Saturday, April 23, 2011

Press Metal Is A Multi Bagger In The Making

The market is holding now, which gives all an opportunity to take money off the table or revise their bets. I have been following Press Metal since its dramatic run up back in December when it shot up from below RM2.00 to hit a high of RM2.80. Thus, it has given me ample time to assess the company. The timing is just about right as well, with the signing of the PPA and the fund raising exercise proposals last week. I am pretty confident that Press Metal could be the best performing stock this year (of course minus all the brilliant penny stocks below 20 sen la).

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Despite the terrible month of March when all hell broke loose, the stock has been collected assiduously by those who have done their homework since then with few sellers. This led me to conclude that its time to get in now, for a trade or better still to hold till more research and institutions discover the stock.

Safe to say, Press Metal 2 years ago was not the animal it is now. We get the biggest gains in a stock when there is a transformational change to their earnings platform, without sacrificing the the strong underlying business model they have built up. To appreciate where Press Metal is going, its good to look at things chronologically.

What is a potential multi bagger? A multi bagger is something you bought and saw returns in the multiples of 100% ... 100% is a one bagger, 200% is a two bagger and so on. These type of stocks do not come around very much. Imagine if you invested in Cypark at RM1.00 or SP Setia-WB at RM0.50, thats what I am talking about.

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Background: Press Metal was principally engaged in manufacturing and marketing of aluminium products, whilst the principal activities of the subsidiaries are manufacturing and fabrication of aluminium and stainless steel products, property development, recycling of waste, and investment holding. PMETAL is one of the largest aluminium extruders in Malaysia. The company has been awarded with the MS ISO 9002 certification and the ISO 14001 Environmental Management System Certification. In addition, it has also been awarded the Occupational, Health and Safety Management System (OHSAS 18001) from TUV Anlagentechnik Gmbh of Germany. The company''s operation facilities are located at Jalan Kapar, in Klang. Its facilities have the capacities to produce approximately 25,000m/t of extrusions per annum. Meanwhile, PMETAL''s billet casting division has a production capacity of approximately 70,000m/t per annum. The company distributes approximately 45% of its products to overseas markets, such as Singapore and Australia.

Press Metal has long established its position as a leading light within the ASEAN aluminium industry. In Malaysia, it is the largest aluminium extrusion producer, with a capacity of 50,000 tonnes. P Metal has also been an integrated aluminium producer, having flexed its wings in China by acquiring an upstream manufacturing plant some three years ago, in addition to the commencement of its own Chinese extrusion plant two years earlier. The smelter – located in Fushan (Guangdong province) – has an estimated capacity of 90,000 tonnes – and is used to support its downstream extrusion plant. One of the plant’s key advantages is self-sufficiency in the supply of power through its own 180MW-coal fired power plant located next to the smelter. Because of this, Press Metal is able to secure power at a 15% discount to Chinese grid prices.

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2007 - Nascent start into the upstream segment of the aluminium industry supply chain (~ three years). Press Metal took over the reins of an existing China smelter in 2007, and only commenced its own smelter in Sarawak last November 2010.

November 2009 - Having rolled out its maiden production in November 2009 (Phase 1A: 60,000 tonnes), Press Metal has put out an early marker over its rivals. The three other similar but larger proposals - i.e. Salco (Rio Tinto-CMS JV), Smelter Asia (GIIG-CHALCO JV) and 1MDB-SGCC JV – are still at the planning/negotiation stage, with no visible signs of them taking off anytime soon. Capacity at is Mukah smelter is poised to double to 120,000 tonnes with the commissioning of Phase 1B by end-4Q10.

Mid-2010 - The group’s value proposition is further enhanced by the recent emergence of Japan’s Sumitomo as a cornerstone investor in its Mukah plant (20% stake plus option for another 5%) – including Phase 2 of its proposed plant expansion worth around US$600mil. The emergence of Sumitomo is critical as its massive trading and distribution arm will extend Press Metal's presence in export markets. Apart from secured off-take, the deal offers a solid platform for P Metal to leverage on Sumitomo’s extensive network and broaden its market share. Sumitomo – Japan’s third largest trading company – is no stranger to the aluminium business. The group already has investments in aluminium smelters in Australia, Brazil and Indonesia. It also trades primary aluminium in Japan and other Asian markets.

