Press Metal’s low cost seen as able to cover aluminium price drop

This article first appeared in The Edge Financial Daily, on April 26, 2019.
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Press Metal Aluminium Holdings Bhd
(April 25, RM4.70)
Maintaing hold with a higher fair value (FV) of RM3.95 (previously RM3.80).
We raise our net profit forecast of financial years 2019 through 2021 (FY19–21F) by 2% to 9% and maintain a “hold” recommendation on Press Metal with a higher FV of RM3.95 (from 3.80 previously). The RM3.95 FV is based on 18.5 times fully diluted (FD) forecast of FY19F earnings per share (EPS) which is: (1) in line with our forward target price to earnings ratio (P/E) for the FBM KLCI, and (2) at a premium to the 10 times average forward P/E of key global aluminium smelters to reflect Press Metal’s favourable cost structure with the bulk of its energy cost (from hydro power) locked in at very competitive rates over the long term.

 
The earnings upgrade is to reflect a downward revision in our price assumption for alumina (which is the input for aluminium), translating to improved margins for Press Metal. We now project the alumina price for FY19–21F at US$400 (RM1,656) to US$450 a tonne (from US$450 to US$500 a tonne previously) underpinned by the additional alumina supply from Hydro Alurnote refinery in Brazil (three million tonnes annually assuming the lifting of a production curb) and Al-Taweelah refinery in the United Arab Emirates (UAE)(a new plant with an annual capacity of two million tonnes). We are keeping our aluminium per tonne price assumptions of US$1,900, US$2,000 and US$2,100 for FY19–21F respectively Global alumina supply could see additional output as there is a strong possibility that the Brazilian Federal Court will rule in favour of a petition submitted by Norsk Hydro, the world’s largest alumina producer. Norsk Hydro has requested that the court lift a production curb on three million tonnes, translating to half of its annually capacity of six million at its Hydro Alurnote alumina refinery.

The Hydro Alurnote refinery in Barcarena, Brazil has been placed under half curtailment since March 2018 on suspicion of toxic waste overflowing from a holding basin. Following an investigation, the local environmental authorities concluded that there was no contamination.

The half curtailment resulted in a global alumina supply deficit of three million tonnes annually, helping to drive alumina prices up to as high as US$650 a tonne at the end of 2018, from about US$400 a tonne prior to the incident

The high alumina prices also drove Alcoa, the biggest aluminium producer in the world, into a net loss of US$199 million in the first quarter of the financial year 2019 1QFY19)(reported last week). However, Press Metal is cushioned by its low cost structure underpinned by cheap hydro power cost.

We are cautious on the outlook for aluminium prices in 2019. We forecast the average aluminium price to ease 5% to US$1,900 a tonne from US$2,000 a tonne in 2018. Industry experts project aluminium consumption in China to grow by a healthy 5% to 38.3 million tonnes in 2019 (from 36.5 million tonnes in 2018), largely backed by the growing automotive and aircraft manufacturing industries. However, during the same period, aluminium production in China is projected to outstrip consumption, rising by a faster rate of 8% to 40 million tonnes (from 37 million tonnes in 2018). China is the largest producer and also consumer of aluminium in the world. — AmInvestment Bank, April 25