Press Metal likely to do well with cost saving measures, higher prices

PETALING JAYA: Earnings at Press Metal Bhd, one of the biggest aluminium producers in the region, is projected to reach a new high this year on cost saving measures and higher product prices, analysts said, even as the company’s smelters in Sarawak are already running at full capacity.

The prospect of increased profits had propelled the stock 72% higher so far this year at RM2.73 last Friday. RHB Research, in a note on Friday, sees a further 30% upside from current level.

RHB Research said in a note that it sees room for an earnings upside with key drivers being the potential cost savings derived from the new smelter commissioned last year as it shares common infrastructure and room to lower power usage.

It also noted that the commissioning of the Samalaju Port which is capable of handling Panamax vessels would help it cut inland logistics and shipping costs.

It also said that the increased value-added production may help to enhance profitability, while upward bias for the all-in aluminium price, which could have bottomed out, will help Press Metal.

RHB Research also noted that the possibly prolonged weakness in the ringgit benefits the company as a third of its production cost is denominated in ringgit while revenue is in US dollar terms.

“While first-quarter earnings were fairly flat quarter-on-quarter, we expect it to increase gradually in the coming quarters. Thus, we retain our earnings estimates and a buy recommendation. We also lift our target price to RM3.66 (from RM3.27 previously) after we lower our weighted average cost of capital (WACC) assumption on its fully-diluted discounted cash flows,” it said.

RHB Research noted that the raised target price of RM3.66 came into account after it factored in a lower WACC of 8.2% (from 9.2%) in tandem with its broad in-house revision.

The raised target price also takes in the rising investor risk appetite and increasing equity flows from foreign institutional funds, it said.

Meanwhile, Kenanga Research noted that Press Metal’s core net profit of RM149mil was within expectation at 23% of its RM648mil full-year forecast and 24% of consensus’ RM783mil estimate.

“We remain positive on earnings growth prospects thanks to higher effective full-year capacity of an additional 27% to 760,000 tonnes coupled with stronger price expectations (+9% to US$1,750/tonne). Management also noted that China’s move to curb aluminum production capacity should tilt the market towards a deficit situation, which bodes well for price sustainability,” Kenanga Research said.

Kenanga Research added that it expects plant upgrades at Press Metal’s factories to improve its financial year 2017 (FY17) and FY18’s operating margins to 15.7-17.4%, from 12.9% in FY16.

Press Metal has said that it wanted to improve its margins on the topline by upgrading its billet production capacity, which offered better premiums.

The company also wants to streamline production cost through the Samalaju Port expansion as well as constructing a conveyor belt to directly transport alumina to its smelting plant.

Kenanga Research maintained its FY17-FY18 core net profit expectations at RM648mil-RM783mil as operating performance came within its expectations.

The research house had retained its outperform rating on Press Metal with an unchanged target price of RM3.15.

This is based on an unchanged forward price to earnings ratio of 17x applied to the average FY17-FY18 estimated fully diluted earnings per share of 18.5 sen.

This is also in view of the bullish price environment, higher productivity and continued margin expansion efforts by the management, Kenanga Research said.