KUALA LUMPUR (Feb 10): Aluminium smelter Press Metal Aluminium Holdings Bhd’s share price hit its all-time high to RM6.68 after rising by as much as 19 sen or 2.93% from its opening price of RM6.45 on Thursday (Feb 10).

This comes as Bloomberg reported on Tuesday (Feb 8) that aluminium prices neared a 13-year high of US$3,215 per tonne on the London Metal Exchange (LME), while Goldman Sachs Group Inc has predicted that the commodity will fetch an even higher price as supply disruptions from China to Europe further tighten the market.

Based on Bloomberg data, the average target price for Press Metal stood at RM7.64 while the consensus rating was “buy” based on eight analysts’ recommendations.

Of all the analysts, Nomura's and RHB Research’s were the most bullish with a target price of RM8.30 and RM8.50 respectively.

Speaking to RHB Research’s analyst Sean Chew, he said that the surge in aluminium prices will remain above trend based on the supply and demand for the commodity.

“On the supply side, production is affected in various regions of Europe and China due to rising energy costs and environmental/de-carbonization policies.

“We believe the road to re-starting of such plants won’t be short as Chinese producers (the largest globally) will continue to be constrained by its dual energy control policy and we do not observe any significant planned capacity expansion ex-China.

“On the demand front, consumption is only expected to rise from the rising adoption of renewable energy (solar), electric vehicles and recyclable packaging,” Chew said.

The sentiment was also shared by UOB Kay Hian’s analyst Desmond Chong who said in a research note on Thursday that the recent price movement of aluminium was way above the research house’s conservative assumption of US$2,400/tonne in 2022.

Chong added that aluminium smelters globally, including Press Metal, have low inventory levels and have insufficient products to supply their key markets.

UOB Kay Hian added that they are expecting a record quarterly net profit in the region of RM346 million to RM403 million or 22%-42% quarter-on-quarter and 100%-133% year-on-year growth from Press Metal.

This comes after the four consecutive record-breaking quarters that it had achieved since its fourth quarter ended Dec 30, 2020 (4QFY20) according to Chong.

Hong Leong Investment Bank (HLIB Research) was also among the many that shared a “buy” call on Press Metal with a target price of RM7.25 in a research update on Feb 4.

HLIB Research’s analyst Jeremie Yap said that the recent price development is positive for Press Metal as it translates into strong earnings.

“If you overlay the aluminium prices with Press Metal’s share price, you can see that they are somewhat positively correlated so it is not surprising that Press Metal has managed to renew its all-time high recently,” Yap told theedgemarkets.com.

HLIB Research estimates that Press Metal’s fourth quarter ended Dec 31, 2021 (4QFY21) core earnings will reach a record high between RM330 million and RM370 million which are equivalent to 16%-31% Q-o-Q and 100-125% Y-o-Y growth, barring any unforeseen swings in cost structure.

According to Chong, the largest integrated aluminium producer in Southeast Asia also has another card up its sleeve, as it had fully commenced operations of its Samalaju P3 plant in Sarawak in the fourth quarter of 2021, which expanded the group’s total smelting capacity by 320,000 tonnes or 42% from 760,000 tonnes.

Notably, Press Metal has a hydro power purchase agreement (PPA) with Syarikat SESCO (Sarawak Energy) for the purchase of electric power of up to 500MW (megawatts) for its P3 aluminium smelter plant at Samalaju Industrial Park, Sarawak which helps the group to formulate a clear roadmap for ESG sustainability, according to Chong.

Similarly, Yap from HLIB Research also cited that Press Metal’s low carbon footprint where its smelting plants are predominantly powered by hydroelectric sources and ESG profile will make it more favourable to investors.

Yap highlighted that Press Metal has plans to become carbon neutral in 2050 by cutting greenhouse gas emissions by 15% and 30% by 2025 and 2030 respectively, while also aiming to reduce water withdrawal by 10% by 2030.

Meanwhile, Chew from RHB Research suggests that downside risks to Press Metal should “mainly come in the form of softening in aluminium prices and higher-than-expected raw material costs”.

But the analyst also pointed out that the downside risk to Press Metal is related to geopolitical trends such as China relaxing its decarbonisation mandate which could drive Chinese smelters to rapidly restart their operations and improve the supply outlook.

“We believe that the risk of China backpedalling is low and if they choose to do so, the aluminium sector should be one of the last to restart given its high energy intensity.

“Secondly, political turmoil in Guinea could lead to lower production of bauxite as it has occurred previously and this affects the availability of alumina (key raw material for aluminium smelting) which subsequently increases the cost of aluminium smelting,” Chew added on the risks to Press Metal’s outlook.

At market close on Thursday, Press Metal shares were 19 sen or 2.93% higher at RM6.68, valuing the group at RM53.97 billion based on 8.08 billion outstanding shares while trading at 66.8 times earnings.

Since Wednesday, Press Metal shares have appreciated by 56.34% or RM2.40 in absolute ringgit value. Last April, the group had undertaken a bonus issue of 4.04 billion shares on the basis of one free share for every existing share held.