from the peak to USD340/tonne. Looking ahead, we expect alumina prices to average USD375/tonne in FY22, supported by output cuts at alumina refineries in China in light of a bauxite shortage – a raw material used to produce alumina. Meanwhile, prices for carbon anode have averaged CNY6,300/tonne so far in 2022 (2021 average: CNY4,320/tonne) – in line with higher crude oil prices.

• We trim FY22F-24F earnings 3-14% as we update our model assumptions and account for the latest raw material price trends. Main revisions include: i) Lower realised LME aluminium prices to exercise caution on the fluid economic environment, ii) latest USD/MYR forecasts to reflect revisions by our economics team, and iii) higher average carbon anode prices. As a result, we derive a new SOP-based TP of MYR7.53 after imputing a 6% ESG premium based on our in-house ESG methodology. Our ESG scoring of 3.30 out of 4.00 incorporates the fume treatment system at PMB’s smelting plant highlighted earlier. We continue to like Press Metal for its favourable market positioning in the new era of decarbonisation.

• Key downside risks include a sharp deterioration in global economic conditions and a spike in raw material costs.

Source: RHB Research - 27 Jul 2022