• D/G to NEUTRAL from Buy, new MYR4.95 TP (DCF) from MYR5.54, 6% upside. FY23 core earnings of MYR 1.2bn came slightly below our and Street’s expectation – in tandem with softening metal selling prices and regional premiums. Given the lukewarm sentiment on the aluminium industry, coupled with limited upside potential in Press Metal’s current valuation, we trim FY24F-26F earnings by 5-11% and downgrade our call.

• A slight miss. 4Q23’s topline was down 10% YoY but improved QoQ, mirroring LME price trends (+2.2% QoQ, +4.6% YoY). 4Q23 core profit improved sequentially, reaching MYR311.7m (+6.4% QoQ, -7.6% YoY) thanks to higher contributions from associates (+78% YoY) and enhanced smelting profitability – PMAH continues to reap further savings from raw material costs due to the lag effect. This brings FY23 figure to MYR 1.2bn (-15.1 % YoY), slightly below our and Street’s full-year estimates at 92% and 95%. Segmental-wise, value-added products (VAP) volume remains at 41% of total sales volumes, thanks to higher volume growth for billets. The group target to boost the share of this lucrative business to 50% by end 2024.

• We moderate our optimism on the prospects of the aluminium sector on FY24’s anticipated surplus. Despite historically low LME and inventory levels, global aluminium demand remains lacklustre, hindering the resurgence of ASPs. Weak demand persists in Europe, with mixed performances among sub- sectors in China. Raw materials-wise, carbon anode prices (c. 23% of PMAH’s smelting costs) continue to ease further, as we observed such prices plunging below the CNY4,000 mark since January. Conversely, alumina prices (c.30% of PMAH’s smelting costs) have seen an uptick, reaching c.USD367/tonne as of end January (+10% MoM) on concerns over supply chain disruptions following a fuel depot blast in Guinea, which affected bauxite supply.

• Earnings revision. Following adjustments to our LME aluminium, carbon anode, and alumina price assumptions (Figure 2), our FY24F-26F earnings have been reduced by 5-11%. Consequently, our new DCF-derived TP is now MYR4.95 (+8% ESG premium, given PMAH’s 3.4 ESG score vs the 3.0 country median). Although it remains one of the lowest-cost smelters, we have downgraded the stock to NEUTRAL, as the current valuation looks fair. Trading at 23.0x FY24F P/E, PMAH commands a premium to its global peers (10.5x) and is trailing close to its 5-year mean (25.9x). This decision stems from the lack of immediate catalysts to boost aluminium ASPs and near-term demand, coupled with limited upside potential in its current valuation.

• Key downside risks includes plunge in aluminium prices, sharp weakening of the USD, elevated raw material prices, and slowdown in global economic growth that would undermine primary aluminium demand. The converse represents the upside risks.

Source: RHB Research - 29 Feb 2024