Press Metal expected to see gradual recovery in 4Q

Press Metal Bhd (Press Metal) is expected to start seeing signs of recovery from the fourth quarter of the financial year 2013 (4QFY13) onwards as its Samalaju smelter is expected to stabilise from October while part of its pots in Mukah may be back in operation at the later part of the year, coupled with the expected recovery of the aluminium price.

According to RHB Research Institute Sdn Bhd (RHB Research) analyst Ng Sem Guan in a note yesterday, while Press Metal’s 4Q prospects are expected to be brighter, its near term growth could potentially be impacted by two major risks which include prolonged repairs and weak aluminium price.

To recap, Press Metal smelters were hit harder than expected by the June power outage in Sarawak.

Ng noted while the group had reduced the negative impact by relying on its Samalaju smelter which escaped severe damage, it has been suggested that the several of the Samalaju smelter pots were possibly sustaining serious damages and require repairs or parts replacements.

Although Samalaju’s production may have decreased, the smelter may still be using more power as it normally takes two to three months to stabilise a smelter, Ng quoted the research firm’s sources.

“Aside from that, we also suspect the commissioning of its remaining pots may be a little behind schedule, as part of the company’s focus has been on stabilising the existing pots in Samalaju,” he added.

Nevertheless, Ng opined for the time being, the six-month halt in 80 per cent-owned Press Metal Sarawak Sdn Bhd (Press Metal Sarawak) operation and that Press Metal Bintulu Sdn Bhd (Press Metal Bintulu) is expected to return to normal operations by October 2013.

Additionally, the analyst noted that Press Metal has a track record in fast-tracking the installation of greenfield smelter plants in Sarawak which could ensure that its repair and reconstruction efforts can be completed by end-2013.

Meanwhile, on that weakening aluminium prices, Ng explained, “The aluminium smelting business is undeniably vulnerable to the risk of commodity price fluctuations. Despite the fact that Press Metal enjoys a cost curve that is lower than its peers’ due to its competitive electricity costs, logistics advantage, lower overheads and others, the weak aluminium price spells bad news for the company.

“Aluminium price had slid further to an average of US$1,815 per tonne during the month and averaged at just US$1,770 a tonne in July.

“Year-to-date, the aluminium spot price averaged at US$1,888 a tonne, compared to our assumption of US$1,950 a tonne for 2013,” Ng said.

He further explained the commodity’s price dropped further to US$1,815 in June, bringing the average price for the quarter to US$1,836 – which is lower than RHB Research’s original expectation by about US$30 a tonne.

However, he highlighted that the demand for aluminium continues to remain healthy, growing at a compounded annual growth rate of 5.5 per cent in 2006 to 2012 to reach 47.7 million tonnes in 2012.

“We also assume that the aluminium price would gradually recover to above US$1,900 a tonne for the rest of 2013 and average at US$2,100 a tonne in 2014, on the back of strong demand growth even while many high-cost smelters had announced plant closures,” Ng opined, however, he noted that the research firm has no assurance that the aluminium prices will not drop further.

“We urge investors to look beyond this temporary hiccup and buy into any share price weakness. Our fair value is trimmed slightly to RM2.77 (per share) as we lower our near-term estimates, but remains undemanding due to its 30 per cent discount to our fully-diluted discounted cash flow,” Ng concluded.