9M17 CNP at RM442m is slightly softer than expected at 68% of consensus and our forecast owing to hedging adjustments and carbon price appreciation. An interim dividend of 1.5 sen was announced, raising dividend to-date to 4.5 sen, slightly under our 7.0 sen estimate at 64%. We adjust FY17-18E CNP by -5% and +10%, respectively, reflecting the current price outlook and updated hedging policy. Revise call to MARKET PERFORM with higher TP of RM5.00 (from RM4.05).

9M17 slightly weaker than anticipated at RM442m, which made up 68% of both consensus’ RM654m and our RM648m estimate due to hedging adjustments and gradual rise in carbon raw material price. An interim dividend of 1.5 sen was announced raising 9M17 dividend to 4.5 sen, coming slightly under our 7.0 sen estimate at 64%.

All-around improvement. YoY, 9M17 CNP jumped 52% thanks to higher production volume on full-year production at its second Samalaju plant and better aluminium prices (+22% to USD1,922/MT) although we note that the bulk of PMETAL’s received prices are hedged due to forward selling policies. Note that 9M16reported net profit included insurance claims of c.RM95m due to a 2015 fire at the first Samalaju plant. However, this is excluded from our CNP calculations due to its one-off nature. QoQ, 3Q17 CNP improved 7% as aluminium prices improved 5% to USD2,010/MT though CNP margin was flat at 7% as lower logistics cost was offset by rising coal prices during the quarter.

Buoyed up. Operationally, prospects remain positive for PMETAL as management continues to add on to its cost-saving and margin expansion initiatives such as the billet upgrade and conveyor belts – set to contribute in FY18; and securing raw materials (silicon, alumina, carbon anodes) supply through new plants and contracts, which should enhance FY19E earnings. Price-wise, with aluminum prices sustaining over USD2,000/MT and roughly 50-60% of overall volume sales secured for FY18, we expect good earnings visibility for PMETAL at least heading into 1H18. In the meanwhile, we observe that the market is betting on PMETAL’s potential inclusion in the FBMKLCI which has supported its share prices well, with a spectacular run-up of 38% to a peak of RM5.20 since end-September.

Adjust FY17-18E CNP by -5% and +10% to RM618-964m as we update our carbon anode price assumptions for FY17-18Eand increase our FY18E aluminum price assumptions to USD2,000/MT (from USD1,900/MT) to reflect a stronger aluminum price outlook which has been partially secured for the coming year.

Revised call to MARKET PERFORM with higher TP of RM5.00 (from OP; TP: RM4.05) based on higher Fwd. PER of 19x (from 18x) applied to higher FY18E FD Core EPS of 24.8 sen (from 22.5 sen). We raise our Fwd. PER to 19x to reflect the re-rating factor from a potential entry into the FBMKLCI as well as the continued strength of aluminum prices, which could be further buoyed by rising crude oil prices. We maintain our positive operating outlook on PMETAL in view of its strong pipeline of upgrades, supportive aluminum prices, superior margins vs. other global players and strong management team. Thus, we upgrade our TP accordingly in line with our ratings definition and revise our call to MARKET PERFORM.

Risks to our call include stronger-than-expected commodity prices and higher-than-expected raw material price increase.

Source: Kenanga Research - 22 Nov 2017