Monday, September 16, 2013

Press Metal - Farewell To Loss-Making Unit

Press Metal -
Price Target:2.77
Last Price:2.10
Farewell To Loss-Making Unit

PRESS’ final asset  settlement  agreement  with  its  China  partners  ends its Hubei smelter losses, in exchange for a nominal income stream from its  extrusion plant.  Although  the MYR50m  one-off  loss is  slightly  more than  its  net  realisable  value,  it  is  likely  non-cash  in  nature  and  largely priced in. Thus, it has no impact to our MYR2.77 FV, which is at a 30% discount to our fully-diluted DCF valuation. Maintain BUY.

- Disposal  of  Hubei  Smelter  via  asset  swap.  PRESS’  90%-owned subsidiary  Hubei  Press  Metal  Huasheng  Aluminium  &  Electric  Co  Ltd (PMH)  has  entered  into  a  final  asset  settlement  agreement  with  Hubei Hashing  Aluminium  and  Electric  Co  Ltd  (HHAE)  and  Qianjiang  City Qiansheng State-Owned Enterprise (QCQ). PRESS will dispose its 90% stake in the 88,000 tonne per annum (tpa) smelting plant, together with its  180  megawatt  (MW)  coal-fired  power  plant  (collectively  the  “Hubei
smelter”),  to  HHAE  in  exchange  for  a  10%  stake  in  PMH.  PRESS  will then  completely  own  PMH’s remaining  asset,  a  30,000  tpa  aluminium extrusion plant located adjacent to the Hubei Smelter.

- Right  time  to  move  on.  The  Hubei  smelter  was  an  important  stepping stone  for  PRESS,  enabling  it  to  gain  access  to  electrolysis  technology and  the  necessary  experience  in  the  general  operation  of  a  smelting plant.  We  believe  its  track  record  in  running  the  smelter  was  the  main consideration  behind  the  Sarawak  Government’s  approval  for  the group’s Mukah plant, followed by the Samalaju smelter. Meanwhile, the high  power  tariff  scenario  in  China  is  likely  to  worsen.  As  the  Hubei smelter recorded a MYR12.8m loss in 1Q13, disposing it off will certainly end PRESS’ losses incurred from this upstream unit, while allowing it to enjoy stable, albeit minimal, earnings from the extrusion plant.

- Reiterate  BUY.  The  divestment  plan  was  made  known  in  4Q12,  when PRESS  reclassified  the  smelter  as  an  asset  for  sale.  We  removed  its outstanding  BV  (amounting  to  MYR41.7m)  from  our  valuation  since initiating coverage in June. Note that its MYR50m one-off disposal loss is slightly more than its net realisable value, although this has largely been priced in. Furthermore it is non-cash in nature. Hence, it does not impact our MYR2.77 FV (a 30% discount to our fully-diluted DCF valuation). The FV  also  implies  an  undemanding  4.9x  P/E  and  0.9x  P/BV,  based  on FY14 estimates. Maintain BUY.

Source: RHB

Publish date: 13/09/13

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