• Maintain BUY, new MYR6.30 DCF-derived TP (from MYR6.53), 27% upside with c.1% yield. The US Federal Reserve's (US Fed) aggressive monetary policy pivot has resulted in the USD/MYR declining 12% since 1 Jul 2024. While Press Metal's earnings profile will be negatively affected, we believe the impact will be mitigated by good fundamental prospects for LME aluminium prices. Valuations remain undemanding at 23x FY25 P/E, below the 5-year historical mean of 25x, justifying our rating on the stock.

• The recent 50bps US Federal Funds Rate (FFR) cut has led to a weaker USD, (down 6% QoQ against the MYR in 3Q24). This poses a downside risk to PMAH, as aluminium trade is predominantly denominated in USD. Based on our sensitivity analysis, every 1% change in the USD/MYR rate will result in a 1.8-2% change in its bottomline (Figure 1). RHB Economics expects a cumulative 100bps cut in the US FFR in 2024 and additional 100bps cut in 2025, with no change to Bank Negara Malaysia’s overnight policy rate (OPR). This is expected to contribute to a downside bias for the USD. Nonetheless, the negative impact should be partially offset by the upward trend in LME aluminium prices, driven by mid- to long-term demand from green sectors and the US tariff rate hike on Chinese aluminium imports (from 7% to 25%).

• Cost outlook. Alumina costs remained elevated amid tight supply at USD508.50/tonne in 3Q24 (+18% QoQ). We expect prices to remain high before normalising in 2025 due to increasing supply, with 1m tonnes of refinery expansions each in Mempawah, Bintan, and India scheduled from 4Q24 to 2027. Meanwhile, carbon anode prices have eased from the 2022 peak and stabilised below CNY4,000/tonne.

• We expect a softer 3Q24, with core earnings estimated at MYR250-300m, driven by the LME aluminium price of USD2,385/tonne (-5.5% QoQ), a weaker USD, higher alumina costs, and a factory fire incident at Samalaju in September. To recap, the fire affected c.9% of the aluminium smelting line (phase 3), and repairs are expected to take 3-4 months. Management estimates this will reduce 2024 annual smelting capacity by c.3%, which translates to a 4-5% reduction in the bottomline, based on our estimates.

• Forecasts. We revised our FY24-26F LME spot price forecasts to USD2,420, USD2,520 and USD2,550 (from USD2,400, USD2,500 and USD2,500), and the USD/MYR to 4.5, 4.0, and 4.1 (from 4.65, 4.45, and 4.5). We also adjusted our cost assumptions accordingly (Figure 4) to reflect the abovementioned factors. As a result, our earnings forecasts are cut by 9.6%, 10.4%, and 9.4% for the respective periods. Post adjustment, our TP falls to MYR6.30 (inclusive of an 8% ESG premium), implying an FY25F P/E of 30x. We believe this valuation is justified, given PMAH’s position as one of the lowest-cost smelters globally, growing awareness of lower-carbon footprint smelters, and the potential of further US Fed rate cuts to boost global demand.

Source: RHB Research - 3 Oct 2024