This article first appeared in The Edge Financial Daily on May 21, 2018

Press Metal Aluminium Holdings Bhd
(May 18, RM4.73)
Maintain buy with a lower target price (TP) of RM5.60: Press Metal Aluminium Holdings Bhd’s first quarter ended March 31, 2018 (1QFY18) core net profit of RM150.5 million was below our and market expectations, making up only 18% to 20% of our and consensus estimates respectively.

The lower-than-expected earnings were mainly due to higher-than-expected alumina and carbon anode prices, both of which are used in the smelting process.

Revenue was up 5.1% year-on-year (y-o-y) mainly on higher aluminium prices of around US$2,154 (RM8,551) per tonne (versus around US$1,853 per tonne in 1QFY17).

Meanwhile, a slower net profit growth of 1.6% y-o-y was mainly due to a higher tax rate for the Hubei extrusion plant.

With current aluminium prices now hovering around US$2,300 per tonne, we have revised our aluminium price assumptions to US$2,005 per tonne for 2018 (from US$1,925 per tonne), and US$2,200 per tonne for 2019 (from US$2,118 per tonne).

Note that the company has already sold forward most of its 2018 production, and approximately one-third of 2019’s output (subject to a maximum of 65% of total production, as the remaining output will become a natural hedge against its alumina cost).

However, with higher-than-expected carbon anode and alumina prices, we trim our earnings estimates by 8% to 9%.

With the revision of earnings estimates, we cut our discounted cash flow-derived TP to RM5.60.

Our new TP implies 30 times FY18 price-earnings ratio (PER), which is close to +2 standard deviation of its historical PER — we believe this is justified given Press Metal’s projected three-year earnings compound annual growth rate of 39%.

Key risks include lower aluminium prices and a sharp weakening in the US dollar that may hurt profitability. — RHB Research Institute, May 18