Affin Hwang initiates coverage on Press Metal, TP of RM4.69

KUALA LUMPUR: Affin Hwang Capital research has initiated coverage on Press Metal Aluminium Holdings Bhd with a hold rating and a 12-month target price of RM4.69, based on 27x 2019E price-earnings.

In a research note, Affin Hwang said Press Metal is in the first quartile for overall smelter costs globally mainly due to competitive electricity costs from 25-year PPA agreements with Sarawak Energy since the commencement of its smelters, lower effective tax rate from an investment tax allowance for its Mukah plan and 15-year tax holiday for its 80%-owned subsidiary, Press Metal Bintulu.

It added that Press Metral aims to expand vertically in the supply chain to weather volatility in its key raw materials. 

"We think it is likely the company will acquire brownfield upstream assets to better manage the cost and supply of carbon anode and alumina, which contribute close to 50% of its total
production costs. 

"To date, it has formed a joint venture with Sunstone and acquired 50% of Japan Alumina Associates (JAA), securing 50% of carbon anode and 15% of alumina current requirements respectively.

PublicInvest believes capacity expansion for Press Metal will be limited in the near future due to limited energy availability with earnings growth likely coming from better product mix.

"Press Metal is targeting to raise value-added aluminium products capacity to 60% of total capacity in 2019. This should contribute positively to the bottom line as value-added aluminium products enjoy better margins compared to standard P1020 ingots."