Aluminium Sector - Strong signals from Alcoa’s 4Q12 results OVERWEIGHT

- Global aluminium giant Alcoa recorded 4Q12 results that bested consensus expectations. 4Q  sales reached US$5.9bil (+1% QoQ) beating the street’s estimates of US$5.6bil.

- Profit from continuing operations doubled QoQ to RM64mil on an improvement in its pricing mix as amid a recovery in regional premiums. 

- Average selling prices for Alcoa’s aluminium metals rose 4.6% QoQ (YoY: -2.1%). This more than masked a decline in production levels at 912 kmt (-2.8% YoY and -5.2% YoY) and seasonal increase in energy prices.

- For FY12, Alcoa achieved its full-year targets and broke a few records among key operating parameters. This would include an all time high for adjusted EBITDA margin of 19.2% for its downstream businesses. 

- On its outlook, Alcoa highlighted strong consumption trends where short-term global demand growth (2010-2012) for aluminium grew at a faster CAGR of 8% vs the 6.5% estimate that the group made back in 2010 (implying a doubling of demand from 2010 to 2020). 

- Moving into 2013, Alcoa is projecting global aluminium demand to accelerate 7% YoY at 49.4 mil mt with China accounting for nearly half of global consumption. Segment wise, the aerospace industry is tipped to chart the strongest growth at 9%-10%. Net surplus is seen to stabilize at ~535k (China: 65%). 

- Taken together, we foresee Alcoa’s consensus-beating 4Q12 results as a precursor of an imminent recovery in global aluminium markets. This largely stems from improving macro data points – including in key economies such as China and the US.

- Notably, there is renewed optimism of a resumption in China’s infrastructure spending following the finalisation of its new leadership. From our channel checks, a key focal point of the Chinese development agenda would be on highway/railway and urbanization projects.  

- Not unlike other base metals such as steel, global aluminium prices appear to have bottomed in 4Q12 and managed to finish 2012 up ~3.5% YoY at US$2,027/tonne.

- We therefore see Press Metal as an excellent proxy to a recovery in global aluminium pricing trends. It is one of only two smelters operating within an expanding ASEAN market.  

- Press Metal’s capacity would triple to 360,000 tonnes when its new Samalaju smelter is fully commissioned.

- We expect the ramp-up of Phase 2A of Press Metal’s new Samalaju smelter (120,000 tonnes) to be fully felt by end-1H13. Press Metal trades at undemanding FY13F-14F PEs of 6x-8x against an improving operating backdrop.   

Source: AmeSecurities