KUALA LUMPUR: UOB Kay Hian Malaysia Research expects Press Metal Aluminium Holdings Bhd, which has a current market capitalisation of RM16bil, to be likely included in the FBM KLCI Index by end-2017.
It said on Tuesday that for a stock to be eligible for inclusion, its market capitalisation has to rise to the 25th place and above.
“Press Metal’s potential inclusion in the index coupled with its low institutional shareholdings of about 15% will be its share price catalysts,” it said.
UOB Kay Hian Research expects aluminium prices to firm up from the current spot price of US$2,150 a tonne on further supply cut from China this winter.
“We raise our 2018-19 net profit forecasts by 10% and 32%. The target price was increased to RM5.20 from RM3.50 on our earnings revision and as we roll forward our valuation to 18 times 2019F price-to-earnings (from 17 times 2018F PE).
“Our target PE is at a premium of 20% to global peers’ average of 14.9 times, given: a) Press Metals’ low-cost advantage over peers, b) earnings visibility from its prudent hedging policy of 12-24 months, and c) potential inclusion into the FBM KLCI Index. We also note that the 18 times PE represents + two standard deviation of the KLCI index’s 15-year PE.
“Near-term catalysts include higher aluminium prices and Press Metal’s potential inclusion into the KLCI Index by end-17, while the longer-term catalyst will be expansion at its Samalaju plant,” it said in a research note.
Despite the main Japanese port (MJP) premium shedding 20% to US$94.50 a tonne for 4Q17 delivery, the London Metal Exchange (LME) spot price has breached the US$2,100 a tonne mark early this month, bringing current all-in aluminium prices to around US$2,250 a tonne.
UOB Kay Hian Research said early this year, China’s Ministry of Environmental Protection (MEP) ordered producers to cut aluminium and alumina output (an ingredient used to make aluminium) by more than 30% across 28 cities for this winter season.
This is in addition to the forced suspension of aluminium plants that have not obtained permits or have not met environmental standards by the National Development and Reform Commission.
“We estimate the government’s bid to reduce smog pollution will take 5.3 million tonnes off the market (or 9% of the global supply of aluminium in 2016).
“Every US$100/tonne increase to our forecast all-in aluminium prices could raise Press Metal's earnings by about RM170mil annually.
"We believe rising aluminium prices could provide significant upside to Press Metal’s 2019 earnings, and have minimal impact on its 2017-18 earnings as Press Metal should have locked in about 80% of its 2018 production volume since early this year, and all of its 2017 production volume since last year,” it said.
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