Press Metal’s low-cost structure and scarcity premium for aluminium to underpin its stock price

Press Metal Aluminium Holding Bhd’s low-cost structure, good track record under the present management, and scarcity premium for aluminium are likely to support its share price. The company’s operating cash flows also look healthy as reflected in the financial results of Q1 CY2020 March 31, said Affin Hwang Investment Bank Bhd.

The group generated a positive operating CF of RM348 million in Q1 compared to RM206 million previously.

Affin Hwang said in a report today, "Although the demand for its value-added products was negatively affected by the slowdown in global aluminium demand, the group managed to mitigate the impact by shifting to produce more primary ingots."

The investment bank also noted that Press Metal assured of having enough operating CF to sustain its operations. Press Metal’s smelting operations were neither disrupted during the Movement Control Order as its operation in Sarawak continued as usual.

However, its extrusion plant in Klang and aluminium wires and rods plants in Peninsular Malaysia were shut for two months since March 8, while its extrusion plant was closed for less than a month.

"Despite the temporary closures of its extrusion plants, we gather that the impact to its earnings is minimal as the extrusion operation contributes less than 5.0 per cent to the group's earnings," Affin Hwang said.

It also said Press Metal secured financing for the ongoing expansions through the RM1 billion sukuk last year and also from some financial institutions.

"So far, PMetal had spent close to RM1.7 billion for the Phase 3 smelter in Samalaju and PT BAI in Indonesia, while the remaining capex of RM1.3 billion will be incurred mostly this year," added Affin Hwang, while sharing that the management of Press Metals estimated development capital expenditures of RM 1 billion and RM 300 million for 2020-21.

Press Metal upgraded its call to "Hold" from a "Sell" with higher target price of RM4.73 per share.

Meanwhile, Affin Hwang warns global aluminium demand to likely remain weak for the rest of the year, before it slowly recovers in 2021, depending on the speed of economic recovery.