Press Metal - Stepping up to the plate BUY

- With greater conviction, we maintain our BUY call on Press Metal with an unchanged fair value of RM2.63/share (target PE: 13x). We hosted a luncheon for Press Metal, and came away from the meeting feeling more convinced about the group’s rising prospects as an integrated producer  of aluminium products. 

- We draw comfort from the fact that the roll-out of Phase 2A of its new aluminium smelter in Samalaju, Sarawak is still on track to go online by end-3QFY12, followed by Phase 2B (end-2Q13). When fully completed, this should triple the group’s smelting capacity to 360,000 tonnes.

- While there have been several proposals for new aluminium smelters in Sarawak and Indonesia, Press Metal already has a head-start via:- (i) the long-term supply of power from Sarawak Energy Bhd (~680MW); and (ii) while Phase 2 is due to be completed by mid-2013.

- This puts the group in a sweet spot to tap into rising aluminium demand – as it has one of only two smelters operating within the ASEAN region for a combined capacity of ~580,000 tonnes. This compares with a base demand of ~5 million tonnes for ASEAN and other keyAsian countries (Japan, Taiwan, Korea).

- To keep up with growing demand, the group is targeting to sell 100% of its aluminium ingots/billets produced at its Samalaju plant compared with 70% for Mukah, which is almost running at full capacity now. Conservatively, we also expect its manufacturing EBIT margin to improve to 9.6% in FY12F from ~8.4% in FY11.            

 

- As for the balance of funding needs under Phase 2 (~RM1bil), a few options are being considered: (i)  New debt; (ii) Forward sales to trading houses/financial institutions; and (iii) Conversion of warrants.

- We do not discount the possibility of seeing renewed interest from strategic investors when Phase 2 kicks off. Notably, Japan’s Sumitomo has the right of first refusal to take up a 20% stake in Phase 2, after having a similar stake in Phase 1. 

- We project Press Metal’s core earnings at RM112mil  for FY12F, rising to RM170mil-RM217mil for FY12F-14F. This is backed by the staggered commissioning of Phase 2A and 2B. The stock offers attractive PE valuations of 6x-10x on FD FY12-14F EPS vs EPS CAGR of 23%.

- Management sees minimal impact from the country’s recently revised minimum wage policy of RM700, as its salary scale is already above the threshold. Wage cost accounts for < 10% of the group’s operating cost.

Source: AmeSecurities