China's energy crisis dents Press Metal’s margin, says Affin Hwang Capital

Affin Hwang Capital informed that China's energy crisis, which is projected to last until 2022, would result in some profit margin erosion in Press Metal Aluminium Holdings Bhd's earnings.

According to Affin Hwang Capital, raw material supply, including alumina, carbon anode, magnesium, and silicon metal, is likely to be under pressure in the next quarters, as China struggles with its energy shortages, causing manufacturing interruptions.

Based on the report, the most energy-intensive businesses, such as cement, steel, and aluminium manufacturing, are anticipated to be the worst impacted by the power shortage.

“Nevertheless, we believe the rise in raw material prices will be partially passed through to customers, mitigating the impact, while the resulting global supply shortage would translate to elevated aluminium prices for a longer period of time. Despite the potential squeeze in margin, we continue to like Press Metal for its strong earnings growth outlook and scarcity premium as it is the only aluminium smelter to be listed in Malaysia and the largest aluminium smelter in Southeast Asia," said Affin Hwang Capital.

Press Metal's Samalaju Phase 3 facility, according to Affin Hwang, is running at 96 percent capacity and is on target to reach full capacity by the end of the year.

The overall capacity of the Samalaju Phase 3 facility will increase to 1.08 million tonnes per year once fully operational, up 42 percent from the present 760,000 tonnes per year.

Affin Hwang has adjusted Press Metal's earnings forecasts for 2021-2023 by 9.5 percent, -5.9 percent, and -4.3 percent, respectively.

This was after accounting for increased aluminium prices due to a worldwide aluminium shortage, higher raw material costs, and a reduced volume mix of value-added products due to a possible disruption in magnesium and silicon metal supplies.

Affin Hwang's "Buy" call on Press Metal has been maintained, albeit with a reduced target price of RM8.20, down from RM8.70 earlier.