Press Metal’s proposed acquisition of JAA expected to be earnings accretive

KUCHING: Press Metal Aluminium Holdings Bhd’s (Press Metal) proposed acquisition of a 50 per cent equity interest in Japan Alumina Associates (Australia) Pty Ltd (JAA) is expected to be earnings accretive for the company, analysts say.

In a press statement, Press Metal said, via its 80-per cent owned subsidiary Press Metal Bintulu Sdn Bhd, it is looking to acquire a stake in JAA for a purchase consideration of A$250 million (or approximately RM739 million).

The proposed acquisition is expected to be completed by the first quarter of 2019 (1Q19).

It noted that JAA holds 10 per cent participation interest in the Worsley Alumina Unincorporated which owns and operates the Worsley Alumina Project, one of the world’s largest, longest life and lowest cost alumina producers.

It believed that the proposed acquisition will provide Press Metal the opportunity to access five per cent of the annual production of the Worsley Alumina Project which amounts to 230,000 metric tonnes of alumina per annum.

It added, the acquisition is an effective approach towards ensuring Press Metal’s long-term access to raw material and reduces its exposure and reliance on third party suppliers.

According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research), the access to Worsley Alumina Project could satisfy circa 15 per cent of Press Metal’s annual alumina requirements of circa 1.5 million metric tonnes (MT), giving Press Metal better control over its supply chain and certainty of securing its feedstocks amid supply tightness in the current alumina market.

“From our back-of-the-envelope calculations, the acquisition translates to an 2018 (FY18) price earnings (PE) of circa 11-folds, which we deem fair as other alumina producers such as Norsk Hydro and Alcoa Corp are trading at 10 to 13-folds.

“Additionally, the acquisition is accretive given that Press Metal is trading at an FY19E PE of 19-folds, and it would be fully funded via external borrowings in lieu of equity issuance,” it added.

However, the research team pointed out that the drawdown to the acquisition would be the increase in borrowings which would increase Press Metal’s net gearing to 0.7-folds from 0.4-folds in FY19E.

“Overall, the acquisition is expected to improve earnings by circa two per cent after considering additional financing costs,” it opined.

As for the impact of the acquisition to Kenanga Research’s estimates, it noted that the acquisition is not expected to make a huge impact on its FY18 and FY19 estimated core net profits (CNPs) of RM720 million and RM1.01 billion as earnings impact from the acquisition is minimal at circa two per cent.

Following the announcement of the acquisition, Press Metal’s shares rose five sen or 1.03 per cent to RM4.88 from its last active closing price at RM4.83 per share, with 8.409 million shares traded.

Meanwhile, on the movement of aluminium prices, Kenanga Research noted that its FY18E aluminium price assumption of US$2,000 per MT (compared with year to date US$2,158 per MT) remains unchanged as it expected potential pullbacks in aluminium prices to US$1,800 to US$1,900 per MT levels from current price of USD2,034 per MT.

“This is because the US Treasury has in mid-Sep relaxed the sanction on Rusal to allow the company to sign new contracts with existing customers, allaying concerns of a supply disruption in the aluminium market.

“This is unfavourable to aluminium prices as the restored supply adds to the current production surplus condition globally,” it explained.

Kenanga Research maintained its ‘market perform’ call on the stock and said: “We continue to like Press Metal given its long-term positive operating outlook and earnings .

“However, at recent prices, we see limited upside on the stock and we expect substantial volatility in both aluminium and raw materials prices.”

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Source: Borneo Post Online

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