Target Price: MYR2.09
1HFY13 Weighed Down By Slow Profit Recognition
Press Metal’s smelters were hit harder than expected by the June power outage in Sarawak, while further softening of aluminium prices since we initiated coverage has undermined our recommendation. However, the aluminium price is showing signs of bottoming out and we expect its smelter repairs to be expedited. It is still a BUY, albeit with a lower FV of MYR2.77, implying 30% discount to our fully-diluted conservative DCF.
• Blackout jolts Sarawak smelters. Sarawak’s worst ever power outage in late June abruptly halted Press Metal’s 80%-owned Mukah smelting operation. The damage is still being assessed by its insurance company’s adjuster while it is kept busy repairing the damaged pots. Although its Samalaju smelter escaped severe damage, our checks with industry experts suggest a temporary blip in plant efficiency, with a few pots possibly sustaining serious damage and requiring repairs or parts replacements.
• Aluminium price could be bottoming out. The aluminium price has weakened since early 2013. As the spot price had dropped below its multiple-year support level of USD1,800 a tonne in mid-June, this will put further strain on Press Metal’s financials in the near future. With the spot price averaging USD1,888 YTD vs our estimate of USD1,950 a tonne in 2013, we decide to lower our price projection for the year to USD1,900 but retain our aluminium price estimates for 2014 and thereafter.
• Reiterate BUY, FV lowered to MYR2.77. The double blow of power outage and drop in aluminium prices impacted Press Metal’s short-term earnings, for which we slash our FY13 core estimates by 42.8% but retain our FY14 numbers. Meanwhile, we believe most of the repair cost will be compensated by insurance. Also, its track record in fast-tracking the installation of greenfield smelter plants in Sarawak gives us hope that its repair and reconstruction efforts can be completed by end-2013. We urge investors to look beyond this temporary hiccup and buy into any share price weakness. Our FV is trimmed slightly to MYR2.77 as we lower our near-term estimates, but remains undemanding due to its 30% discount to our fully-diluted DCF. The FV also implies an undemanding 4.9x P/E and 0.9x P/BV, based on FY14 estimates.
Publish date: 29/08/13