Press Metal - Phase 2 swinging into motion

Maintain BUY on Press Metal on a lower fair value of RM2.63/share based on an unchanged target PE of 13x, factoring a more conservative pricing assumption on an evolving global macro situation. But, we remain bullish with Press Metal’s transformational growth prospects as the largest integrated aluminium producer in the ASEAN region with an expanded capacity of 360,000.

Our positive outlook is largely driven by: (i) Press Metal’s status as the larger of only two existing aluminium smelters serving the growing ASEAN market; (ii) The group remains the only active direct play on the roll-out of Sarawak’s Bakun dam, widely viewed as among the lowest-cost hydro-plants in the region; (iii) The long-term supply of power from Bakun enhances its cost competitiveness in weathering any protracted weaknesses in the global aluminium market.

Core earnings rose 46% YoY, boosted by a strong 4QFY11 (+34% QoQ) on a marked improvement in the output at its Mukah Smelter (utilization: ~90%) with maiden power supply from Bakun in October that offset a weakening in the global aluminium industry.  

Phase 2 of Press Metal’s plant expansion in Samalaju is still on track to complete by end-3Q12. It is mulling a few options to fund the balance of funding requirements for Phase 2 (~RM500mil-RM1bil: (i) New debt; and (ii) Forward sales to trading houses/financial institutions.

As supply of power from Bakun to its existing 120,000-tonne Mukah plant had finally arrived last October, Press Metal has since aggressively ramped-up its capacity to ~90% from 50%-60% prior to that. Accounting for half of sales, the group has successfully penetrated the key Asian markets such as Japan, Taiwan and South Korea. While aluminium prices remain tepid near-term, prospects should pick-up from 2QFY12 onwards on (i) Rising demand in Asia; (ii) Global production cut-backs; and (iii) Re-stocking activities post a weak 4Q11-period.

Notably, the immediate focus of Press Metal is on import substitution within a fast-growing ASEAN market – with the entire Phase 2 of its expansion program (240,000 tonnes) scheduled to be in full-flow by end-2013. Indeed, its completion should prod renewed interest from strategic investors, including Japan’s Sumitomo that already has a 20% stake in its Mukah plant.   

The stock offers attractive forward PE valuations of 6x-9x on FD FY12-14F EPS vs EPS CAGR of 23%. Near-term event-driven catalysts would be: (i) Successful completion of its new smelter by end-3QFY11; and (ii) crystallization of a formal PPA with SEB. 

Source: AmeSecurities