Affin Hwang Capital Research upgrades Press Metal to Buy, TP RM5.35

  • Analyst Reports
  • Friday, 18 Oct 2019

Press Metal1

KUALA LUMPUR: Affin Hwang Capital Research has upgraded Press Metal from Hold to Buy with a target price of RM5.35, based on a higher 2020 price-to-earnings ratio (PER) target of 33 times.

It said on Friday Press Metal is prepped for a two-year core EPS CAGR of 38% in FY20-21E, underpinned by new aluminium production capacity which will start in October 2020, maiden earnings contribution from its investment in PT Bintan Alumina Indonesia and a weak ringgit.

“The resumption of alumina supply and hence lower production cost provides a near-term catalyst.” it said.

Affin Hwang Capital Research said construction of Press Metal’s third aluminium smelting plant with a production capacity of 320,000 tonnes started in August 2019. The new plant is expected to come online in October 2020 and lead to a 42% increase in smelting capacity.

“We believe Press Metal’s operating margin will improve on the back of lower alumina prices. Alumina prices fell to US$290-US$300 a tonne after peaking at US$638 in September 2018 due to the disruption in global alumina supply, ” it said.

Affin Hwang Capital Research expects alumina prices to remain at 16%-17% of LME aluminium prices as alumina supply recovers with the resumption of 50% of Alunorte’s production at Alunorte and new capacity.

In addition, Press Metal’s acquisition of PT Bintan Alumina Indonesia (PT BAI) should ensure sustainable alumina supply and at favourable rates in the future.

Recently, S&P Global Ratings downgraded Press Metal’s rating to “B+” from “BB-“, while Moody revised the group’s outlook to Negative.

The rating agencies are concerned about the group’s financial health on the back of its debt-funded expansion plan.

“However, we believe the group’s leverage is still manageable. Based on our calculation, its net gearing will increase to one time from 0.8 time (as at end-June 2019) after accounting for the expansion capital expenditure and the PT BAI acquisition.

“In addition, we expect its operating cash flow to remain healthy and sufficient to support its day-to-day operations, ” Affin Hwang Capital Research said.

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