Press Metal to gain from currency, aluminium price appreciation
KUCHING: Press Metal Bhd’s (Press Metal) outlook has been viewed positively, driven by higher US dollar to ringgit and aluminium price appreciation supported by strong Asia ex-China demand.
In a report, Kenanga Investment Bank Bhd’s research arm (Kenanga Research) said, “We continue to be positive on Press Metal as we expect further earnings growth on higher US dollar to ringgit and aluminium price appreciation supported by strong Asia ex-China demand.
“Margin expansion will continue as the company sees full production volume at its new smelter and increases high value alloy production volume.”
It noted that aluminum prices made a strong recovery in 2016, at a 16 per cent rise to US$1,733 per metric ton (MT) and was even higher after conversion at 21 per cent to RM7,775 per MT.
“Looking ahead, we expect 2017 US dollar aluminum prices to stabilise at the US$1,600 to US$1,800 level with an average of US$1,700 per MT,” it projected.
Meanwhile, the research team also believed that Press Metal would benefit from the recent appreciation of the US dollar as the bulk of its revenue is US dollardenominated while only circa 30 per cent of its costs (alumina) is denominated in US dollar, with the balance denominated in Chinese yuan (carbon anodes) or ringgit (electricity, transport, labour, and others).
Aside from that, it pointed out that with the full commissioning of its new smelter at Samalaju, it expected Press Metal to continue improving its net margins in the financial year 2016 (FY16) to FY17 estimate to 6.2 to 7.3 per cent from 5.4 per cent in FY15.
“We think there is still room for margin expansion in 2017, in view of US dollar appreciation, rising operational efficiency due to better full-year utilisation, and increased volume of higher margin aluminum alloy products,” it opined.
On the performance of the steel sector, Kenanga Research pointed out that global demand has steadily increased in 2016 to 4.9 million MT as of Oct 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 one per cent production surplus, we note that Asia ex-China demand deficit is far more substantial at 2.34 million MT or a seven per cent deficit to production.
“We expect Asian players such as Press Metal to benefit from this trend, as international automakers such as Japan and Korea count among its major clients,” it said.
Overall, the research team pegged an ‘outperform’ call on the stock. It also upgraded its forecast of the Press Metal with its FY17E core net profit expected to be at RM519 million. This is on assump- tion that the dollar to ringgit would reach RM4.25 per dollar and it also upgraded its forecast of the stock to reflect productivity improvements and higher alloy volumes.
“We also update our dividend payout assumption to 65 per cent (from 45 per cent) to reflect the average three-year payout ratio, which we think is more appropriate after the inception of its quarterly pay-out policy,” it added.