Steady earnings seen for Press Metal in 1Q24

PETALING JAYA: Hong Leong Investment Bank Research (HLIB Research) expects Press Metal Aluminium Holdings Bhd to post steady earnings for the first quarter of its financial year 2024 (1Q24) although rising costs may drag on margins.

“We expect Press Metal’s 1Q24 core earnings to come in at the range of RM330mil-RM350mil, representing 21% to 22% of our FY24 forecasts, barring unforeseen swings in cost structures.

“This is estimated from the average London Metal Exchange (LME) aluminium spot prices of US$2,203 per tonne versus US$2,193 in 4Q23, and US$2,400 in 1Q23,” the research firm said in a report yesterday.

It added that the price of alumina, the raw material for aluminium, staged a strong start in 1Q24, rising 8% quarter-on-quarter (q-o-q) and this may drag on Press Metal’s smelting margins.

“But it could be mitigated by a slightly better contribution from its associate PT Bintan, via higher alumina average selling prices,” HLIB Research said.

The rise in alumina prices was due to supply disruptions in Guinea where there was a major oil depot explosion and the closure of Alcoa Corp’s 2.2 million-tonne alumina refinery in Western Australia.

HLIB Research noted that the Major Japan Port (MJP) spot premium, which reflects the premiums charged over the LME cash contracts for standard aluminium ingots imported into Japan, is catching up with rising logistic costs.

“Recall that freight costs have gone up by about US$80 since the emergence of the Red Sea attacks but the MJP spot premium was still lagging in 1Q24.

“We believe the MJP premium likely caught up with the hike in freight costs from 2Q24 as S&P Global reported that the MJP premium for the first shipment of 2Q24 had jumped 60% q-o-q to US$145, higher than the whole of 2023.”

However, the research house said the underlying demand fundamentals have not improved drastically since the start of the year as the rise in the MJP premium was merely compensating for the logistic-costs pressure.

The research house said, while there are signs China’s economy is recovering, it may still be early to ascertain if the recovery is durable as this could be temporarily induced by China’s stimulus policies.

“China’s official manufacturing purchasing managers index returned to expansion in March with a one-year high of 50.8, halting five consecutive months of contraction. This has stirred the LME aluminium price to over US$2,400 per tonne.”

HLIB Research maintained a “hold” call on Press Metal with a higher target price of RM4.65 (from RM4.38), based on a price-earnings multiple of 22.5 times.

The research firm said it liked the stock due to its favourable cost structure as the bulk of its energy costs are locked in via a 15 to 25-year power purchase agreement with Sarawak Energy Bhd.

The group also has a solid track record and favourable environmental, social and governance profile as its smelters are hydro-powered.

“Nonetheless, we view that its risk-reward profile is reasonably balanced as the aluminium market remains unexciting at this juncture,” HLIB Research added.