• Maintain NEUTRAL, new MYR5.14 TP (DCF) from MYR4.95, 8% downside. 1Q24 core profit of MYR396m came within our and Street’s expectations, driven mostly by higher associates contributions and enhanced smelting profitability. Given the lukewarm sentiment towards the aluminium industry, coupled with limited upside potential in Press Metal’s current valuation, we lift our FY24F-26F earnings by 9-12% after revising our LME aluminium price assumptions.

• A stellar quarter. Despite a flattish LME aluminium price trend (+0.2% QoQ, -8.2% YoY) and reduction in sales volumes for the quarter, 1Q24’s topline reached MYR3.6bn (+2.4% QoQ, +17.7% YoY) thanks to PMAH’s hedging mechanism. 1Q24 core profit also showed an uptrend momentum, reaching MYR396m (+6.4% QoQ, -7.6% YoY) thanks to higher contributions from associates (>100% QoQ and YoY) and enhanced smelting profitability due to higher realised prices, lower input costs, and a stronger USD. This constitutes c.25% of our and Street’s full-year estimates – within expectations. Segmental-wise, value-added products (VAPs) volume improved to 46% of total sales volumes thanks to higher volume growth for all three categories of semi-finished products. This is on track with PMAH’s target to boost the share of the lucrative VAP business to 50% by end 2024.

• Outlook. LME aluminium prices peaked at an average of USD2,533/tonne in 2Q24 (+15% QoQ, +11.9% YoY), mainly driven by positive developments in China. Nevertheless, the rally is overdone in our view, as global production is picking up after China’s Yunnan Province partially resumed production levels. Demand also remains unexciting. Raw materials-wise, carbon anode (c. 23% of PMAH’s smelting costs) and alumina (c.30% of smelting costs) prices have stabilised at this juncture. The group has also updated its hedging mechanism: i) 2024 (30% at USD2,600/tonne), ii) 2025 (30% at USD2,650- 2,700/tonne), and iii) 2026 (25% at USD 2,700/tonne).

• Earnings revision. While our thesis and view remains largely unchanged, our FY24F-26F earnings are lifted by 9-12% following the adjustments in our LME aluminium price assumptions: i) FY24 (USD2,300/tonne) and ii) FY25 (USD2,350/tonne). Consequently, our new DCF-derived TP is now MYR5.14 (+8% ESG premium). Although PMAH remains one of the lowest-cost green smelters in the world, we keep our NEUTRAL call as the current valuation looks fair. It trades at 27.1x FY24F P/E, PMAH commands a premium to its global peers (10.5x) and is trailing close to its 5-year mean (25.5x). Key downside risks include a plunge in aluminium prices, sharp weakening of the USD, elevated raw material prices, and a global economic growth slowdown. The opposite represents the upside risks.

Source: RHB Research - 4 Jun 2024