We expect PMETAL’s 1Q22 results to come in at yet another record high with a net profit of between RM420-470m (+47-64% QoQ, +104-128% YoY). If met, we would deem the results to be within our expectations as we believe that PMETAL is on track to more-than-double its profits YoY in FY22 due to: (i) elevated aluminium prices; (ii) full commissioning of its Phase 3 Samalaju expansion; and (iii) further contribution from its 25%-owned PT Bintan alumina refinery. After some housekeeping measures: (i) diluting the group’s share base post-private placement; and (ii) updating the group’s audited numbers from its recently released FY21 annual report, we maintain BUY with a slightly lower TP of RM7.59 (20x P/E on FY23F EPS).

A strong 1Q22. PMETAL’s 1Q22 results are tentatively scheduled for release on 30 May 2022. We expect core earnings for the quarter to come in at a record high – between RM420-470m (+47-64% QoQ, +104-128% YoY), barring any unforeseen swings in cost structure. This will be driven by the following reasons: (i) higher LME aluminium spot prices, averaging at USD3,248/tonne in 1Q22 (vs. the average of USD2,104/tonne in 1Q21 and USD2,760/tonne in 4Q21); and (ii) full commissioning of the Phase 3 Samalaju project – resulting in full sales tonnage contribution in 1Q22.

Aluminium spot prices wanes on China lockdown. Impacted by the China lockdown since March, aluminium spot prices have corrected 21% as the lockdown in the largest consuming country has triggered a possible downward shift in the aluminium consumption curve. Consequently, PMETAL’s share price has corrected 25% in a span of two months.

Long-term structural supply issues linger. Nevertheless, we reckon the fall in aluminium prices may be temporary amid a structural supply deficit in the near term. In our view, the robust demand for aluminium is here to stay, as we are just at the start of the adoption of EV and solar panels on the back of the rising de-carbonization efforts globally. On the other hand, aluminium supply will continue to face disruption following the Ukraine and Russia conflict and power rationing (especially on fossil fuel-based power source) in China. We believe that the combination of robust demand and stunted supply will cushion further downside to aluminium prices.

Bargain hunting opportunity arises. Also, taking cue from China’s easing domestic new Covid-19 cases (Figure #1) and potential relaxation of its SOP and reopening of its major economies, we reckon the aluminium prices will stage a turnaround in anticipation of an increase in aluminium consumption from China. Hence, current PMETAL’s 40% correction from YTD high of RM7.40 provides a good opportunity for investor to accumulate, as its share price is highly correlated to aluminium prices (+95% correlation based on 3Y historical data).

Forecast. Tweaked slightly after some housekeeping measures: (i) diluting the group’s share base post-private placement; and (ii) updating the group’s audited numbers from its recently released FY21 annual report, but no major changes in our assumptions or FY22-23f profit forecasts.

Maintain BUY with TP of RM7.59. We maintain our BUY recommendation on PMETAL with a slightly lower TP of RM7.59/share (from RM7.71 previously) based on a P/E multiple of 20x, which is at a slight premium to both its 7-year historical mean P/E of 15x and to the 10x average forward P/E of its global peers. However, we believe that valuations are justified due to: (i) its favourable cost structure as bulk of its energy costs are locked in via 15-25 year power purchase agreement (PPA) with Sarawak Energy Bhd; (ii) the scarcity premium of a growing large-cap, investible aluminium proxy in Malaysia; and (iii) its low carbon footprint as its smelters are hydro powered, boosting its ESG profile.

Source: Hong Leong Investment Bank Research - 19 May 2022