Press Metal: Capacity expansion likely to translate into superior earnings growth for FY16

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KUCHING: Press Metal Bhd’s (Press Metal) capacity expansion of its Samalaju plant in Bintulu has been viewed positively by analysts as the expansion will likely translate into superior earnings growth in the financial year 2016 (FY16).

Following a visit to the plant, Kenanga Investment Bank Bhd’s research team (Kenanga Research) was positive on the progress of the expansion and it believed that Phase 2 of the Samalaju plant would be fully operational by end of the third quarter of 2015 (3Q15), while Phase 3 is expected commence operations by end-4Q15.

While its Phase 2 Samalaju smelting plant was shut down temporarily earlier this year due to a fire incident, the research team noted that about 15 per cent of the smelting pots are already up and running.

“Although the remaining pots are still under maintenance (cleaning and repair), management is confident that the plant will resume full operations by end-3Q15.

“We also like the fact that, unlike the previous power shutdown incident in Mukah, the pots in Samalaju remain functional and were adequately insured,” it added.

As for Phase 3 of the Samalaju smelting plant, Kenanga Research pointed out that the construction progress is on track.

“The Phase 3 Samalaju smelting plant (320,000 capacity) will be trailing its Phase 2 plant (320,000 capacity). The construction progress of Phase 3 is already 60 per cent completed and management is optimistic that it will be able to commence operations by end-4Q15.

“Moreover, on June 16, 2015, the early supply and delivery of 500MW power by Sarawak Energy Bhd is timely as the group will be able to execute full production upon commissioning of Stage 3 smelting plant.

“As ramping up of production takes at least six months, we expect the group’s total smelting capacity to increase from existing 440,000 to 760,000 before end of FY16,” it added.

Meanwhile, on aluminium prices, the research team the price has dropped to US$1,685 per metric tonnes (MT) currently from US$1,960 per MT (down 14 per cent) as at June 2015, mainly due to excess global aluminium supply in 1Q15.

“Nonetheless, we notice that aluminium prices have started showing signs of rebound from its 16-month low of US$1,650 per MT.

“Going forward, with the fact that global consumption of aluminium has surpassed the global production by 291,100 MT as of 2Q15, we believe aluminium prices will recover over the medium-to-long term.

“However, we opt to be conservative for now by cutting our aluminium price assumption from US$1,900 per MT to US$2,035 per MT in FY15 to FY16E to US$1,800 per MT.

“Illustratively, our sensitivity analysis suggests that a one per cent decrease in aluminium price assumption will reduce FY15 to FY16E earnings by six to three per cent (circa RM17 million to RM10 million,” it projected.

Kenanga Research also revised its US dollar estimates, in line with its in-house economist forecast of RM3.68 per dollar for FY15E from RM3.53 per dollar.

All-in, the research team believed the current trend of prices for aluminium would have a neutral impact on earnings.

It noted, after adjusting for, lower aluminium price assumption and higher dollar estimates, its FY15E earnings is relatively unchanged (cut by only one per cent).

“Nonetheless, FY16E earnings are revised slightly higher by two per cent as we revised the production capacity 50 per cent higher in FY16 in line with the start of production in Phase 3, but this is partly offset by the full power drawdown from SESCO,” the research team added.