PETALING JAYA: Press Metal Aluminium Holdings Bhd’s low-cost business structure would further strengthen after it gains economies of scale through ongoing expansion in Samalaju, Sarawak and Indonesia.
This in turn would support the group’s earnings amidst the uncertainties in the global aluminium market, said Affin Hwang Capital.
According to the research firm, Press Metal’s management reiterated its focus on gaining economies of scale through its two major ongoing expansion plans.
“Coupled with stable alumina and carbon costs, the expansion will strengthen the group’s low-cost model and help the group weather the challenging outlook in the current low aluminium price environment, ” said Affin Hwang Capital in a report where it has upgraded the stock to a “hold” with a higher target price of RM4.73 from RM3.80.
It added that given the ample liquidity in the market, scarcity premium for a well-run company, and 2021 estimated earnings growth of 53.6%, it has assigned a higher price earnings ratio (PER) multiple of 34x on its 2021 estimated earnings per share, in line with past-3-year mean PER.
For the 1Q20, Press Metal’s core net profit fell by 10.1% year-on-year (y-o-y) to RM104mil, largely due to lower revenue in tandem with weaker aluminium selling prices.
The Covid-19 outbreak has resulted in contraction in global aluminium demand, causing weakness in London Metal Exchange (LME) aluminium prices, which averaged at US$1,697 per metric tonne (MT) in 1Q20 or 8.7% lower y-o-y.
Despite the lower core net profit, Ebitda margin improved by 2.5 percentage points, mainly due to lower alumina costs, noted Affin Hwang Capital.
The group’s phase 3 expansion in Samalaju would increase its smelting capacity by 42% to 1.08 million MT. The plant is expected to be operational by January next year instead of October this year due to Covid-19.
Meanwhile, its PT Bintan Alumina acquisition is expected to provide up to 75% of its annual alumina requirement. The project is under construction and is said to be on schedule, according to the research firm.
Affin Hwang Capital notes that Press Metal’s operating cash flows remain healthy, coming in at RM348mil in Q120, compared to RM206mil in 1Q19.
“While the demand for its value-added products were negatively affected by the slowdown in global aluminium demand, the group managed to mitigate the impact by shifting to produce more primary ingots. While this may affect the group’s profit margin, it ensures that the group has enough operating CF to sustain its operation, ” it noted.
On the other hand, dividend payout could come in lower. Press Metal announced a dividend per share (DPS) of 1 sen for 1Q20, which was lower compared to 1Q19 DPS of 1.25 sen.
“This translates into a dividend payout ratio of 39.4%, compared to our 2020 estimated DPR of 40% (vs. 2019 DPR of 43%). While the group guided that it may have to conserve some cash to weather the current economic downturn, we believe the group will maintain a DPR of at least 40%. Hence, we maintain our DPS assumption of 3.6 sen for 2020.”
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