Press Metal faces near-term headwinds

Longer-term prospects remain intact

Press Metal Aluminium Holdings Bhd, which was one of last year’s top performing stocks on Bursa Malaysia, isn’t having a great start to 2019.

Since the beginning of the year, shares in Press Metal, South-East Asia’s largest aluminium smelter, have been under pressure.

This is due to expectations of lower aluminium prices, the end produce of Press Metal’s smelter. Also adding pressure is a rise in raw material prices, which in turn could hit the smelter’s margins.

Press Metal’s share price has declined by more than 12.22% to RM4.24 on a year to date basis.

However, the stock is still trading at a toppish historical price-earnings (PE) multiple of 26.58 times.

Aluminium prices have been on the downtrend since last April after hitting a seven-year high at US$2,537 per tonne.

Since the beginning of the year, prices have recovered slightly.

However, aluminium prices could remain under pressure following the decision by the US to lift sanctions on the world’s largest aluminium producer outside China, namely Russia’s United Co Rusal.

As a result, Press Metal’s profit is expected to decline this year, according to several analysts.

RHB Research has trimmed its earnings forecast on Press Metal from FY18 to FY20 by 7-13% after assuming lower aluminium prices.

“We believe the recent weakness in aluminium prices, arising from a trade war, slower global gross domestic product (GDP) growth and lower than initially expected earnings growth, will continue to exert pressure on Press Metal’s share price,” it said in a note to clients yesterday.

The research house has revised down its aluminium average selling price (ASP) to U$2,000 per tonne for FY18 (from US$2,035/ tonne) and US$2,020/tonne for FY19 (from US$2,118).

Yesterday, the aluminium price was traded at US$1,894 per tonne.

According to Bloomberg data, five out of six research houses that cover the stock have a “hold” call on Press Metal. The analyst consensus target price for the stock is at RM4.53 a share.

Meanwhile, Kenanga Research has cut Press Metal’s earnings per share to 20.6 sen in FY19 premised on an earnings growth of 27% and assuming aluminium ASP average US$2,000/tonne.

The research house had earlier targeted ASP for 2019 at US$2,100 per tonne.

“We continue to like Press Metal for its long-term positive operating outlook and earnings growth potential.

“However, we expect substantial volatility in both aluminium and raw materials prices to cloud earnings visibility in the near term,” Kenanga said in a report recently.

Notwithstanding the gloomy outlook, analysts remain bullish on Press Metal’s long-term outlook.

One reason is that despite the lift in sanctions by the US on Rusal, there could be supply disruptions of aluminium coming from China. Soaring production costs are forcing some Chinese aluminium smelters to shut down.

According to a report by Reuters quoting Rusal, the aluminium market faces supply disruptions and soaring production costs, while about 50% of production facilities outside China and 60% in China were making a loss based on current London prices and average market premiums.

“The aluminium market is in heavy deficit and demand is set to improve, the aluminium price has upside potential,” Rusal said.

Aluminium production outside China was flat at 27.6 million tonnes in 2018, but demand rose by 2.8% to 30 million tonnes thus retaining 2.4 million tonnes deficit, Rusal said.

It said further supply disruptions were possible, given most smelters outside China were making a loss.

It has been reported that the China’s Aluminium producers are expected to cut at least another 8,00,000 MT per year of smelting capacity in coming months.

RHB Research expects aluminum prices to slowly recover and gradually return to the USD2,000/tonne level by the end of the year.

“We believe there is a potential upside for aluminium prices in the long-run, as currently half of the smelters in China are still loss-making from rising energy costs therefore some smelters may further cut production,” it says.

Press Metal posted a 5% jumped in net profit to RM162.5mil in the third quarter ended Sept 30, 2018, from RM154.4mil a year earlier, of which the company said was partly aided by proceeds from an insurance settlement.

It pointed out that the group’s financial performance could have been stronger if not because of the higher alumina prices, the raw material the smelter needs.

To manage the volatility in the aluminium and raw material prices, Press Metal is increasing its value-added production and could be eyeing acquisitions to manage its raw material costs, according to AffinHwang Capital Research.

In its report last month the research outfit said that Press Metal is likely to acquire brownfield upstream assets to better manage costs and the supply of carbon anode and alumina.

Carbon anode and alumina contribute close to 50% of Press Metal’s total production costs.

To date, Press Metal has formed a joint venture with Sunstone Development Co Ltd, a Chinese aluminium raw material supplier to manufacture pre-baked carbon anodes in China. Press Metal has also

It has also acquired 50% of Japan Alumina Associates (JAA), which in turn owns a 10% stake in the Worsley Alumina project. As a result of these exercises, Press Metal has said it has secured 50% of its carbon anode and 15% of its alumina requirements.

AffinHwang also pointed out that Press Metal’s earnings will be driven by better product mix.

“Press Metal is targeting to raise value-added aluminium products capacity to 60% of total capacity in 2019,” AffinHwang said.

It is for this reasons that over the long term, Press Metal will overcome its current headwinds.