Press Metal - Sunshine after the rain BUY

BUY
Fair Value RM2.42

Investment Highlights

• Maintain BUY on Press Metal with a lowered fair value of RM2.42/share – pegged to an unchanged target PE of 13x. This is to account for a softer 1H12 for the global aluminium market amid as macro cycles remained fluid. 
• Against this backdrop, we expect Press Metal’s upcoming 2QFY12 results – scheduled for release this week – to be relatively weak. Benchmark aluminium prices fell 9% QoQ to US$1,978/tonne in 2Q12 as buying sentiment turned cautious on account of weaker macro data points. 
• Stacking it up, we have trimmed FY12F-14F core net profits by 7%-14% on:- (i) our more conservative pricing assumptions; and (ii) some initial start-up cost for its new aluminium smelter at Samalaju. 
• Press Metal’s prospects should be lifted by additional capacity kickers moving into 2H12. With construction completed and pre-testing works ongoing, commercial operations are pencilled in for a 4QFY12 launch (Phase 2B: 1QFY13). Abroad, our channel checks reveal that aluminium prices may rebound in the coming months on renewed hopes of policy easing – notably in China. 
• To be sure, industry reports have pointed towards some nascent signs of buying interest in Asia by Chinese traders as current spot prices (US$1,823/tonne) are hovering near year-lows. Further price support may come from an easing in aluminium supply on production cutbacks by smelters. 
• Press Metal could raise up to RM143mil to part-finance Phase 2 via the conversion of 65% of its major shareholders’ (Koon family) entitlement in the group’s 2011/2019 warrants. Prior to this, Press Metal had raised another RM350mil in syndicated term loans for Phase 2B. 
• We continue to like Press Metal for its transformational growth prospects as one of only two aluminium smelters operating within a growing ASEAN market. Phase 2 would help triple its smelting capacity to 360,000 tonnes when it is fully commissioned next year. 
• On revised earnings, we expect any tangible earnings impact from Phase 2 to only filter through in FY13F (+45%) when operational efficiencies are gradually ramped up. To this end, we reckon that Press Metal is still open to foreign investors when its new plant kicks off – including Japan’s Sumitomo which already has a 20% stake in Phase 1. 
• Indeed, valuations remain alluring at FD12F-14F PEs of 5x- 9x against robust EPS CAGR of 23%. With its capex already frontloaded, we also forecast Press Metal’s net gearing ratio to improve to 1.4x by FY14F from an estimated 2.1x in FY12F (FY11: 1.4x).

Source: AmResearch