PETALING JAYA: Affin Hwang Capital has initiated coverage on Press Metal Aluminium Holdings Bhd with a “hold” rating and a 12-month target price of RM4.69.
“Press Metal is the largest integrated aluminium smelter and extruder in Southeast Asia. We like the company for its competitive cost advantage coupled with its potential expansion both upstream and downstream in the aluminium supply chain,” it said in its report.
It projected a 2017-2020 earnings per share compounded annual growth rate of 7% on the back of better product mix and improved cost management while highlighting the group’s low-cost advantage, stable profit margin and strong management team.
“Being the only aluminium smelter to be listed in Malaysia, we believe there is also a scarcity premium that is reflected in the current market valuation for the stock. Apart from that, Press Metal’s inclusion as an index component stock for both the FBM KLCI and MSCI since end-2017, and high institutional shareholding will support the share price,” it said.
In its report, Affin Hwang Capital noted that Press Metal signed 25-year power purchase agreements with Sarawak Energy for its plants’ electricity supply, which provides long-term sustainable electricity with 1.5% tariff increments per annum, ensuring fixed energy costs.
Press Metal consumes about 1,200 MW daily to run its smelters in Samalaju and Mukah, with an annual smelting capacity of 640,000 MT and 120,000 MT respectively.
After suffering damages to its plant and machinery due to a state-wide power outage in 2013, the company adopted multiple measures to mitigate the effects of power outages, including installing a bypass system which takes less than an hour to restart operations.
The company also benefits from an income tax exemption under the 15-year pioneer status awarded in 2013 to its 80%-owned subsidiary Press Metal Bintulu (PMB), which runs the smelters in Samalaju.
Press Metal’s effective tax rate is expected to remain low at about 9-10% in 2018-2020 based on the tax exemption on 100% of PMB’s statutory income derived from the production of aluminium products.
Press Metal, which aims to expand upstream in the supply chain to better manage the cost and supply of its main raw materials, is looking to acquire existing upstream assets that can synergise with its midstream business, which is positive for the group given the volatility in raw material prices.
The group has also locked-in a smaller portion (less than 50%) of its annual alumina requirement for 2019 at a slightly higher price as a percentage of LME aluminium prices compared with 2018.
“In the event that alumina prices increase faster than aluminium prices, Press Metal has the option to buy alumina at the price agreed in the contract, cushioning the impact of higher alumina prices,” said Affin Hwang Capital.
Meanwhile, its proposed acquisition of 50% stake in Japan Alumina Associates would enable the group to secure 230,000 MT of alumina or 15% of its annual alumina requirement. In addition, the group has secured 50% of its carbon anode requirement of 300,000 MT per annum through its joint venture with Sunstone in China.
“In our view, capacity expansion is limited in the near future given limited energy availability. Hence, earnings growth will likely come from better product mix. Press Metal is targeting to raise value-added aluminium products capacity to 60% of total capacity in 2019. This should contribute positively to the bottom line as value- added aluminium products enjoy better margins compared with standard P1020 ingots,” it said.
Source: The Sun Daily