Press Metal Bhd
(March 6, RM2.62)
Maintain outperform with a higher target price (TP) of RM3.15: We attended Press Metal Bhd’s fourth quarter of financial year 2016 (4QFY16) results briefing and came away with a positive view on its short-term price outlook. Its long-term earnings will be further supported by improving production efficiency and potential for expansion.

We upgrade our FY17 to FY18 core net profit (CNP) by 9% to 19% to RM648 to RM783 million, premised on higher aluminum price assumption of US$1,750 to US$1,800 per tonne (from US$1,700 to US$1,800 per tonne). Maintain outperform with a higher TP of RM3.15 (from RM2.60) based on higher forward price-to-earnings ratio of 17 times (from 16 times) on supportive aluminium price outlook.

We also came away from Press Metal’s 4QFY16 results briefing maintaining our bullish aluminium price view as China has recently ordered a 30% cut in production for both aluminium and alumina.

Meanwhile, countries like India and Australia are exploring or have implemented anti-dumping duties on Chinese aluminum, which level the playing field for other manufacturers. Furthermore, with limited US production due to high manufacturing costs, premiums are on the rise at forward premiums reaching US$200 (RM890) per tonne from a low of US$160 per tonne in Oct 2015.

We expect Press Metal to enhance its cost profile, especially for logistics, as the adjoining Samalaju Port is scheduled to start operations in mid-2017. We gather that the company is currently constructing a conveyor belt directly into the port.

Additionally, management mentioned that the Mukah plant in Sarawak should see reductions in costs and transport time as an upcoming road will save 100km in travelling distance to the closest port.

We are positive on these developments as we understand that these measures should reduce logistics costs by US$8 to US$10 per tonne (-3%).

We expect additional margin expansion with a better top line as Press Metal doubles its existing billet production capacity by mid-2017. Over the longer term, the company is targeting 50% alloy production by 2018, which we estimate will generate additional revenue of US$150 per tonne on top of standard aluminium prices.

After accounting for cost of additives, we estimate an additional margin of US$50 to US$80 per tonne for aluminium alloys.

Management also mentioned that they are open to expansions. On the upstream side, alumina manufacturing would increase cost-efficiency but could be risky due to high investment costs and regulatory risks.

Ongoing downstream growth would cost less and provide margin growth. Meanwhile, midstream expansion in current production lines remains dependent on power availability. We understand that this is a continuous work-in-progress as the Sarawak government is commissioning several new power plants.

We expect Press Metal to further expand smelting capacity once power is secured, as they have sufficient area to commission a third Samalaju plant (320,000 tonnes per year capacity). — Kenanga Research, March 6