Press-ing for higher margins
Press Metal to up production on increasing demand for aluminium
PETALING JAYA: The largest aluminium smelter in the region, Press Metal Bhd, is likely see better margins this year following the recovery of aluminium prices.
Aluminium was trading at its lowest 13 months ago. In mid-February, the commodity hit US$1,900 a tonne or 20% higher than it was a year ago.
Press Metal is planning a production increase of 20% to 760,000 tonnes this year.
Group chief executive officer Datuk Paul Koon Poh Keong said that aluminium prices would remain stable this year, especially with lower output from China.
“Press Metal is also targeting to increase our production of ‘value-added’ products that demand higher margins,” he told StarBiz.
Presently, he said 30% of its capacity was “value-added” aluminium products and the firm is targeting to increase it to 50% of total production this year.
“We expect the demand for aluminium to increase especially from the automotive sector that is going into low-emission technology vehicles, especially in Europe.
“In addition, China will be using more aluminium for its nationwide high-speed rail projects,” he said.
In February, the Chinese government proposed a reduction in aluminium production in several provinces during the winter months to address the concerns about the country’s air quality.
In China, industries such as steel and aluminium burn coal, contributing to the problem of air pollution.
Press Metal posted a net profit of RM495.5mil in the financial year ended Dec 31, 2016, more than a three-fold jump from RM132.35mil in the previous year on the back of a stronger US dollar and higher output.
Revenue for the year increased more than 53% to a record RM6.6bil from RM4.3bil previously.
Profit margins in FY16 stood at 8% compared with 3% in FY15.
In addition to the stable aluminium prices and increase in product mix, Koon said the Samalaju Port, scheduled to open in mid-June, could improve the company’s margin.
Koon said the company would expand its plant in Samalaju, Sarawak, to ride on the growth in demand for aluminium.
“Aluminium is a metal of the future, it is not expensive, durable and light,” he said.
The company exports about 90% of its products, with the rest for local consumption.
It has two aluminium smelting plants in Sarawak namely Mukah and Samalaju.
Koon said Press Metal has used almost 60% of its land in Samalaju, with the company
having completed the third phase expansion last June.
“We have 40% left for expansion in Samalaju, it depends on the timing and how much power we can secure in the state,” he said. A 25-year power purchase agreement enables the company to operate at a relatively lower cost.
The company has been able to maintain its profitability during the downturn in aluminium price and a fire incident at its smelting plant in 2015.
With the planned expansion, Koon said that the firm would work on strengthening its balance sheet.
“With the amount of cash flow we are generating, we are confident of reducing our debt fast,” he said.
Last week, Press Metal received its shareholders’ approval to undertake a corporate exercise that would see shares of the company being exchanged to a new holding company (newco).
The exercise would involve one newco share for every Press Metal share.
Once the share exchange has been completed, the newco, known as Press Metal Aluminium Holdings Bhd, would be the holding company of Press Metal and would take over its listing status.
The move is seen as one of the company’s initiatives to boost growth.
Shares in Press Metal have been trending upward, increasing more than five times in 18 months.
They were last traded at RM2.59 a share, based on a price-earnings ratio of about 17 times FY16 earnings.
“While some quarters may argue that there is limited growth potential for Press Metal post the full commissioning of all its smelters, we see room for earnings upside from potential cost-savings,” said RHB Research in a report.
It said the cost-savings could be derived from a new smelter that was sharing some common infrastructure and the cut in land logistics as well as shipping costs while the increase in the production of value-added goods would enhance profits.