KUCHING: Press Metal Aluminium Holdings Bhd’s (Press Metal) outlook garnered mixed views despite improving aluminium prices post-lockdown.
AmInvestment Bank Bhd’s research team (AmInvestment Bank) yesterday remained cautious on Press Metal’s outlook given that the upside to global aluminium prices is capped by a significant build-up of inventory (aluminium production has not slowed throughout the pandemic, while consumption takes time to recover).
“The unusually high volatility in the cost of input alumina in recent years, which more often than not, resulted in severe margin squeeze to aluminium producers,” it forewarned in a report.
However, it also noted that this weakness in prices could be partially mitigated by Press Metal’s recent signing of a 15-year power purchase agreement (PPA) with Sarawak Energy Bhd for the supply of 500MW of electricity, enabling it to power an additional annual aluminium smelting capacity of 320K tonnes. This should boost its overall smelting capacity by 42 per cent to 1.08 million tonnes by 2021 from 76,000 tonnes currently.
On the other hand, the research team at Kenanga Investment Bank Bhd (Kenanga Research) believed that Press Metal could record a stronger second half of the financial year 2020 (2HFY20) as aluminium prices are expected recover swiftly.
“This second quarter of FY20 (2QFY20) should be the weakest quarter in FY20 given the swift recovery in aluminium after it plunged to as low as US$1,425 per MT in early April as the Coronavirus Disease 2019 (Covid-19) pandemic disrupted business activities globally.
“With gradual business resumption around the globe which resulted in rising commodity prices, we believe the worst is over for the aluminium prices,” it opined.
As such, it raised its aluminium price assumption to US$1,730 to US$1,830 per MT for FY20 to FY21 from US$1,700 to US$1,830 per MT with alumina-to-aluminium price ratio unchanged at 17 to 16.5 per cent.
Affin Hwang Investment Bank Bhd’s research team (AffinHwang Capital) is also more positive on the recovery of aluminium prices and its demand as there are signs of recovery in the global economy, higher cancelled warrants in August, suggesting more demand for physical aluminium and deliveries.
It also highlighted that the weakness in the dollar should provide some support to LME prices.
On Press Metal’s 1H performance, AffinHwang Capital noted that Press Metal’s 1H20 core net profit declined by 15 per cent y-o-y to RM185.9 million attributable to lower revenue contribution of RM3,561 million (down 17.3 per cent y-o-y) from lower aluminium selling price and the production halt during the Movement Control Order (MCO) in 2Q20.
“The impact of the revenue decline was however dampened by lower operating expense incurred due to lower alumina and carbon anode raw material costs (down 19.9 per cent), possibly after the acquisition of JAA,” it added.
Sequentially, AffinHwang Capital said, Press Metal’s 2Q20 revenue fell 11 per cent to RM92.9 million on the back of weaker aluminium selling prices during the quarter and as operations at Press Metal’s extrusion and wire rod plants were halted for two months due to the MCO.
Nevertheless, it noted that noth plants have since resumed operations in stages since mid-May.
All in, AffinHwang Capital and AmInvestment Bank maintained their ‘hold’ recommendation on the stock while Kenanga Research upgraded its call to ‘outperform’ given the strong recovery in aluminium price, and with the Samalaju Phase 3 to kick start in early 2021, FY21 is expected to be a strong growth year.