This article first appeared in The Edge Financial Daily, on July 13, 2016.

Press Metal Bhd
(June 12, RM3.93)
Maintain buy with an increased target price (TP) of RM5.17: Press Metal Bhd’s proposed share split and bonus issue are a welcome sentiment booster. Separately, the transfer of its listing status to Newco also allows it to streamline its business. Other positives are: i) all smelting pots have been running at full capacity since June and ii) aluminium price shows signs of bottoming out, with an upside bias. This, on top of our terminal growth (TG) revision to -2% and lower 10% discount to our fully diluted discounted cash flow (DCF) valuation, leads us to lift our TP to RM5.17 from RM4.50.

Press Metal has proposed a one-into-two share split followed by an issuance of two bonus shares for five subdivided shares. This exercise, while neutral in terms of market capitalisation, is timely in improving the stock’s liquidity. Apart from that, its share price will be adjusted to RM1.41, which will make it more affordable to retail investors.

Press Metal has also proposed the transfer of its listing status to a new investment holding company, Newco, by exchanging all its subdivided shares for Newco shares. Upon completion, Press Metal will become a wholly-owned subsidiary of Newco. The proposal enables Newco to streamline its business segments to enable flexibility for expansion when opportunities arise. The creation of Newco also safeguards the group from direct operating risks such as legal claims and litigation.

Press Metal’s Phase 3 smelter in Samalaju was fully commissioned in late May 2016. Phase 2 of its Samalaju smelter also returned to normal operations in November 2015 after six months of repairs undertaken after a fire incident. Meanwhile, its Mukah smelter (Phase 1) is operating normally. Its aluminium smelting capacity has risen to 760,000 tonnes per annum, which is at 1.3% of global primary aluminium production. We expect sales tonnage to surge 65.7%/11.8% year-on-year in the financial year ending Dec 31, 2016 (FY16) and FY17 respectively.

The London Metal Exchange (LME) aluminium cash price seems to be forming a new support level above US$1,600 (RM6,268) per tonne. The premium, which is a surcharge consumers must pay on top of the LME price, has also normalised at around US$100 per tonne. The uptick in all-in aluminium prices again supports our view of the improving fundamentals in the aluminium market, which suggests that prices have bottomed.

We continue to like Press Metal. It is a world-class low-cost smelter in the first quartile of the global cost curve that is set to leverage on the enlarged production and bottoming out of aluminium prices. With the prospect of improved share liquidity post the bonus issue and internal reorganisation to streamline its businesses, we keep our “buy” rating but raise our TP to RM5.17 from RM4.50. This is after cutting the discount to our fully diluted DCF to 10% from 20% and raising our TG rate to -2% from -3%. Key risks include any downward pressure on aluminium prices and unexpected interruptions in the power supply to its smelting plant. — RHB Research, July 12