PMETAL's 9MFY24 results beat expectations on higher associate income from PT Bintan, supported by elevated alumina ASP in 3QFY24. However, topline declined QoQ due to lower aluminium ASP coupled with the weakening of USD. Aluminium prices are expected to remain firm on the back of the demand recovery in China and constrained supply due to geopolitical tensions. We raise FY24-25F forecast by 17-12% to account solely for higher associate income. OP maintained but with a higher TP of RM6.00.

9MFY24 results outperformed. At 90%/85% of house/street's full- year estimates, PMETAL's 9MFY24 core profit of RM1.41b beat expectations. This was due to stronger-than-expected associate income from PT Bintan in 3QFY24 as alumina prices remained elevated (average alumina market price +16% QoQ, +50% YoY). It declared a 3rd interim NDPS of 1.75 sen (ex-date: 16 Dec; payment date: 31 Dec), totalling YTD NDPS to 5.25 sen, consistent with 9MFY23.

Elevated alumina prices boosted associate income. 3QFY24 core profit declined 7% QoQ to RM475.7m as topline contracted 4% due to lower realised ASP coupled with the weakening of USD against MYR.

The average LME aluminium spot price fell 6% QoQ to USD2,382/MT.

However, the weaker earnings were mitigated by higher associate incomes (+50%) from PT Bintan on higher alumina price as mentioned above. The average alumina market price rose 16% sequentially to USD504/MT in 3QFY24 due to the increased demand from Chinese smelters.

Better YoY aluminium prices. YTD, 9MFY24 core profit surged 53% YoY to RM1.41b on the back of an 11% hike in revenue. This was primarily attributable to higher realised ASP for aluminium coupled with stronger USD, higher volume as well as higher associate income.

The average LME aluminium spot price rose 4% YoY to USD2,369/MT in 9MFY24. Meanwhile, the higher associate income (+229% YoY) was attributed to higher contribution from PT Bintan arising from full commissioning of its 2m MT capacity per annum in 2QFY23, as well as higher alumina prices as the average alumina market price leapt 26% YoY to USD435/MT.

Outlook. China's consumption of aluminium has thus far in 2024 surprised to the upside, while globally, demand for aluminium has been buoyed by RE investments and EVs. Meanwhile, global aluminium supply will remain tight due to: (i) more stringent "green" requirements, especially in China, resulting in the permanent shutdown of smelters powered by fossil fuels (especially coal), (ii) the sanctions on Russian producers by the West (Russia contributes to c.6% of world aluminium production), and (iii) higher tariffs on China imports by the US.

Forecasts. We raised our FY24-F25F net profit forecast by 17%-12%, to adjust solely for associate income on the back of: (i) higher alumina assumptions by 9%-11% to USD450/MT for both years, and (ii) 100% plant utilisation from 50%-75% based on 2m MT installed capacity (full-year basis). Correspondingly, our NDPS projection is also raised proportionally based on unchanged pay-out ratio of 40%. For forex sensitivity, every 10 sen depreciation to our USD/MYR assumption of 4.40, FY25F EPS would increase by 6.7% and TP by 3.5%.

Valuations. Post earnings revision, our DCF-derived TP is raised to RM6.00 (from RM5.80), based on new WACC of 7.5% (from 7.8%) and unchanged 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 smelters, i.e., Japan Alumina Associate (40%), PT Bintan (25%), and the newly acquired PT Kalimantan Alumina Nusantara (KAN, 80%-stake) which supply 40% of its requirements currently which would be increased to 75% when KAN is ready in 2027, and (iii) green investment appeal as a clean energy source producer. OUTPERFORM rating maintained.

Risks to our call 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 - 2 Dec 2024