November 12, 2010

PMETAL - AmResearch: Press Metal transforming into integrated aluminium giant

Stock Name: PMETAL
Company Name: PRESS METAL BHD
Research House: AMMB

KUALA LUMPUR: AmResearch has initiated coverage on PRESS METAL BHD [] with a BUY call and a fair value of RM3.30/share. This pegs the stock to a target PE of 11 times ' at a steep 28% discount to its larger pure integrated global aluminium peers.

In its research note on Thursday, Nov 11, it said Press Metal is on the cusp of a structural transformation into an integrated aluminium giant within Asean, following the successful rollout of its smelter in Mukah, Sarawak.

Press Metal's Mukah plant will crucially have unencumbered access to cheap hydro power and the first mover advantage as the country's first smelter.

Press Metal's Mukah smelter is one of only two operating within Asean' which together with China ' has a base consumption of 20 million tonnes (or circa half of global aluminium demand).

AmResearch said the recent emergence of Japan's Sumitomo as a cornerstone investor in the smelter (20% stake plus option for another 5%) has further enhanced the stock's value proposition.

'Additionally, Press Metal is in a strong position to secure an additional power of 510MW from Sarawak Energy Bhd at attractive rates against the spectre of an insufficient off-take in the state when Bakun comes on stream by end-1H11,' it said.

The research house said Press Metal is a direct play on the debasement of the US dollar and its associated reflationary pressure on base metal prices. London Metal Exchange aluminium prices have surged 10% YTD to US$2,389/tonne, amid an extended commodity rally since September.

Earnings are at an inflexion point ' with a robust FY10F-12F EPS CAGR of 64%. Core earnings surged six-fold to RM30mil just from a six-month contribution from Phase 1A (70% of group profits).

With capex for the entire Phase 1 (US$300mil) already frontloaded, AmResearch expects sequential earnings momentum to gain traction along with rapid expansion in margins.

Total capacity should double to 120,000 tonnes in FY11 with the commissioning of Phase 1B by year-end.

AmResearch has conservatively assumed average LME-based selling prices of US$2,400/tonne-US$2,425/tonne for FY11F-12F (FY10F:US$2,200/tonne) against the backdrop of an improving global aluminium imbalance.

'Valuations are exceedingly compelling, at FY10F-12F PEs of only 6x-14x against EPS CAGR of 62%. We believe Press Metal deserves to trade at a scarcity premium given its deepening progression as an integrated regional aluminium player ' with a further capacity kicker stemming from Phase 2 of its Mukah expansion (US$600 mil),' it said.


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