This article first appeared in The Edge Financial Daily on April 9, 2020

Press Metal Aluminium Holdings Bhd
(April 8, RM3.63)
Maintain hold with a lower fair value (FV) of RM3.03: We cut our financial year 2020-2022 (FY20–22F) net profit forecasts by 29%, 12% and 13% respectively, largely to reflect weaker aluminium prices. We also reduce our FV by 29% to RM3.03 (from RM4.24 previously) based on 15 times revised FY21F earnings per share (EPS) (from RM4.24 based on 18 times FY21F EPS previously). The cut in our multiple is to reflect a higher market risk premium as the Covid-19 pandemic cripples the global economy. At 15 times, the multiple is also in line with our target price-earnings ratio (PER) for the FBM KLCI. It is still at a substantial premium to the eight times average forward PER of key global aluminium smelters to reflect Press Metal Aluminium Holdings Bhd’s favourable cost structure with the bulk of its energy costs (from hydropower) locked in at very competitive rates over the long term. We maintain our “hold” call.

We cut our assumptions for the average aluminium selling price per tonne for FY20 to FY22F by 11%, 4% and 4% to US$1,600 (RM6,960), US$1,800 and US$1,850 respectively (from US$1,800, US$1,930 and US$1,930 previously). Year to date, aluminium prices have averaged at US$1,710 a tonne and they last traded at US$1,482 a tonne.

We also cut our assumptions of average alumina cost per tonne for FY20 to FY22F to US$270 to US$300, from US$350 to US$380. Alumina prices have also eased and were last traded at US$242 a tonne, from US$280 a tonne in early January 2020, as the supply of aluminium in China gradually normalises with the lifting of lockdowns since end-March 2020.

We remain cautious about Press Metal’s overall outlook due to: i) weak prospects for aluminium prices and the high cost of input alumina, resulting in a margin squeeze; and ii) the company’s valuations which are at a premium versus its global peers. This means the upside to its share price may be capped.

However, this could be mitigated by Press Metal’s recent signing of a 15-year power purchase agreement (PPA) with Sarawak Energy Bhd for the supply of 500 megawatts of electricity. This will enable it to power an additional annual aluminium smelting capacity of 320,000 tonnes and boost its overall smelting capacity by 42% to 1.08 million tonnes by 2021 from 760,000 tonnes currently. — AmInvestment Bank, April 8