Bright outlook for Press Metal’s earnings growth

PETALING JAYA: Press Metal Bhd is expected to see further earnings growth driven by the US dollar’s appreciation and stronger aluminium prices, supported by strong demand from Asia ex-China.

Last year, aluminium prices recovered strongly, by 16% to US$1,733 a tonne. The prices were even higher after conversion, recording a 21% improvement to RM7,775 a tonne.

“Looking ahead, we expect 2017 US dollar aluminium prices to stabilise at the US$1,600 to US$1,800 level with an average of US$1,700/MT,” Kenanga Research said in its report last Friday.

The research house maintained its “outperform” call on the stock with a higher target price of RM2.15 from RM1.79 previously. The stock is its top pick for the first quarter of 2017.

It said Press Metal will benefit from the recent appreciation of the US dollar as the bulk of its revenue is US dollar denominated while only some 30% of its costs (alumina) is denominated in US dollars. The rest of its costs are denominated in yuan (carbon anodes) and ringgit (electricity, transport, labour and others).

According to Kenanga Research, global demand rose steadily last year to 4.9 million tonnes as of October 2016, on par with production figures which have been on a downtrend due to the closure of inefficient plants, particularly in China.

“Although Chinese supply/demand is still at a 287,000 MT at 1% production surplus, we note that Asia ex-China demand deficit is far more substantial at 2.34 million MT or a 7% deficit to production.

“We expect Asian players such as Press Metal to benefit from this trend, as international automakers such as Japan and Korea are its major clients,” it said.

With the full commissioning of its new smelter at Samalaju, Kenanga Research expects Press Metal to continue improving its net margins in FY16-17E to 6.2-7.3% from 5.4% in FY15. It believes there is room for margin expansion in 2017, in view of the greenback’s appreciation, rising operational efficiency due to better full-year utilisation, and increased volume of higher margin aluminium alloy products.

Kenanga Research upgraded Press Metal’s FY17 estimated core net profit by 13% to RM519 million on the back of its updated US dollar/ringgit assumption to 4.25 from 4.10 previously as well as the revised margin assumptions to reflect productivity improvements and higher alloy volumes.

It also updated its dividend payout assumption to 65% from 45% previously to reflect the average three-year payout ratio, which it reckons is more appropriate after the inception of the company’s quarterly payout policy.