PMETAL’s smelting plant in Samalaju caught fire which affected 100 pots or a-third of installed capacity in Plant 3. It expects to take c.4 months to restore operations which will reduce the group’s smelting capacity by 3% in FY24 while the damaged assets and loss of revenue are expected to be covered by insurance. Meanwhile, aluminium prices remain volatile which lead us to trim our assumptions. As such, we cut FY24/FY25 earnings forecasts by 18%/21% and TP by 9% to RM5.80, though OUTPERFORM rating is maintained.

Plant 3 caught fire. Yesterday, PMETAL announced that a fire incident occurred at its Plant 3 Smelter in Samalaju on Monday night which had since been extinguished. While Plant 1 and 2 remain unaffected, the fire has affected 100 pots out of the 300 pots in Plant 3. These 100 pots make up c.9% of the group’s total smelting capacity and it will take c.4 months to restore the damaged pots back to operational status.

To impact c.3% of FY24’s smelting capacity. This is negative news as it will reduce PMETAL’s smelting capacity by about 3% of group’s total smelting capacity in FY24. Fortunately, there were no injuries or fatalities. In addition, the affected assets are adequately covered by insurance while the loss of revenue for more than two months is also covered by insurance.

Aluminium price remains volatile. The spot price of LME aluminium has been see-sawing in the past two months, rising from below USD2,200/MT in end-July to peak at above USD2,500/MT in mid- August before retracing to USD2,300/MT level currently. This is despite aluminium prices expected to stay firm on the back of the demand recovery in China. YTD, LME aluminium spot price averaged at USD2,360/MT against our assumption of USD2,550/MT. The company has guided it hedged 40% of its FY24 selling price at USD2,600/MT and 35% for FY25 at USD2,650/MT.

Forecasts. We cut FY24-FY25F earnings by 18%-21% to account for: (i) lower aluminium price assumptions to USD2,500-2,450/MT from USD2,550-2,650/MT and long-term assumption to USD2,200/MT from USD2,300/MT, and, (ii) reduced plant utilisation to 95% from 98% in FY24 due to the fire incident. On forex sensitivity, for every 5% MYR depreciation to our USD/MYR assumption of 4.20, FY25F EPS would increase by 15% and TP by 17%.

Valuations. Post earning revision, our DCF-derived TP is reduced by 9% to RM5.80 (from RM6.35) based on unchanged WACC of 7.8% 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. OUTPERFORM rating maintained.

Risks to our recommendation 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 - 12 Sep 2024