KUALA LUMPUR: Press Metal Aluminium Holdings Bhd’s hedging strategy may help it partially negate the lower prices of aluminium today.
Despite low London Metal Exchange aluminium inventories, which is at its lowest levels since 2010, aluminium prices continue to correct themselves amid tightening of global monetary policies.
It has fallen with some 41% correction from the peak in March, Affin Hwang Research said.
“We like Press Metal’s hedging policy, which partly insulates the company from price downswings. The company still benefits from upswings on the unhedged portion,” Affin Hwang Research said.
“However, we revise our earnings forecasts for next year as we fine-tune our model to reflect the downward movement of aluminium price.”
Affin Hwang maintained its “hold” rating on Press Metal with a lower target price of RM4.30 per share, based on an unchanged target 2023 forecast price-to-earnings ratio of 21 times.
Meanwhile, Affin Hwang said aluminium demand has softened on concerns over a global recession and zero-Covid policies in China.
It noted the trend between global aluminium prices and Press Metal’s share price, which had a correlation of 0.56 before the pandemic.
“However, since the early days of the pandemic (between March 2020 to present), the two prices have shown a stronger positive relationship with a correlation of 0.95. Hence, the volatility in the aluminium price also affects the share price,” Affin Hwang said.
“We think the correlation strengthening is driven by higher aluminium prices positively impacting earnings of aluminium producers.
“The aluminium price ascension coincides with capacity-driven earnings growth of Press Metal, hence accentuating the upwards trajectory of the company’s share price,” it added.
On another matter, Shanghai Metal Market and Bloomberg data revealed that there is an estimated 1.18 million tonnes of capacity that has been cut in Europe as of September this year, due to operational challenges over power costs and labour strikes.
Meanwhile, Affin Hwang said Press Metal’s performance for the six months of 2022 was within its expectation, with earnings surging 77.2% year-on-year, driven by higher aluminium prices and increased production outputs.
“Sequentially, core earnings contracted slightly to RM409.2mil, a result of easing aluminium prices in the second quarter. Do note that aluminium prices are (still) at a premium to the 10-year historical range,” it said.
Affin Hwang also said the group has hedged about 65% of its 2022 forecast production at US$2,400 (RM11,154) per tonne and 35% of its 2023 forecast production at US$2,500 (RM11,618) per tonne.
“We reduce our average aluminium price assumption for 2023 (slightly) to US$2,400 (RM11,154) as we fine-tune our model to better reflect the downward movement of aluminium prices.
“However, we maintain our assumption for alumina and carbon anode prices,” it said.