Press Metal to rev up earnings

Press Metal has inked PPA with Syarikat SESCO to purchase up to 500MW of electricity

by SHAZNI ONG

PRESS Metal Aluminium Holdings Bhd’s capacity expansion plan is expected to raise earnings in the near team and strengthen its presence as a major integrated aluminium producer/ player in the region and globally.

Analysts, however, remain cautious of weak aluminium prices due to concerns over a global economic slowdown.

In a statement on Wednesday, Press Metal announced it has inked a power purchase agreement (PPA) with Syarikat SESCO Bhd, a unit of Sarawak Energy Bhd, to purchase up to 500MW of electricity.

The drawdown is divided into two stages — 300MW by October 2020, which will last for 15 years, and the balance 200MW to be made available on a reasonable endeavour basis by SESCO.

With the power deal done, Press Metal can now proceed with its plan to construct a third aluminium smelter at Samalaju Industrial Park in Sarawak.

The additional 320,000 metric tonnes (MT) annual capacity will raise its total output to 1.08 million tonnes per annum.

Kenanga Research, in a note yesterday, said the new plant is expected to bring meaningful earnings contribution from financial year 2021 (FY21) onwards.

“The new plant is estimated to lift FY20 earnings by RM39 million assuming a 50,000MT output (two months production), while an estimated fullyear contribution of about RM240 million is expected to kick in from FY21 onwards,” the company stated.

The figures assume an average aluminium price of US$2,000 (RM8,280)/ MT, additional depreciation expense of about RM150 million and finance costs of RM80 million.

The cost for the additional electricity acquired is slightly higher than those of the previous PPAs.

Kenanga has upgraded an ‘Outperform’ call on the company with a higher target price (TP) of RM5.50 (previously RM4.50), based on a higher FY20E price-earnings ratio of 25.4 times.

“The valuation is justified by sturdy earnings growth prospects in FY21 (+24% core net profit growth) on the back of capacity expansion.

“Independent of the expansion, Price Metal’s operating outlook is already looking positive with increasing contribution from value-added products and a series of upstream acquisitions in the pipeline,” Kenanga added.

The risks to its call include a sharp fall in aluminium prices, an escalation of raw material prices and the possibility of a major plant disruptions/ closure.

Regardless of the division of drawdown stages, Kenanga believes the group will be able to fully utilise the full 500MW electricity from October 2020 onwards.

The plant’s construction should begin as soon as next month and will take about 11 months to complete, meaning the new capacity is likely to be ready before the drawdown of power in October 2020.

“The plant is expected to incur capital expenditure of RM1.5 billion, which would be fully financed by debt. The new debt should raise gearing to 0.8 time in FY20 from our previous estimate of 0.5 time in the same forecast year,” Kenanga noted.

The gearing level is manageable, given Price Metal’s excellent cashflow generation capabilities as demonstrated by how rapidly the group pared down its gearing from 1.9 times in FY13 to 0.7 time in FY18, the research house said.

Affin Hwang Capital Research noted that while the news is positive, the new output capacity will be partially offset by weak aluminium prices due to concern over a global economic slowdown.

“As such, we cut our 2019-20E earnings by 5%-13%, while we raise our 2021E earnings by 28%. We reduce our aluminium price assumptions to US$1,900-US$2,000/MT for 2019-21E given ongoing concern over the global economy slowdown and the US-China trade dispute,” the research outfit noted.

It lowers its alumina price assumptions to US$300-US$340/MT as global alumina supply improves.

Affin Hwang maintains its ‘Hold’ rating on Press Metal, despite increasing its 2020E TP earnings multiple to 31 times from 27 times and raise its 12-month TP to RM4.80 based on 2020E earnings per share.

Being the only aluminium smelter listed in Malaysia, there is a scarcity premium priced in the current market valuation for the stock.

In addition to that, Press Metal’s inclusion in the FTSE Bursa Malaysia KLCI and MSCI Inc since end-2017 will support the share price.