AmResearch: Cautious on Press Metal given cap on upside to aluminium prices

AmBank Research remained cautious on Press Metal Aluminium Holdings Bhd’s outlook given the upside to global aluminium prices is capped by a significant build-up of inventory, the unusually high volatility in the cost of input alumina in recent years and the company’s premium valuations vs. those of its much larger global peers, limiting the upside to its share price.

The research house has maintained a hold call on the counter but raises its fair value by 8% to RM4.25 from RM3.94 previously based on 18x revised FY22F EPS. The counter closed at RM4.98 on Aug 18.

“While the 18x multiple is in line with our target P/E for the FBM KLCI, it is at a substantial premium to the 10x average forward P/E of key global aluminium smelters. This is to reflect Press Metal’s favourable cost structure with the bulk of its energy costs (from hydro power) locked in at very competitive rates over the long term.” it said.

AmResearch has also increased its FY20–22 net profit forecasts for Press Metal by 7%, 11% and 8% respectively to reflect stronger aluminium prices.  

Press Metal’s 1HFY20 core net profit of RM197.3mil (adjusted for PPE written off mostly) came in at 47% of AmRearch’s full-year forecast and 51% of full-year consensus estimates respectively. 

“However, we consider the results above expectations as we expect a stronger 2H on recovering aluminum prices.  Its 1HFY20 core net profit dropped 10% YoY mainly due to lower aluminium prices realised, as average aluminium spot price fell 13% in to US$1,642/tonne in Jan-June 2020 (vs. US$1,852/tonne a year ago).”

It added that this was partially mitigated by the lower cost of input alumina, as reflected in a 34% fall in average alumina spot price to US$265/tonne in Jan-June 2020 (vs. US$400/tonne a year ago). 

 YTD, aluminium spot prices have averaged at US$1,687/tonne and it was last traded at US$1,746/tonne, whereas alumina spot prices have averaged at US$265/tonne and it was last traded at US$282/tonne. 

“We revise our assumptions for average aluminium selling price per tonne upwards for FY20–22F to US$1,680, US$1,800 and US$1,900 respectively (from US$1,600, US$1,700 and US$1,800). This is to reflect the general uptrend in global commodity prices across the board on the back of the weakening USD.”

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