The current LME aluminium price of c.USD2,600 has surpassed our expected trading range of USD2,300-2,500, following the reopening of China’s borders. That said, the International Monetary Fund (IMF) recently revised its 2023 global growth projection to 2.9% from 2.7% (in Oct 2022). The odds remain in Press Metal’s favour, with ongoing catalysts including being a beneficiary of a structural demand shift, and the favourable alumina-to-aluminium cost ratio.
Odds are turning in its favour. LME aluminium prices recently rebounded to USD2,600, averaging at USD2,500/MT in January vs USD2,400 in Dec 2022, as the relaxation of China’s COVID-19 restrictions fuel optimism of a potential demand recovery.
That said, the official Manufacturing Purchasing Manager Index (PMI) rose to a 4-month high of 50.1 in January, up from 47 in Dec 2022, according to China’s National Bureau of Statistic (NBS). It is expected Press Metal’s timely shift to hedge 35% of its forward sales in 2023 (from 60% in 2022), to accord it with ample upside from the strengthening of aluminium prices.
Still favourable cost structure. The average alumina price edged up slightly to USD343/MT in January, from USD320/MT in 4Q22, as production was dragged by a seasonally weaker production month in conjunction with the Lunar New Year and intermittent power curtailment in selected regions of China.
Nevertheless, the average alumina-to-aluminium cost ratio stood at 13.8% in January, largely unchanged from 4Q22. Carbon anode prices eased 7% averaging at CNY6,540 in January, vs CNY7,040 in 4Q22.
4Q22 preview and near-term outlook. The research house expects 4Q22 topline YoY growth to moderate to 1% in view of the softer aluminium prices. However, 4Q22 core earnings YoY growth should rise 16% as a result of easing alumina price. It also expects the current supply tightness caused by the continued Russia-Ukraine war, the matured stage of the monetary cycle, and the reopening of China’s economy to continue lending support to aluminium prices.
Earnings revision. RHB Research has lowered its forecast earnings for financial year (2022F) estimates by 10% after factoring in a lower premium assumption. It has lifted forecast earnings for financial year 2023-24 (2023F-2024F) estimates by 6% and 9% in view of the rebound in aluminium prices coupled with a favourable cost ratio. The research house’s 2023 aluminium price forecast is now USD2,600 from USD2,400. Every USD50 appreciation to aluminium prices
could increase PMAH’s earnings by 4%.
Valuation. The research house has reiterated BUY on Press Metal with a new target price (TP) of MYR6.18 from MYR5.66; which translates to 19% upside. The research house’s TP implies 25x 2023F P/E against its historical mean of 26x. It imputes a 9% ESG premium to its intrinsic value, based on its in-house ESG methodology.
Key downside risks include plunge in aluminium prices, weakening of USD against MYR, escalating raw material costs.
