Bullish view on aluminium price recovery proves beneficial for Press Metal

It is the time for Press Metal Bhd (Press Metal) to shine as analysts expect the group to ride on aluminium price recovery and margin expansion in its Manufacturing and Trading (M&T) to drive earnings growth.

According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research), it holds a bullish view on aluminium prices, premised on the increasing popularity of aluminium in the auto industry as a steel alternative, growing demand in emerging markets, and declining global production rates.

Thus, Kenanga Research expects aluminium prices to increase to an average of US$1900 per metric tonne (MT) (+3 per cent) in financial year 2014 estimate (FY14E) and US$2100 per MT (+11 per cent) in FY15E.

“Based on our sensitivity analysis, every US$100/MT increase in aluminum prices could directly translate into a five per cent increase in Press Metal’s bottom line.

“Hence, we believe Press Metal should benefit directly from the higher price trend as 97 per cent of revenue is derived from its M&T division, which sells aluminum ingots, billets and extrusion products,” it opined.

The research arm is expecting M&T division’s margin to expand significantly by 4.5 times to 8.6 per cent (from 1.9 per cent in FY13).

It noted that the large quantum of growth is due to a low base effect in FY13 as a result of the Mukah plant shutdown which depressed FY13 earnings.

“Our margin expectation is on the conservative side, as it is similar to the FY12 level of 8.6 per cent, even though margin should see improvement versus FY12 due to the new and higher energy-efficient Samalaju plant.

“As for FY15, we expect profit before tax (PBT) margin improvement to 9.2 per cent as the Group is embarking on additional logistics upgrades, which should lower average manufacturing cost per MT,” Kenanga Research projected.

Furthermore, it highlighted that the company is targeting to increase its alloyed aluminum production to 40 per cent by FY16E, which commands a better price premium with minimal additional capex.

“Overall, we expect the margin expansion to flow straight to bottom line as M&T division contributed 97 per cent of Press Metal’s revenue and 99 per cent of PBT in FY13,” it further projected.

On top of margin expansion, Kenanga Research is also expecting superior revenue growth of 25 per cent to RM3.9 billion in FY14E on additional capacity expansion.

The research arm pointed out that Press Metal has continued to ramp up production at the Samalaju plant by 33 per cent to its full rated capacity of 320,000 MT per year of aluminum production.

“We expect the newly-added capacity to boost revenue immediately,” it said, explaining that this is because each ‘potline’ consists of about 150 aluminium smelting pots which are operated as a batch.

Kenanga Research noted that the smelting process runs continuously with each pot producing almost 3 MT of aluminium per day.

Hence, it opined that Press Metal’s new expansion should enjoy optimal capacity utilization from the new potline upon commencement of operations.

“As for FY15E, we expect revenue growth of 16 per cent to RM4.5 billion, driven mainly by rising aluminium prices and a shift towards value-add alloyed aluminium products, which command a 15-20 per cent price premium above the market price of aluminum,” the research arm projected.

Based on Kenanga Research’s estimates, Press Metal has a higher-than-average expected FY14E operating margin of 10.8 per cent compared to its regional peers’ average FY14E margin of 4.5 per cent.

It noted that the margin advantage is due to the attractive electricity costs compared to other aluminium smelters in the region.

“We expect the high margin trend to be sustainable as the Power Purchase Agreement (PPA) signed between Press Metal and Sarawak Energy (Sesco) in 2011 should be effective for another 22 years,” it said.

Lastly, the research arm noted that Press Metal’s subsidiary Press Metal Bintulu (PMB), which operates the Samalaju smelter, may get an additional five years extension for its pioneer status upon expiry in December 2017 (the current extension started January 2013).

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