• Reiterate BUY and MYR6.53 TP (DCF), 33% upside and 2% FY24 yield. We visited Press Metal’s Samalaju manufacturing facility and came away encouraged on the sector’s mid- to long-term earnings prospects. Our positive outlook on aluminium is primarily driven by the ongoing rise in ASPs, and "green push" towards EVs and solar panels. PMAH’s valuation is undemanding, 21x 2025F P/E or 0.9SD below the 5-year mean of 25x.

• A trip to Samalaju. We visited the smelting facilities, which have an annual capacity of 960,000 tonnes (89% of the group's total smelting capacity), and casting plants for value-added products like billets, alloys, and wire rods. These facilities are operating at optimal utilisation, producing c.900 tonnes/day in each of the three phases. The facilities are strategically located near the deep-water Samalaju Industrial Port (SIPSB) – vital for facilitating cross-border trade. Furthermore, a 3.5km conveyor belt system connects the plants to SIPSB, ensuring smooth and efficient delivery of alumina.

• We remain cautiously optimistic on the outlook for aluminium. Global prices have seen recoveries from the temporary blip in July, likely due to the possibility of rate cuts by the US Federal Reserve (US Fed) by September. Main Japanese Port or MJP spot premiums are also on an upward trend (+10.3% QoQ as of QTD-August), driven by higher freight costs. We expect aluminium ASPs to be supported by: i) Slow capacity expansions in Indonesia, ii) mid- to long-term demand from green sectors such as EVs and solar, and iii) increase in US tariffs on Chinese aluminium imports to 25% from 7%. While the pace of major drivers like solar-capacity expansions may moderate in 2H24, we expect long-term growth to be supported by the global push to reduce carbon emissions.

• Cost outlook. Alumina prices remain elevated amidst tight supply, standing at USD496.20/tonne (+15.1% QoQ as of QTD-August). By contrast, carbon anode prices have eased from their 2022 peak, declining to CNY3,730/tonne as at end August. While the high alumina prices are a concern, this is expected to gradually soften as supply increases with the launch of three new projects in Mempawah, Bintan, and India, each with a capacity of 1m tonnes. They are scheduled to come online between 4Q24 and 2027.

• We make no changes to our earnings estimates. Our assumption on PMAH’s hedging policy remains unchanged: i) 35% at USD2650 (2025), ii) 30% at USD2,700 (2026), and iii) 15% at USD2,750 (2027). Our MYR6.53 TP implies 27x 2025F P/E, slightly ahead of its 5-year mean of 25x. We reiterate our BUY call, premised on PMAH’s cost advantage (coupled with sustained demand from green sectors), potential US Fed rate cuts to boost global demand, and rising market preference for lower-carbon footprint smelters.

• Key risks include a plunge in aluminium prices, sharp weakening of the USD, elevated raw material prices, and slowdown in global economic growth, which undermines primary aluminium demand.

Source: RHB Research - 5 Sep 2024