October 2010 - P Metal is on the cusp of a structural transformation into an integrated aluminium giant within ASEAN, following the successful rollout of its smelter in Mukah, Sarawak. Press Metal has a roadmap to be a pure integrated aluminum player. Mukah plant will crucially have unencumbered access to cheap hydro power and the firstmover advantage as the country’s first smelter. Press Metal’s Mukah smelter is one of only two operating within ASEAN – which together with China – has a base consumption of 20 million tonnes (or circa half of global aluminium demand). Press Metal is in a strong position to secure an additional power of 510MW from Sarawak Energy Bhd at attractive rates against the spectre of an insufficient off-take in the state when Bakun comes on stream by end-1H11.

November 2010 - Phase 1B of the Mukah plant was commissioned – doubling its capacity to ~120,000 tonnes.

April 12, 2011 - Press Metal and three other foreign companies have signed separate power purchase agreement (PPA) term sheets with Sarawak Energy Bhd. Apart from Press Metal, the other three companies are Japan’s Tokuyama Corp, Singapore listed OM Materials and Asia Minerals Ltd. Sarawak Energy Chief Executive Officer Torstein Dale Sjotveit was quoted as saying that the four companies would require long-term supply of 1,300MW of power to their plants. Part of the electricity would be supplied via the 2,400MW Bakun Hydroelectricity dam – which is expected to commence production of its first 300MW in three months’ time. The latest development marks another significant step towards the crystallisation of a tariff structure for power off-take for Phase 2 of Press Metal’s US$600mil expansion plans.

April 15, 2011 - Press Metal announced that it has received approval from the Sarawak state planning authority to construct a new 240,000 tonne p.a. smelter in Samalaju Industrial Park, Bintulu. The land is to be developed over a period of five years – and could potentially triple Press Metal’s existing capacity to 360,000 tonnes.

April 18, 2011 - This is highly significant, as soon as they secured the PPA, Press Metal announced the following proposals:
(i) Renounceable rights issue of up to RM324mil nominal value Redeemable Convertible Secured Loan Stocks (RCSLS)
(ii) Up to 147mil free detachable warrants.
The basis for conversion is (1) RM2.20 nominal value RCSLS and (1) one warrant for every three (3) existing P Metal ordinary shares. The conversion price of the RCSLS has been fixed at RM2.20 – with a maturity period of 8 years. The latest proposal appears to be a strategic move by Press Metal to raise capital ahead of the targeted roll-out of Phase 2 of its expansion programme estimated to cost ~US$600mil (RM1.8bil). Alpha Milestone Sdn Bhd – a vehicle owned by the Koon family (major shareholders of P Metal) – has given their irrevocable undertaking to subscribe for the RCSLS/warrants not taken up by other shareholders. This is also highly significant.

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Risk Factor #1 - Delays in negotiations for the PPA. Any delays in ongoing negotiations between Press Metal and SEB on the supply of power from Bakun could be a potential drag factor. That factor have been drastically nullified by the signing of PPA last week, a fact which was seemingly lost on investors.

Risk Factor #2 - Balance sheet concerns At face value, Press Metal’s current balance sheet appears to be a little stretched at 169% as at 30 June 2010. This is mainly due to the hefty US$300mil spent on Phase 1 under its Mukah smelter. Its looked like the funding requirements were based on a debt/equity ratio of 60:40. However, its net gearing level to improve to 121% and 97% respectively by FY11F-FY12F – as deleveraging would come along with rising cash flows from its Mukah smelter. The full-commissioning of Phase 1 – where the US$300mil capex has already been spent upfront – is expected to kick in from FY11F onwards.Furthermore, we do not discount the possibility of Sumitomo coming in as a co-investor for Phase 2 of the new smelter worth an estimated US$600mil.

The RCSLS / free warrant proposals last week should put to rest the burden of fund raising for them to start Phase 2. Its an attractive scheme and I think the controlling shareholders would be mopping up shares in the coming days and weeks ahead of the ex-date. Hence I expect a smooth trajectory upwards to RM3.20 up to the ex-date for the share price.

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Earnings Visibility - With capex for the entire Phase 1 (US$300mil) already frontloaded, we can expect sequential earnings momentum to gain traction along with rapid expansion in margins. Total capacity should double to 120,000 tonnes in FY11 with the commissioning of Phase 1B by year-end. Earnings are at an inflexion point – with a robust FY10F-12F EPS CAGR of 64%. Core earnings surged six-fold to RM30mil just from a six-month contribution from Phase 1A. Earnings are at an inflexion point – with a robust FY10F-12F EPS CAGR of 64%. In 1HFY0, core earnings surged six-fold to RM30mil just from a six-month contribution from Phase 1A of the Mukah smelter.

