KUCHING: Press Metal Bhd’s (Press Metal) growth is set to gain stronger traction as London Metal Exchange (LME) aluminium prices consolidate and premiums hit record high.
With aluminium prices escalating, smelting businesses such as Press Metal are set to benefit from the rise in key input costs.
The aluminium company has also been viewed as ‘all geared’ to enjoy the fruit of years of aggressive investments in its world-class low cost aluminium smelters in Samalaju and Mukah.
RHB Research Institute Sdn Bhd’s (RHB Research) analyst Ng Sem Guan in a report explained that global aluminium producers have done well to curtail output.
“Coupled with the absence of new smelting capacity outside China (beyond the few being ramped-up now) and moderate demand growth, the market is generally expecting its first supply deficit in a decade from 2014.
“This favourable development has lifted the sector’s fundamentals and seen the LME’s aluminium cash price breaking the US$2,000 per tonne psychological barrier last week.
“Additionally, the regional premium payable for metal deliveries to Japan for July to September also rose to a record US$400 per tonne to US$408 per tonne, which is eight to 12 per cent over the preceding quarter,” Ng said.
With aluminium prices escalating, the analyst clarified that smelting businesses such as Press Metal, are set to benefit from the rise in key input costs.
“In the smelting business, certain costs at a smelting plant – such as electricity, overhead, maintenance, depreciation and interest costs – are fixed, regardless of the price movement of aluminium.
“However, the cost of its key material – alumina – is a fraction of the all-in aluminium price, which we currently assume at 15.5 per cent.
“Although carbon anode prices are not directly correlated with the price movement of aluminium, the former moves in tandem with the latter to a certain degree.
“Therefore, as aluminium prices move up, only its key input cost will rise by an almost similar percentage. The difference will add to the original margin spread.
“However, if aluminium prices were to decline, only material costs become cheaper. Fixed costs remain the same. Thus, the profit margin is narrowed,” Ng explained.
RHB Research revised its 2014/2015 physical premium aluminium prices assumptions by US$100 and US$200, which lifts the research house’s all-in aluminium price estimates to US$2,200 and US$2,400 per tonne (from US$2,100 and US$2,200 per tonne), respectively.
“We then assume US$2,000 as the long-term LME cash price, which is expected to grow by a marginal 1.5 per cent thereafter. Our long-term physical premium is now set at US$400 per tonne,” it added.
“As we raise our aluminium price assumptions, we accordingly make changes to our earnings estimates in the coming quarters.
“For the time being, we expect all-in aluminium prices to average at US$2,300 per tonne (for the third quarter 2014) and US$2,365 per tonne (for the fourth quarter of 2014), and middling around US$2,400 per tonne in 2015.
“Based on those assumptions, we expect Press Metal to record a core profit RM80 million (3Q14) and RM90 million (4Q14), with quarterly profits to normalise around RM94 million in FY15 to make up a full-year profit of RM375 million,” Ng said, and added Press Metal is set to see almost double quarter-on-quarter (q-o-q) and triple year-on-year (y-o-y) profit.
Meanwhile, RHB Research commended Press Metal’s aggressive investments in its world-class low cost aluminium smelters in Samalaju and Mukah.
“The improved industry dynamics are timely, as both of its smelters have been fully operational since April. The higher aluminium prices should also mean extra dollars for every tonne of metal produced,” the research house said.
Overall, Ng highlighted, “Press Metal’s track record prompted us to raise our value-added production estimate for the Samalaju smelter to up to 40 per cent of total production by FY18.
“That, on top of our assumption of higher aluminium prices, led us to raise our estimates by 22.4 and 35.5 per cent for FY14 and FY15.
“We also ascribe a nominal terminal value on it at RM425 million versus nil previously. Our fully-diluted discounted cash-flow based (DCF) fair value rises to RM7.38 per share (20 per cent discount to our DCF), implying undemanding 15-folds and 10.5-folds price earnings and 2.1-folds and 1.8-folds price to book value on its FY14F/FY15F respectively.
“We believe its verbal commitment of a 30 to 50 per cent dividend payout ratio may support a further re-rating.”
RHB Research pegged a ‘buy’ call on the stock.