Press Metal notes redemption to lead to cost savings

by SHAZNI ONG/ pic credit:

PRESS Metal Aluminium Bhd’s move to redeem its US dollar notes will materialise in cost savings, while higher production capacity and prices of aluminium look set to provide a boost to its earnings.

Press Metal, via its wholly owned subsidiary Press Metal (Labuan) Ltd, is set to redeem a total of US$173.11 million (RM725.94 million) of its US$400 million notes.

The offer was implemented through a modified Dutch auction procedure, where the final purchase price was set at 100% of the principal amount.

iFAST Capital Sdn Bhd fixed-income analyst Ganageaswaran Arumugam said Press Metal is seeking to reduce its effective cost of financing with this transaction and optimise its capital structure.

“Based on S&P rating announcement on July 28, 2020, in which the rating agency affirmed Press Metal’s rating of ‘B+’, the estimated interest cost savings could range from RM20 million to RM30 million a year, a credit positive event in our opinion.

“In the same rating announcement, S&P maintained its negative outlook on Press Metal, on the basis of softer aluminium prices in the next 12 to 18 months,” he told The Malaysian Reserve.

Ganageaswaran believes despite softer aluminium prices, Press Metal is likely to remain profitable, supported by the company’s operational efficiencies, integrated operations, as well as the anticipated expanded capacity in Bintulu.

“We view this tender offer by Press Metal as motivated by opportunistic economic considerations, and given our comfort with the company’s credit profile, we remain positive on Press Metal’s prospects,” he added.

UOB Kay Hian Holdings Ltd analyst Desmond Chong said since the gradual reopening of the global economy following the lockdown easing, aluminium prices on the London Metal Exchange have seen a recovery to settle at circa US$1,778 per tonne at present from the low of US$1,462 per tonne at end-March 2020.

The 22% surge is against the backdrop of stronger demand for physical aluminium and deliveries globally which have also driven Shanghai Futures Exchange Aluminium prices up by 30% over the past three months.

“Based on our sensitivity analysis, every US$100 per tonne increase to our previous spot aluminium price assumption of US$1,600 per tonne would increase Press Metal’s earnings by RM219 million annually assuming alumina and carbon anode prices of US$256 per tonne and 2,720 yuan (RM 1,642.43) per metric tonnes (MT) respectively,” he said.

Chong believes Press Metal would enjoy part of the aluminium price update as the group’s policy is to hedge up to 65% of its annual production and two years forward.

“We understand some of the smaller smelters globally have shut down their operations due to the challenging operating environment (causing lesser supply), hence balancing the equilibrium.

“We are now assuming higher spot aluminium prices of US$1,685 per tonne and US$1,750 per tonne for 2020 and 2021,” he said.

Chong said with the resumption of Norsk Hydro Alunorte’s operations in 2019 (which partly eased the supply constraint), prices of alumina, which accounts for 32% to 40% of Press Metal’s costs of goods sold, has been hovering at US$230 to US$280 per tonne year-to-date from US$330 a tonne last year.

“Based on our sensitivity analysis, every US$20 per tonne increase to our previous alumina cost assumption of US$256 per tonne would reduce Press Metal’s earnings by RM101 million assuming no hedging being done at all, and vice versa,” he said.

Chong has increased his 2020-2021 net profit estimates for Press Metal by 4% and 16% respectively to account for higher spot aluminium prices of US$1,685 to US$1,750 per MT, and higher alumina prices of US$270 to US$285 per MT, but partially offset by a weaker US dollar versus ringgit.

“Based on our currency sensitivity analysis, every 1% strengthening of the ringgit versus the US dollar from our base assumption will reduce Press Metal’s 2020-2021 earnings by 5% respectively,” he said.

UOB Kay Hian has a ‘Hold’ call on Press Metal with a higher target price of RM4.90 from RM3.90, based on 27 times its financial year 2021 forecast (FY21F) price earning (PE) multiple which is at its five-year forward PE mean.

“Should aluminium prices continue to go up based on our sensitivity analysis, every US$50 per tonne increase to our FY21 spot aluminium price assumption of US$1,750 per tonne would increase Press Metal’s earnings by 13% annually, assuming other input costs being equal.

“Assuming a similar PE being ascribed, this could mean a 13% upside or 65 sen to our target price of RM4.90, at RM5.55,” he said, Press Metal closed at RM4.79 sen yesterday down 20 sen for the day.