Press Metal Aluminium Holdings Bhd
(Jan 14, RM4.52)
Initiate coverage with a hold rating and a target price of RM4.69 per share: Press Metal Aluminium Holdings Bhd is placed in the first quartile for overall smelter costs globally mainly due to competitive electricity costs from 25-year power purchase agreements with Sarawak Energy Bhd since the commencement of its smelters and lower effective tax rate from an investment tax allowance for its Mukah plant and 15-year tax holiday for its 80%-owned subsidiary Press Metal Bintulu Sdn Bhd.
To weather volatility in its key raw materials, Press Metal aims to expand vertically in the supply chain. We think it is likely the company will acquire brownfield upstream assets to better manage the cost and supply of carbon anode and alumina, which contribute close to 50% of its total production costs. To date, it has formed a joint venture with Sunstone Development Co Ltd and acquired 50% of Japan Alumina Associates, securing 50% of carbon anode and 15% of alumina current requirements respectively.
In our view, capacity expansion will be limited in the near future given limited energy availability. Hence, earnings growth will likely come from better product mix. Press Metal is targeting to raise value-added aluminium products capacity to 60% of total capacity in 2019. This should contribute positively to the bottom line as value-added aluminium products enjoy better margins compared with standard P1020 ingots.
We initiate coverage with a “hold” rating and 12-month TP of RM4.69 based on a 2019E (estimate) price-earnings ratio (PER) of 27 times (close to its three-year mean +one standard deviation level). We believe our PER valuation is justified by its low-cost advantage, stable profit margin reflecting its strong execution, and strong management team led by its founder and chief executive officer Tan Sri Koon Poh Keong. Its inclusion in the MSCI and FBM KLCI indices since late-2017 is expected to support the share price. Key risks to our call include volatility in aluminium prices and its key raw materials, namely alumina and carbon anode prices. — Affin Hwang Capital Research, Jan 14