Aluminium futures prices on the LME, currently averaging RM7,913/tonne for 2021 will continue to fuel the company’s record earnings prospects in 2021
by NUR HAZIQAH A MALEK / pic by BLOOMBERG
PRESS Metal Aluminium Holdings Bhd stands to benefit from sustained gains in metal prices and expectations of more headroom for global down-stream demand to recover to pre-pandemic levels.
Based on the assumption, RHB Investment Bank Bhd has maintained its ‘Buy’ call on the company and has set a higher target price of RM7.10 from RM6.05.
RHB analyst Lester Siew in a recent note stated that aluminium futures prices on the London Metal Exchange (LME) are currently averaging US$1,930 (RM7,913) per tonne for 2021, which continue to fuel the company’s record earnings prospects for next year.
“Our valuation implies 30 times financial year 2021 (FY21) private equity — or an increase by 0.3 standard deviation to its five-year mean — which we believe is justified given its visible earnings growth prospects of 30% compound annual growth rate for FY19 to FY22, while supported by favourable industry tailwinds.
“Key downside risks to our call include a sharp decline in LME aluminium prices, deterioration in global economic conditions, and a spike in key raw material prices,” he said.
He added that the exchange prices turned positive year-to-date towards US$1,900 per tonne, which conversely saw the recovery in aluminium raw material prices relatively lagged, tracking below 15% of LME prices versus the historical average of 16% to 17%.
“Headline indicators are painting an increasingly positive picture for aluminium’s physical market conditions, with worldwide manufacturing Purchasing Managers’ Index sustaining its rise above the 50 mark, while global aluminium inventories have been in destocking mode since June.
“Going forward, we still expect aluminium prices to be well-supported by incremental downstream demand, as aggregate industrial activities have yet to return to pre-pandemic levels,” he said, adding the climate action also presents the upside scenario for Press Metal.
“Given its low carbon footprint of 2.3 tonnes CO2 equivalent per aluminium tonne, we believe Press Metal is ideally positioned to benefit from global decarbonisation efforts which could prove long-term constructive for the aluminium market, in our view.
“This is seen to arise from the green demand potential for aluminium as a building-block material for eco-friendly applications, alongside prospects of carbon-conscious supply discipline going forward,” he said.
Rising aluminium prices are also showing strong earnings visibility, which leads to the anticipation of sequential core improvement in the second half of 2020 (2H20), in tandem with higher aluminium prices and recovery in LME physical premiums and value-added products mix.
“Subsequently, FY21 is set to mark the transition from recovery to a new growth phase, underpinned by Samalaju Industrial Park’s Phase 3 expansion in Jan 2021 coupled with the firmer LME forward prices — US$1,930-RM1,980/tonne average for 2021-2022 — which should incentivise management to hedge its forward sales volume further,” he said.
Following the revision of commodity price assumptions, the FY20 to FY21 earnings has been raised to 17% to 18%.
“We also pencil in a long-term LME aluminium spot increment of 2% annually from 1.5% previously,” Siew said.