This article first appeared in The Edge Financial Daily on August 18, 2017

Press Metal Aluminium Holdings Bhd
(Aug 17, RM3.34)
Maintain hold with a higher fair value (FV) of RM2.92: We maintain our “hold” recommendation but raise our financial year 2017 (FY17) to FY19 net profit forecasts for Press Metal Aluminium Holdings Bhd (PMAH) by 8%, 11% and 10% respectively, and upgrade our FV to RM2.92 (from RM2.62) based on 13 times its fully diluted FY18 forecast earnings per share, in line with the average forward price-earnings ratio of major global key smelters.

The earnings upgrade is to reflect higher assumptions of average blended aluminium prices per tonne realised at US$1,806 (RM7,747.74), US$1,950 and US$2,145 for FY17 to FY19 versus US$1,785, US$1,910 and US$2,100 we assumed previously.

This follows the statement from the Shandong National Development and Reform Commission which ordered the closure of 3.21 million tonnes of aluminium production by 2017, representing 9% of the nation’s total production. Additionally, China’s significant shift in demand, particularly in lightweight vehicles and the aerospace industry, has created greater demand for aluminium in the longer term.

PMAH’s first half of FY17 results came in within expectations at 47% of both our full-year forecast and the consensus estimate. Second quarter ended June 30, 2017 (2QFY17) core profit before tax (PBT) grew 36% year-on-year (y-o-y), underpinned by: i) additional production from a new smelting plant — Samalaju Phase 2; ii) better metal prices in FY17, as aluminium’s average selling price (ASP) in 2QFY17 (US$1,905 per tonne) was higher than in 1QFY17 (US$1,852) — the improvement in ASP was due to ongoing cuts in aluminium production in China by the government to address environment-related issues such as pollution; and iii) interim insurance claims of RM45 million recognised in 2QFY16 PBT. Inclusive of insurance claims, y-o-y PBT grew by 5%.

Meanwhile, PBT increased by 5% quarter-on-quarter, contributed by: the 2QFY17 ASP that was higher than the 1QFY17 ASP and PMAH’s continuous improvement in reducing production cost.

Moving forward, PMAH will continue its efforts to expand value-added product lines, resulting in better margins as well as improving its operational efficiency, such as the adoption of the conveyer belt by end-2017 linking Samalaju Port to PMAH’s smelter, and creating a shorter route with the new coastal road from Mukah to Bintulu.

We continue to like PMAH because: i) it is one of the dominant local aluminium players in the local market; ii) the ASP is expected to improve with the ongoing China reforms to cut aluminium supply and steady demand growth, particularly from infrastructure projects and the automotive segment; and iii) low production cost which enables PMAH to maintain better margins than its competitors. However, we believe PMAH’s current share price has very much reflected its fundamentals. — AmInvestment Bank, Aug 17