PMETAL’s 1QFY24 results beat expectations. Its 1QFY24 core net profit jumped 48% YoY on a strong ASP and better contribution from associate PT Bintan. Aluminium prices will be buoyed by the recovery in demand in China while supply will be capped by geopolitical tensions. We raise our FY24-25F net profit forecasts by 34% and 36%, respectively, lift our TP by 30% to RM6.35 (from RM4.90) and upgrade our call to OUTPERFORM from MARKET PERFORM.

PMETAL’s 1QFY24 core profit of RM420.2m beat expectations, coming in at 29% and 26% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from higher-than-expected ASP and stronger-than- expect performance from associate PT Bintan. It declared a first interim NDPS of 1.75 sen, which exceeded our expectation.

YoY, its 1QFY24 revenue grew 18% largely due to a higher sales volume (+13%) coupled with the stronger USD against MYR, partially eroded by a lower ASP (-5%). The average LME aluminium spot price fell 8% in 1QFY24 to USD2,200/MT from RM2,401/MT in 1QFY23. Its core profit jumped by a steeper 48% buoyed by higher contribution from associate PT Bintan on full commissioning of PT’s 2m MT capacity per annum in 2QFY23.

QoQ, its top line grew 2% as a higher ASP (+4%) more than cushioned a lower sales volume (-2%). Its core profit jumped 27% on lower input cost and higher contribution from associate PT Bintan (+27%) driven by higher alumina prices.

Outlook. China’s consumption of aluminium has thus far in 2024 surprised to the upside, while globally, the demand for aluminium has been buoyed by RE investments and EVs. Meanwhile, global aluminium supply will remain tight due to: (i) more stringent “green” requirements, especially in China, resulting in the permanent shutdown of smelters powered by fossil fuels (especially coal); (ii) the sanctions on Russian producers by the West (Russia contributes to c.6% of world aluminium production); and (iii) higher tariffs on China imports by the US.

Forecasts. We upgrade our FY24-25F net profit forecasts by 34% and 36%, respectively, as we raise our aluminium price assumption to USD2,550/MT-USD2,650/MT (from USD2,350/MT-USD2,400/MT) and long-term assumption to USD2,300/MT (from USD2,200/MT). Correspondingly, we also increase our NDPS forecasts based on an unchanged pay-out ratio of 40%.

Valuations. We raise our DCF-derived TP by 30% to RM6.35 (from RM4.90) based on WACC of 7.8% (updated from 8.7%) and TG of 2%.

Our TP reflects a 5% premium by virtue of its 4-star ESG rating as appraised by us (see Page 4).

Investment case. We continue to like PMETAL for its: (i) structural cost advantage over international peers given its access to low-cost hydro-power secured under four long-term PPA contracts ending between 2034 and 2040, (ii) strong secured alumina supply with stakes in two alumina miners, i.e., Japan Alumina Associate (40%) and PT Bintan (25%) which supply 80% of its requirements, and (iii) green investment appeal as a clean energy source producer. Upgrade to OUTPERFORM from MARKET PERFORM.

Risks to our call include: (i) a global recession resulting in a sharp fall in the demand for aluminium, hurting prices, (ii) escalation in the cost of key inputs such as alumina and carbon anode, and (iii) major plant disruptions or plant closures.

Source: Kenanga Research - 31 May 2024