This article first appeared in The Edge Malaysia Weekly, on March 13 - 19, 2017.

ALUMINIUM stocks have not been left out of the rally seen in the steel counters over the last 12 months. If you were a shareholder in Press Metal Bhd, or other aluminium stocks, the value of your shares would have gained up to 60% year to date.

Press Metal is one of the top 30 gainers on Bursa Malaysia so far this year. The stock closed at RM2.55 last Friday — near its all-time high —  giving it a market capitalisation of RM9.45 billion.

Similarly, LB Aluminium Bhd and A-Rank Bhd also saw their share prices increase 10% and 14% to close at 67 sen and RM1.12, giving them a market capitalisation of RM166 million and RM134 million, respectively. It is worth noting that these two aluminium players have a common single largest shareholder in Datuk Leow Chong Howa, a low-profile local businessman.

Meanwhile, shares of Aluminium Company of Malaysia Bhd (Alcom) and Tong Herr Resources Bhd also rose 27% and 25%, to settle at RM1.15 and RM2.55, giving them a market capitalisation of RM154 million and RM394 million respectively. Both counters are currently trading at their multi-year highs.

In general, higher aluminium prices and the strengthening of the US dollar bode well for aluminium companies.

To recap, the London Metal Exchange benchmark three-month primary aluminium contract was traded at US$1,400 to US$1,450 per tonne in 2015, but it has since rebounded to US$1,800 to US$1,900 levels in the first quarter of this year (see chart).

Interestingly, Reuters earlier this month reported that China, the world's largest producer of the metal, will force aluminium smelters in four provinces surrounding Beijing to cut output by 30% over the winter heating season, which runs from mid-November to mid-March.

Beijing’s Air Pollution Control regulation, which was approved on Feb 20, represents a potential “redefinition” of the global aluminium market, the newswire said. The ordered production cuts have sent aluminium prices close to a two-year high of US$1,949 per tonne on March 1.

The rally in aluminium stocks started way before that. In fact, Press Metal’s share price has more than tripled, while A-Rank has almost doubled over the past 12 months. Meanwhile, shares of LB Aluminium, Alcom and Tong Herr have also gone up steadily by over 40%. More importantly, the rally is not expected to end so soon.

Press Metal CEO Datuk Paul Koon Poh Keong, who anticipates aluminium prices to continue to hold up well, says he sees no reason why they should reverse course for the time being.

“Prices of commodities,  especially  aluminium, have gone up more than last year. We have to deliver the results. Our share price performance has to be results-driven and grow healthily,” he tells The Edge.

Press Metal is trading at a trailing 12-month price-earnings ratio (PER) of 23 times, which is one of the highest among its peers, and also triple that of A-Rank’s 8 times and LB Aluminium’s 7.5 times.

Despite the run-up in stock prices and relatively high PER, Koon opines that shares of Press Metal are not overvalued.

“If we look at the FY2017 (estimated) numbers, our PER has not reached 20 times yet. Last year, we made a profit of about RM500 million, so our PER was in the high teens, which, in my opinion, is not super high; it is reasonable,” he says.

For the full year ended Dec 31, 2016 (FY2016), Press Metal’s net profit more than tripled to RM495.45 million from RM132.35 million a year earlier. Its revenue in FY2016 stood at RM6.61 billion, up 53% from RM4.32 billion achieved in FY2015. The improvement was due to higher smelter output and the strengthening of the US dollar against the ringgit.

“The upside is visible, and I think our shares are not too highly valued. If we can get the market to believe that we are able to perform better than last year, then maybe the valuation (now) is not that rich. We should always look ahead, not backward,” Koon says.

The rise in Press Metal shares has seen Koon and his brother Poh Ming debuting on Forbes’ Malaysia “50 Richest” list this year. They are ranked 13th with a net worth of US$1.1 billion (RM4.9 billion).

“There are a lot of good potential stocks. Look at the gloves and plantation counters, they are all trading at more than 20 times. To me, Press Metal has a good potential,” Koon says.

But LB Aluminium could be a better bet than Press Metal due to the former’s low gearing of 0.2 times against the latter’s 1.2 times. In contrast, the remaining three players — Tong Herr,  A-Rank and Alcom — all have zero gearing.

“LB Aluminium’s results were also very good. It consistently paid reasonable dividends every year, raising its dividend per share from 1.75 sen to two sen. With aluminium prices going up, I believe its results should get even better in the coming quarters,” an investor in LB Aluminium says.

While Press Metal has a very strong growth story, the fact that the company is highly geared remains a concern for some.

“Financially, LB Aluminium is much better than Press Metal. To me, risk management is very important. For such an established company, LB Aluminium should command a better PER of at least 12 times,” the investor says.

LB Aluminium has a net tangible assets per share of RM1.15.

With a smelting capacity of 760,000 tonnes and an extrusion capacity of 160,000 tonnes per annum, Press Metal is the largest integrated aluminium producer in Southeast Asia.

A-Rank’s official website states that it is the country’s largest manufacturer and supplier of aluminium billets, and one of the leading suppliers of aluminium extrusion billets in Asia. The group, through its subsidiary Formosa Shyen Horng Metal Sdn Bhd, has an installed capacity of 120,000 tonnes per annum.

LB Aluminium, meanwhile, declares that it is the largest supplier of aluminium extrusions in Malaysia and among the largest manufacturers in Southeast Asia. The group’s existing integrated production facilities have an annual extrusions capacity of 100,000 tonnes.

For easier understanding, a senior industry executive says LB Aluminium is a downstream player, A-Rank a mid-stream player and Press Metal an upstream or integrated player.

“Press Metal and LB Aluminium are competitors in the extrusion sector. LB Aluminium is a big extruder in Malaysia, but Press Metal is bigger if we include its China operations. Besides, Press Metal has a smelting business as well, which is much bigger than its extrusion business,” he said.

If the clampdown on metal production in China continues and the US dollar remains strong, local aluminium players could continue to see better days ahead.

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