KUCHING: Press Metal Bhd (Press Metal) will be a direct beneficiary of rising aluminium prices and premiums.
Aluminium sheets are being rolled out for use in beverage making. — Bloomberg photo
AmResearch Sdn Bhd (AmResearch) noted that aluminium prices have reached a 17-month high due to low inventories, high demand and the cut in global capacity.
On Monday, the London Metal Exchange (LME) spot aluminium closed at US$2003.25 per MT, a 14 per cent year to date (YTD) gain, adding that the YTD average is US$1,772.66 per MT.
“Similarly, global aluminium premiums have reached all-time highs due to strong demand for physical deliveries,” the research house pointed out, adding that on Monday, global aluminium premiums were trading at US$305-US$432 per mt.
Press Metal’s smelters are currently operating at maximum capacity – 440,000 metric tonnes (MT) – and have competitive production costs compared to peers.
“To reflect macro demand, we have revised upwards our selling price assumption to US$1,850 per MT (from US$1,800 per MT earlier) and premiums from US$250 per MT to US$300 per MT,” the research house said.
On a side note, AmResearch highlighted that smelters worldwide are being shuttered due to rising costs.
“At the same time, demand is expected to grow by six per cent annually due to higher usage in automobile, aerospace and other industries,” it projected.
For the first time in almost a decade, it observed that there will be a global aluminium deficit of 930,000 MT this year.
In terms of dividend payout, the research house noted that Press Metal declared an interim five sen dividend last quarter to reward its shareholders.
Following this, AmResearch has increased its dividend payout assumptions to 15 sen-17 sen for financial year 2014-2016 forecast (FY14F-16F), versus four sen to five sen earlier, based on a payout ratio of circa 30 per cent.
It noted that these translate to yields of 3 per cent-3.5 per cent.
“We deem this to be possible due to strong cash flow generation in the coming years. We expect capital expenditure (capex) to be minimal at RM60 million-RM80 million per annum,” it projected.
Nevertheless, the research house believes that the payout could be reduced if the management decides to embark on future expansion plans.
As for the group’s balance sheet, it is expected to improve with net gearing expected to fall to 0.9-fold in FY15F (from 1.9-fold last year).
Regarding Press Metal’s price-earnings (PE), AmResearch has increased its PE multiple to 15-fold from 12-fold previously, as Press Metal is a prime beneficiary of rising aluminium prices and premiums.
“Earnings are surging from a low base, with its trajectory boosted by rising aluminium prices from a four-year trough level,” the research house affirmed.
Looking at earnings forecast, the research house has raised its FY14F-16F core net profit by 10 per cent-12 per cent to reflect higher selling prices and premium assumptions.
“Our FY14F core fixed deposit (FD) earnings per share (EPS) is now 40 sen, versus 37.5 sen earlier,” it said.
Likewise, FY15F core FD EPS has been raised by five per cent to 47.2 sen from 44.8 sen. Its FY16F EPS is increased to 47.4 sen from 46 sen.
All in, AmResearch maintained ‘buy’ on Press Metal and raise its fair value to RM6.00 per share from RM4.50 per share previously, pegged to 15-fold PE over FY14F core FD EPS of 40 sen.