KUALA LUMPUR (Nov 4): The proposed State Sales Tax (SST) on aluminium products by the Sarawak state government may squeeze Press Metal Aluminium Holdings Bhd's margins as the company grapples with pressure on its profitability.

Sarawak Chief Minister Datuk Patinggi Abang Johari Tun Openg told the state assembly today that the new levy on aluminium products will kick in starting January 2020. The rate is set at 1%, according to a copy of his speech sighted by The Edge.

This raises concerns on the profit margin of Press Metal, Asean's largest aluminium smelter that has plants in the state.

The state government expects to collect RM58 million in SST from aluminium products in 2020, as part of a drive to boost state revenue, the chief minister said.

"(This is) to enable the state to maintain its development momentum and keep up with (an) accelerated pace of development especially in the rural areas which require a substantial amount of funding," Abang Johari said.

The new levy raises concern on Press Metal's profitability moving forward. A large bulk of Press Metal's products is meant for exports, it is not known whether there will be any exceptions granted.

The SST on aluminium products comes at a time when Press Metal is putting together a funding plan for a long-delayed third aluminium smelting plant in Sarawak.

On July 31, the company signed a new power purchase agreement (PPA) with Sarawak Energy Bhd (SEB), which is the sole power provider in Sarawak. The PPA gives it access to up to 500MW over 15 years.

Upstream smelting segment is the core business that accounted for 90.6% of Press Metal's audited revenue and 97% of operating profit in the financial year ended Dec 31, 2018 (FY18).

In FY18, Press Metal reported RM9.17 billion revenue — up 12.2% year-on-year (y-o-y) — and RM870.5 million pre-tax profit (up 7.6% y-o-y). Its audited operating profit was RM1.11 billion, according to its annual report.

The upstream smelting segment contributed RM8.31 billion revenue and RM1.08 billion operating profit in FY18. Press Metal's two smelting plants are located in Samalaju and Mukah respectively with a combined smelting capacity of 760,000 metric tonnes a year (see table).

In the first six months of FY19 (1HFY19), Press Metal had seen turnover decline 5.7% y-o-y to RM4.3 billion (1HFY18: RM4.6 billion). Net profit tumbled 29.9% y-o-y to RM218 million (1HFY18: RM311.1 million).

At 4pm, Press Metal was traded at RM4.78, up 6 sen or 1.27%. Its market capitalisation was approximately RM19.22 billion.