This article first appeared in The Edge Malaysia Weekly on February 4, 2019 - February 10, 2019

ALTHOUGH grappling with the rising raw material cost and weaker aluminium selling prices, Press Metal Aluminium Holdings Bhd still expects a bigger bottom line this year, barring any curve balls.

The optimism contrasts with the jitters in the market, which have been piling pressure on the company’s share price. Press Metal’s share price has been battered over the past 12 months, falling 24.5% after tripling in value in 2017.

While the decline may offer a buying opportunity for long-term investors, it is worth noting that key factors affecting the company’s prospects remain up in the air at the moment.

Analysts contacted by The Edge indicate that the selling pressure is primarily due to concerns over the impact of the rising alumina cost and weaker aluminium selling prices on the company’s earnings.

“Barring unforeseen circumstances, we are still expecting year-on-year [profit] growth [this year], driven by increased contributions from value-added products, which is almost 50% [of output] now and which we are targeting to hit 60% this year,” says Tan Sri Paul Koon Poh Keong, co-founder and group CEO, in an email.

Koon is referring to Press Metal’s drive to diversify away from its main products — alloy wheel ingots for the automotive industry, aluminium billets and aluminium wire rods — towards more value-added downstream goods.

Supply disruptions have pushed alumina prices up by 7% over the past 12 months to US$405 per tonne (MT), says Kenanga Research in a report last Thursday.

Meanwhile, the aluminium price on the London Metals Exchange dropped from its multi-year peak of US$2,469 per MT last April to as low as US$1,836 per MT earlier this month, a two-year low.

Alumina is a key raw material in producing aluminium. Commenting on the rising cost of alumina, Press Metal tells The Edge that the pressure may dissipate soon.

“We do not foresee this (high alumina cost) to be a permanent situation. Once production resumes (at Alunorte refinery), we expect the situation to turn around and alumina prices to normalise swiftly,” Koon says.

The refinery in Brazil — the world’s largest alumina production facility — has been operating at half capacity since early last year, following a production embargo due to breaches of environmental guidelines.

In last Thursday’s report, Kenanga Research agrees with the assessment, saying that alumina prices “could retrace if Alunorte restarts production this year”. It notes that Press Metal’s FY2019 alumina needs are largely unhedged.

The research house also says the current weakness in aluminium prices is likely to be “temporary” and it sees prices recovering from just below US$1,900 per MT this month.

Kenanga Research has a “market perform” rating on Press Metal with a target price of RM4.20. Of the other research houses tracking the stock, three have “hold” ratings while two rated the stock a “buy”, with target prices of RM3.77 to RM5.69 per share.

For Press Metal, a price normalisation would be a relief as recent increases saw the cost of alumina forming 20% to 21% of its smelting cost, compared with 16% to 18% previously.

It is worth noting that the local authorities in Para, Brazil, lifted the embargo on the Alunorte refinery on Jan 16, although full production has yet to commence, pending a Federal Court approval.

Should full-capacity production resume at Alunorte, the resulting increase in volume may reverse the shortfall situation and move into surplus territory and, theoretically, lower prices.

“The global alumina market closed last year with a deficit of 600,000 tonnes. This year, the company expects it to move to a surplus ... projected to be between 200,000 and one million tonnes, assuming ongoing third-party supply disruptions in the Atlantic region,” said Alcoa Corp, the world’s eighth largest aluminium producer, on Jan 16.

“The projected alumina surplus is driven by China, where refining expansions are expected to outpace demand growth from smelting.”

When asked for its outlook on the cost of alumina this year, Press Metal declined to give a projection, citing fast-changing variables at play.

“However, the way we look at it, the cost of alumina production in China will remain high as it imports most raw materials,” says Press Metal.

Last October, Press Metal acquired a 50% stake in Japan Alumina Associates (Australia) Pty Ltd (JAA) for RM739 million. JAA has a 10% stake in Worsley Alumina in Australia, which is among the world’s largest and lowest-cost alumina production operations.

Press Metal has said the acquisition, expected to be completed in the first quarter of this year, would allow it to partially secure long-term alumina supply and avoid supply volatility.

“The completion of the JAA acquisition by end-1QFY2019 should add a nine-month earnings contribution in FY2019, improving earnings by about 3% after considering financing costs,” says Kenanga Research.

To recap, Press Metal is forecast to record a net profit of RM665.4 million on revenue of RM8.64 billion for the 2018 financial year ended Dec 31 (FY2018), according to the mean estimate from five research houses. For FY2019, net profit is tipped to rise to RM797.8 million on revenue of RM9 billion.

So far, the company has recorded RM473.6 million in net profit — up 4.6% year on year — as revenue grew 16.2% to RM6.94 billion in the nine-month period up to Sept 30, 2018.

Press Metal is expected to release its financial results for the fourth quarter ended Dec 31, 2018 (4QFY2018), in late February.

The company is the largest aluminium smelter in Southeast Asia with an annual capacity of 760,000 MT.

Cheap hydropower in Sarawak has allowed Press Metal’s plant in Samalaju a production cost advantage over its global peers, analysts said previously.

While prospects of an aluminium price recovery may not be certain yet, a silver lining for investors is that Press Metal has hedged 40% of its aluminium sales volume for FY2019 at US$2,000 to US$2,100 per MT, a premium to the current market price, Kenanga Research says.

“This (hedging), together with the increase in contribution from value-added products will cushion margin compression,” says Koon. “Value-added products also serve to enhance our margins and strengthen our position and branding power directly with end users.”
 

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