We laud Press’ disposal of a 20% stake in PMB to Sumitomo for MYR444m, which matches our DCF value for PMB. This will cut Press’ gearing from 1.74x to 1.2x, giving rise to a MYR336.4m disposal gain. However, ongoing repairs at the Mukah smelter and weak aluminium prices may cap its share price. We apply a 25% discount to our new fully-diluted DCF, with a higher MYR3.77 FV (from MYR2.77). BUY.
Win-Win Tie-Up With Sumitomo
Sumitomo acquires 20% stake in PMB. Press has entered into a conditional sale and purchase agreement (SPA) with Summit Global Management XII B.V. (SGM), a subsidiary of Sumitomo Corporation (Sumitomo), for the proposed disposal of a 20% equity interest in its wholly-owned subsidiary, Press Metal Bintulu SB (PMB), for a provisional cash consideration of USD140m (c. MYR444m). This is Sumitomo’s second investment in Press’ subsidiary, its first being a 20% stake in Press Metal Sarawak SB (PMS), which operates a 120,000 tonne per annum (tpa) aluminium smelting and billet casting plant in Mukah, Sarawak (Mukah smelter).
PMB a prized asset. PMB currently operates a 320,000 tpa aluminium smelting plant at Samalaju Industrial Park, Bintulu, Sarawak. The plant, which started stage commissioning since 4Q12, achieved full production last month. As this smelter is 2.66x larger than its Mukah smelter, it enjoys overhead cost efficiency. In addition, its state-of-the-art 400kA smelting technology consumes 10% less power than PMS, while its proximity to Bintulu Port – at 77km vs 187km from Mukah – could save PMB USD30 a tonne on logistics costs. Its capex, which only doubles PMS’, will also help PMB save on interest and depreciation, on top of its 10-year pioneer status.
Therefore, PMB is a “prized asset” for Press and the group’s main asset. A coup for Press. As the disposal of Press’ 20% stake in PMB will be earnings dilutive, we are making the necessary adjustments by lowering our FY14 core estimates by 7.5% to MYR265.3m. Nonetheless, we deem the proposed disposal fairly valued at MYR444m, which happens to match our DCF valuation for PMB (see Figure 1). This is an opportunity to unlock and crystallise Press’ investment in PMB, as the price tag implies PMB’s full valuation at MYR2.22bn, far exceeding its latest market capitalisation of only MYR1.25bn. For the time being, the disposal is expected to result in a net gain of about MYR336.4m for Press. The group is also set to realise synergies from the partnership by capitalising on Sumitomo Group’s network and marketing expertise in the aluminium business. In addition, the disposal will help address market-wide concern over the group’s high leverage, as its net gearing ratio of 1.74x (as at 30 June 2013) is expected to reduce to a manageable 1.2x upon completion of the transaction in FY14.
Sumitomo to reap synergy from PMB too. That said, we believe PMB is also an important asset of Sumitomo, which is part of a consortium of 12 Japanese companies which owns a 58.88% stake in PT Indonesia Asahan Aluminium. The Indonesian government rejected the consortium’s request for a 30-year extension after its agreement expired. PMB fits well into Sumitomo’s business strategy as it will be able to continue to supply aluminium to the latter’s trading division.
Tall Order For PMB Comes With Reward And Penalty
Salient terms of SPA. The SPA is conditional on PMB satisfying or SGM waiving (acting at its sole discretion), inter alia, the closing conditions . Among others, PMB will undertake the capitalisation of the amount owed by PMB to Press and its subsidiaries of at least MYR409m (outstanding of MYR749.5m as at 31 Dec 2012), via the issuance of at least 409m new ordinary shares of MYR1.00 each in PMB, which will increase its paid-up capital to at least MYR459m. Apart from that, PMB plant has to meet other closing conditions, including: (i) construct at least 300 aluminium smelting pots, of which at least 290 are fully operational, (ii) achieve a mean average daily production capacity of not less than 852 tonnes in the rolling 30-day period (~95% utilisation rate), and (iii) maintain electrical power consumption with a mean average of below 14,000 kilowatt hour (kWhr)/tonne in the rolling 30-day period. Barring any unforeseen circumstances, we believe these closing conditions will likely be met before the target completion in April 2014.
Proceeds adjustments until 2018. The disposal consideration of PMB will be subject to certain adjustments, namely adjustments on balance sheet at completion, capital expenditure, earn-out and production costs for the period until end-FY18. Press is subject to a negative adjustment or “penalty” if it fails to meet certain agreed conditions but the amount is capped at USD69m (49.3% of the original disposal consideration). Likewise, SGM will make revise up the disposal price tag or “reward” Press if it surpasses certain targets stipulated in the SPA, but subject to a maximum of USD43m (30.7% of the original disposal consideration).
Tall order, but this comes with a reward. We are excited that the disposal consideration of USD140m – which we already deem fair – could see a potential upward adjustment of up to USD69m. However, we are more hopeful of a reward of not more than USD21m upon the finalisation of PMB’s FY18 accounts, which takes into consideration certain production costs. While there is no further elaboration on what will be included in the production costs, we suspect these are likely to be limited to production efficiency and overhead cost controls, which are still within management’s control. However, in the event that Press fails to achieve the minimal target set on production costs, it is subject to a penalty of up to USD26.9m in favour of SGM.
Transaction risk likely to be contained at USD16m up to 2018. Meanwhile, we are mindful of a potential negative earn-out adjustment (penalty) – capped to USD16m – in favour of SGM. The earn-out adjustment will be based on PMB’s free cash flow (FCF) as and when its accounts are finalised every year until FY18. While many factors could impact the group’s FCF, we believe the key factor lies in the group’s profitability, as smelting margin is very sensitive to aluminium price movement, which is beyond management’s control. That said, the penalty of USD16m will be spread over the period of five years. Should PMB surpass the FCF target set in the SPA, SGM will reward up to USD48m in favour of PMB. As the transaction value happens to match our calculation, we suspect an average aluminium price of around USD2,200-2,400, together with the physical delivery premium of USD150/tonne, were used as benchmarks to meet the target FCF.
Source: RHB
tonywong8
Samalaju port is under construction and expected to be completed 3 years from now. By the time, the port is only 2 to 3 Km away. The saving of logistic cost can be USD 20.00 x320000=USD 6.4M or Rm 20M.
2013-11-04 23:34