KUCHING: Analysts are growing optimistic and raising earnings forecasts for Press Metal Bhd (Press Metal) as the group is in the early stage of an earnings upcycle.
Its strong investability is premised on improved balance sheet, upturn in aluminium prices and premiums and capacity boost following the production ramp-up of its two plants, said AmResearch Sdn Bhd (AmResearch)
“Press Metal’s balance sheet is being bolstered by recent initiatives such as the exit of its loss-making Chinese smelter business and a sale of a 20 per cent stake of its Samalaju plant to Sumitomo,” it said, adding that provisions have also been made for the shutdown of its Mukah plant last year.
“As capex has been frontloaded, net gearing will fall to 0.9 times this year, and further to 0.5 times in financial year 2015 forecast (FY15F) and 0.4 times in FY16F. Its net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) ratio will also improve from 6.2 times last year to one by end-FY16F.”
Secondly, AmResearch said Press Metal will benefit from a global upturn in aluminium prices and premium.
“For the first time in 10 years, there will be a global supply shortfall due to capacity cuts and rising demand. At the same time, premiums are at an all-time high due to the lack of physical deliveries, as most stocks are held for financial deals,” it observed.
“With a recent court order resulting in stock continued being held back for up to 24 months, prices would only increase,” AmResearch predicted. “As a result, we have raised our price assumptions to US$1,800 per metric tonne (MT) against US$1,700 previously with an average blended premium of US$250 per MT.”
Further upside for the group will stem from a possible early conversion of loan stocks by shareholders which will bring gearing further down and reaffirm conviction of its growth story. Press Metal is currently trading at an attractive price earnings ratio (PE) of eight times.
“Despite the recent share price run-up, there is deep valuation given its significant balance sheet improvement,” AmResearch affirmed. “We peg Press Metal with a higher fair value of RM4.50 per share based on a 12 times PE of FY14F core fully diluted earnings per share of 37.5 sen.”