Press Metal -
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.
Publish date: 13/09/13