• Maintain BUY, new MYR6.18 TP from MYR5.66, 19% upside. The current LME aluminium price of c.USD2,600 has surpassed our expected trading range of USD2,300-2,500, following the reopening of China’s borders. That said, the International Monetary Fund (IMF) recently revised its 2023 global growth projection to 2.9% from 2.7% (in Oct 2022). The odds remain in Press Metal’s favour, with ongoing catalysts including being a beneficiary of a structural demand shift, and the favourable alumina-to-aluminium cost ratio. We incorporate a 9% ESG premium to our intrinsic value.

• Odds are turning in its favour. LME aluminium prices recently rebounded to USD2,600, averaging at USD2,500/MT in January vs USD2,400 in Dec 2022, as the relaxation of China’s COVID-19 restrictions fuel optimism of a potential demand recovery. That said, the official Manufacturing Purchasing Manager Index (PMI) rose to a 4-month high of 50.1 in January, up from 47 in Dec 2022, according to China’s National Bureau of Statistic (NBS). We expect PMAH’s timely shift to hedge 35% of its forward sales in 2023 (from 60% in 2022), to accord it with ample upside from the strengthening of aluminium prices.

• Still favourable cost structure. The average alumina price edged up slightly to USD343/MT in January, from USD320/MT in 4Q22, as production was dragged by a seasonally weaker production month in conjunction with the Lunar New Year and intermittent power curtailment in selected regions of China. Nevertheless, the average alumina-to-aluminium cost ratio stood at 13.8% in January, largely unchanged from 4Q22. Carbon anode prices eased 7% averaging at CNY6,540 in January, vs CNY7,040 in 4Q22.

• 4Q22 preview and near-term outlook. We expect 4Q22 topline YoY growth to moderate to 1% in view of the softer aluminium prices. However, 4Q22 core earnings YoY growth should rise 16% as a result of easing alumina price. We expect the current supply tightness caused by the continued Russia-Ukraine war, the matured stage of the monetary cycle, and the reopening of China’s economy to continue lending support to aluminium prices.

• Earnings revision. We lower our 2022F earnings estimates by 10% after factoring in a lower premium assumption. We lift 2023F-2024F earnings estimates by 6% and 9% in view of the rebound in aluminium prices coupled with a favourable cost ratio. Our 2023 aluminium price forecast is now USD2,600 from USD2,400. Every USD50 appreciation to aluminium prices could increase PMAH’s earnings by 4%.

• Valuation. Our DCF-derived TP implies 25x 2023F P/E against its historical mean of 26x. We impute a 9% ESG premium to our intrinsic value, based on our in-house ESG methodology. Key downside risks: Plunge in aluminium prices, weakening of USD against MYR, escalating raw material costs.

Source: RHB Research - 3 Feb 2023