We attended PMETAL’s 4Q16 Results Briefing and came away with a POSITIVE view on its short-term price outlook. Its long-term earnings will be further supported by improving production efficiency and potential for expansion. We upgrade our FY17-18E CNP by 9-19% to RM648-783m. Maintain OUTPERFORM with higher TP of RM3.15 (from RM2.60) based on higher Fwd. PER of 17.0x (from 16.0x) on supportive aluminium price outlook.

A bullish year for prices. We recently attended PMETAL’s 4Q16 Results Briefing and came away maintaining our bullish aluminium price view as China has recently ordered a 30% cut in production for both aluminum and alumina. Meanwhile, countries like India, Australia and are exploring or have implemented anti-dumping duties on Chinese aluminum, which level the playing field for other manufacturers. Furthermore, with limited US production due to high manufacturing costs, premiums are on the rise at forward premiums reaching c.USD200/MT from a low of USD160/MT in Oct 2015.

Going down the cost ladder. We expect PMETAL to enhance its cost profile, especially for logistics, as the adjoining Samalaju Port is scheduled to start operations in mid-2017. We gather that the company is currently constructing a conveyor belt directly into the port. Additionally, management mentioned that the Mukah plant should see reductions in cost and transport time as an upcoming road will save c.100km in travelling distance to the closest port. We are positive on these developments as we understand that these measures should reduce logistics cost by USD8-10/MT (-3%).

Premium product focus. We expect additional margin expansion with better top-line as PMETAL doubles its existing billet production capacity by mid-2017. Over the longer term, the company is targeting 50% alloy production by 2018, which we estimate will generate additional revenue of USD150/MT on top of standard aluminum prices. After accounting for cost of additives, we estimate an additional margin of USD50-80/MT for aluminum alloys. Exploring expansions. Management also mentioned that they are open to expansions. On the upstream side, alumina manufacturing would increase cost efficiency but could be risky due to high investment cost, and regulatory risk. Ongoing downstream growth would cost less and provide margin growth. Meanwhile, midstream expansion in current production lines remains dependent on power availability. We understand that this is a continuous work-in-progress as the Sarawak government is commissioning several new power plants. We expect PMETAL to further expand smelting capacity once power is secured, as they have sufficient area to commission a third Samalaju plant (320k MT/year capacity). Upgrade FY17-18E CNP by 9-19% to RM648-783m, premised on higher aluminum price assumption of USD1,750-1,800/MT (from USD1,700-1,800/MT). We also upgraded premium assumptions to USD180-200/MT (from USD160-180/MT) and imputed logistics savings and higher margin on increased billet and alloy production.

Maintain OUTPERFORM with higher TP of RM3.15 (from RM2.60) based on higher Fwd. PER of 17x (from 16x) and higher average FY17-18E FD EPS of 18.5 sen (from 16.2 sen). We upped our Fwd. PER by 1x to 17x to account for the run-up in aluminum prices, which has led to re-rating for international aluminum counters. We will consider reverting to 16x if aluminum prices correct closer to our estimate. Nevertheless, we are still OUTPERFORM on the stock, given the bullish price environment, continued increase in cost efficiency and increased proportion of high-margin products.

Source: Kenanga Research - 06 Mar 2017