Press Metal: Key Proxy Of Sustainable Aluminium Production Poised to Gain from Its Proactive Hedging Practice and Tight Inventory Level
In its coverage on Metal sector, RHB Research has named Press Metal as its Top Pick of the sector based on its capacity driven earnings upcycle (3-year forward earnings CAGR of 26% from 2021). Press Metal is a key proxy of low carbon-producing aluminium smelters and its stands out in the global decarbonisation effort in limiting coal-based smelters. On top of that with current tight industry supply, Press Metal’s proactive hedging policy should provide some ASP protection amid softness in London Metal Exchange (LME) prices.
Tight inventory level. LME inventory recorded 332,175 tonnes as at end-September from 939,200 tonnes at the beginning of the year – the low inventory level is likely attributed to the potential slowing down in demand (ie zero-COVID policy in China that has negatively impacted demand for aluminium) and production cut from the European region. Taking cue from August production numbers, global aluminium production recorded its fastest growth in 2022, at 3.8%. Nonetheless, it is believed the current tight supply coincides with the supply cut from Eastern Europe (due to high input cost), while a potential ban on Russia’s metals would continue to pose a threat towards the current tight inventory level, and in turn, be positive for aluminium prices.
LME aluminium prices. LME aluminium prices plunged to a low of USD2,155/tonne from its peak of USD3,878/tonne in March, representing a 44% correction. It is expected the near term softness of LME aluminium prices to be capped by the current industry tight supply despite expectations that the persistent hawkish tone by the US Federal Reserve will weigh in on LME prices in the near term.
ESG update. In terms of the environmental aspect, PMAH undertook a business process lifecycle management under its environmental assessment. In 2021, its greenhouse gas (GHG) emission intensity (measure by CO2 emission/tonne of aluminium produced) was 2.57 tonnes, below the global industry average of 11.5 tonnes, according to Aluminium Insider. The research house upgrades its “S” score given the group’s commendable management of its occupational health and safety (resulting in two consecutive years of zero fatality) apart from its continuous effort in supporting work-life balance of its employees. And the research house makes no changes to its “G” score. All in, our ESG score is raised to 3.4 from 3.3.
Earnings revision and valuation. However, the research house lowers its spot LME aluminium price assumption for 2022 and 2023 to USD2,450 and USD2,300 from USD2,500 and USD2,550, while it expects the impact to be cushioned by the strengthening of USD/MYR. Every 1% appreciation in the USD should potentially lift its FY23F earnings by 2%.
RHB Research has fine-tuned its 2022-2023 USD/MYR assumptions to 4.6 and 4.625. Their DCF-based target price (TP) of MYR5.73 incorporates a 9% ESG premium. It reiterate “BUY“, with new TP of MYR5.73 (from previous TP MYR6.58), which translates 37% upside and c.2% FY23F yield.
Key risks are plunge in aluminium prices and a sharp weakening of the USD may hurt profitability; any interruption in power supply to its smelting plant may damage machinery and disrupt operations; COVID-19’s prolonged incidence could
undermine global economic growth and, consequently, primary aluminium demand.