AmWatch - Press Metal : Significant balance sheet improvement; strong earnings growth BUY, 16 Apr 2014

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Press Metal : Significant balance sheet improvement; strong earnings growth                                    BUY

We maintain BUY on Press Metal Bhd and raise our fair value to RM4.50/share (from RM3.07/share previously), based on a 12x PE of FY14F core FD EPS of 37.5sen. Press Metal is in the early stage of an earnings up-cycle. We have raised our FY14F core earnings estimates by 55%, FY15F by 20% and FY16F by 15%.

Its strong investability is premised on:- (i) improved balance sheet, with net gearing expected to reduce to 0.9x by year-end (from 1.9x at end-FY13); (ii) upturn in aluminium prices and premiums given an expected shortfall in global supply; and (iii) capacity boost following the production ramp-up of its two plants.

Press Metal’s balance sheet is being bolstered by recent initiatives, i.e. the exit of its loss-making Chinese smelter business and a sale of 20% stake of its Samalaju plant to Sumitomo. Provisions have also been made for the shutdown of its Mukah plant last year. As capex has been frontloaded, net gearing will fall to 0.9x this year, and further to 0.5x in FY15F, and 0.4x in FY16F. Net debt/EBITDA will also improve from 6.2x last year, to 1.0x by end-FY16F.

Secondly, Press Metal will benefit from a global upturn in aluminium prices and premium. For the first time in ten years, there will be global supply shortfall due to capacity cuts and rising demand. At the same time, premiums are at an all-time high due to the lack of physical deliveries. We have raised our price assumptions to USD1,800/metric tonne (MT) (vs. USD1,700/MT previously) with an average blended premium of USD250/MT. Thirdly, both its Mukah (120,000 MT) and Samalaju (320,000 MT) plants are already operating close to 100%.  Press Metal is currently trading at an attractive PE of 8x. Despite the recent share price run-up, there is deep valuation given its significant balance sheet improvement.

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