PMETAL is investing RM1.04b for an 80% stake in a JV project for an alumina refinery in West Kalimantan, Indonesia. We are positive on this venture as the investment aims to secure alumina supply, with two other investments in alumina refinery, ensuring 75% of its alumina requirement is locked in. Given its balance sheet and cashflow generating ability, PMETAL can finance this without taking on debt. However, it has to equity account for this investment. We maintain our estimates, TP of RM5.80 and OUTPERFORM call.

To JV for a 3rd investment in alumina refinery plant. Yesterday, PMETAL announced that it is setting up a strategic JV in PT Kalimantan Alumina Nusantara (KAN) with two Indonesian parties, namely PT Alakasa Alumina Refineri (AAR) and PT Dinamika Sejahtera Mandiri (DSM). PMETAL is expected to subscribe for a total of seven tranches of new KAN shares or 80% equity stake in KAN at a total of USD240.0m (c.RM1.04b). Eventually, the shareholding of KAN will be - PMETAL 80%, AAR 19.77% and DSM 0.23%.

The JV company – KAN will undertake a project in Sanggau, West Kalimantan, covering c.980ha of land to house an alumina refinery plant with an annual production capacity of 1 to 1.2m MT, along with a power plant, jetty and supporting infrastructure. The total cost for Phase 1 is estimated at USD750m (c.RM3.24b). There is potential for capacity expansion in Phase 2 which could add another 1 to 1.2m MT. Meanwhile, KAN is expected to secure bauxite supply from DSM while the final product, alumina will be sold to PMETAL.

Strategic leverage. This venture is not unexpected, as PMETAL also holds a 50% stake in Japan Alumina Associates (Australia) Pty Ltd (JAA) and a 25% stake in PT Bintan. These investments allow PMETAL access to 230,000 MT alumina production capacity at JAA and 500,000 MT at PT Bintan. With the KAN venture, PMETAL has effectively locked in 75% of its alumina requirement, ensuring a stable supply of raw materials, and potentially logistics savings.

Forecasts. Maintained as the new venture is unlikely to affect its near- term earnings. For reference, PT Bintan project took 2.5 years to reach production. Furthermore, PMETAL has no financial constraints in funding the project as it had RM2.01b cash as of Jun 2024 with strong cash flow generating ability.

Valuations. Maintain our DCF-derived TP of RM5.80, based on unchanged WACC of 7.8% and TG of 2%. On these assumptions, we estimate that PMETAL may have to generate savings of c.1 ppt to pre- tax margin annually to justify the USD240m outlay from a NPV perspective. 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 40% 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 - 19 Sep 2024