This article first appeared in The Edge Financial Daily on October 19, 2018
Press Metal Aluminium Holdings Bhd
(Oct 18, RM4.92)
Maintain market perform with an unchanged target price (TP) of RM5: Press Metal Aluminium Holdings Bhd has proposed to acquire a 50% equity stake in Japan Alumina Associates (Australia) Pty Ltd (JAA) from ITOCHU Minerals & Energy of Australia Pty Ltd via its 80%-owned Press Metal Bintulu, for a total cash consideration of A$250 million (RM739 million).
JAA is an investment holding company which has a 10% interest in the Worsley Alumina Unincorporated Joint Venture (Worsley). Worsley is one of the world’s largest and lowest-cost alumina producers with 4.6 million tonnes annual capacity, of which 5% or 230,000 tonnes would be attributable to Press Metal.
This would satisfy 15% of Press Metal’s annual alumina requirements of 1.5 million tonnes, giving Press Metal better control over its supply chain and certainty of securing its feedstocks amid supply tightness in the current alumina market. The acquisition is slated for completion in the first quarter of 2019.
From our back-of-the-envelope calculations, the acquisition translates into a financial year 2018 (FY18) price-earnings ratio (PER) of 11 times, which we deem fair as other alumina producers such as Norsk Hydro and Alcoa Corp are trading at 10 to 13 times.
Additionally, the acquisition is accretive given that Press Metal is trading at an FY19 estimate (FY19E) PER of 19 times, and it would be fully funded via external borrowings in lieu of equity issuance. The drawdown of borrowings would increase Press Metal’s net gearing to 0.7 times from 0.4 times in FY19E. Overall, the acquisition is expected to improve earnings by 2% after considering additional financing costs.
No change in FY18E and FY19E core net profits of RM720 million and RM1.01 billion as earnings impact from the acquisition is minimal at 2%. Our FY18E aluminium price assumption of US$2,000 (RM8,320) per tonne (versus year-to-date US$2,158 per tonne) remains unchanged as we see potential pullbacks in aluminium prices to US$1,800 to US$1,900 per tonne levels from the current price of US$2,034 per tonne.
This is because the US Treasury had in mid-September relaxed the sanction on Rusal to allow the company to sign new contracts with existing customers, allaying concerns of a supply disruption in the aluminium market.
This is unfavourable to aluminium prices as the restored supply adds to the current production surplus condition globally.
Maintain market perform with an unchanged TP of RM5 based on a PER of 19.4 times, applied to FY19E fully diluted earnings per share of 25.8 sen. This reflects earnings growth of 20% to 40% on the basis of aluminium average selling price averaging US$2,000 to US$2,100 per tonne in FY18 to FY19. We continue to like Press Metal, given its long-term positive operating outlook and earnings growth potential. However, at recent prices, we see limited upside on the stock and we expect substantial volatility in both aluminium and raw materials prices.
Risks to our call include sharp rises/declines in aluminium prices and major plant disruptions/closure. — Kenanga Research, Oct 18