Preferential Business Model - A key advantage of the Mukah smelter is its unencumbered access to cheap hydro power under the Sarawak Corridor for Renewable Energy (SCORE) – Sarawak’s economic growth corridor. Supply of power typically accounts for one-third of an aluminium smelter’s cost structure. Press Metal had in January 2009 signed a technical agreement with SEB for the supply of over 600MW of power over a 25-year period. For Phase 1 (180MW), Press Metal has managed to secure power from SEB at fairly attractive rates (~half of the cost of Chinese smelters). While the actual tariffs were not disclosed, earlier press reports indicated that the aluminium smelters were requesting for power rates of 13.6 sen/kHW (~US$4 cents/khW). The additional power would likely come from the Bakun hydroelectric dam.

Regional Player - What many investor might not know is how Press Metal’s rapid progression as an integrated aluminium giant within ASEAN will translate to its visibility for institutional investors. ASEAN together with China – has a base consumption of 20 million tonnes (or ~half of global aluminium demand). In Malaysia alone, aluminium consumption is circa 250,000 tonnes compared with Press Metal’s current capacity of 120,000 tonnes (360,000 tonnes assuming Phase 2 takes off). There is currently a void of aluminium smelters within ASEAN – where Press Metal is one of only two players.

Industry Outlook - Japanese trading giant Marubeni recently projected the global aluminium imbalance (global surplus) to fall by 23% to 1.3 million tonnes in 2011 from an estimated 1.7 million tonnes in 2010. Alcoa – America’s largest aluminium maker – was even more aggressive. It has revised 2010 global surplus estimates to ~1 million tonnes or an 18% decline from its previous estimates in 2Q10.

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Valuation - Valuations are exceedingly compelling – at FY10F-12F PEs of only 6x-14x against EPS CAGR of 64%). This represents a deep 40% discount to its larger integrated global commodity and pure aluminium peers. It is also trading at a Price/Book ratio of only 1.1x or a 30% discount against its peers. Press Metal deserves to trade at a scarcity premium - given its deepening progression as an integrated regional aluminium player with an additional capacity kicker coming from its Mukah smelter. More importantly, Press Metal is deeply under-appreciated and under-covered with just ONE research house coverage currently.

What You Didn't Know About Press Metal (look at your iPad or when you shop at IKEA) - Traditionally, the four main user-groups for Press Metal’s aluminium products can be broken down into:
(i) Rolling-mill sheet producers,
(ii) Cable producers;
(iii) Alloy wheel producers; and
(iv) Extrusion manufacturers.
To stay ahead of competition, P Metal has strived to add value to its conventional approach of supplying commodity-based extruded aluminium by offering custommade solutions. This includes the packaging and installation of aluminium products for end-clients. As a result, Press Metal has successfully established itself as one of only two suppliers of aluminium products for IKEA in China. It is also a supplier to the contract manufacturer for Apple’s I Pad (accounting for 20% of P Metal’s volume under a three-year contract).

Planning and Execution Are In The Details - Press Metal’s move upstream is not something new - given its investments in China. You might like to know that Aluminium Corp of China Ltd (CHALCO) – China’s leading aluminium producer - was roped in as the technical partner and turnkey contractor for the Mukah smelter, thereby truncating any start-up risk. The group has since redeployed over 100 staff from its Chinese plant to kickstart its plant in Mukah.

Results - For 2009 the company recorded revenue of RM1.18bn and net profits of RM26.7m, EPS 7.3 sen. As the Mukah operations started to kick in towards the last quarter of 2010, 2010 saw its revenue jumping to RM1.713bn and net profit scaling to RM81.4m, EPS was 18.9 sen. For 2011, revenue is slated to move up to RM2.1bn and net profit should hit RM128m, an EPS of 30 sen. The RM2.1bn figure ONLY takes into account the gradual contributions from Phase 1. Hence we are not needing to look very far out into the horizon to get comfort. Even IF THEY STOP EVERYTHING for Phase 2 now, the stock is very cheap.

Significant Covenants - I like this a lot. If you peruse their Annual Report, you will find that the company has "covenants with their borrowing policy". In connection with the significant term loan facilities of a subsidiary, Press Metal Sarawak Sdn. Bhd., the subsidiary and the Group have agreed on the following significant covenants with the lenders:
i) Project Debt-to-Equity ratio of the subsidiary to be maintained below the ratio of 70:30 at all times; equity is defined to include all subordinated debts and shareholders advances;
ii) Minimum Finance Service Cover Ratio (“FSCR”) of 1.25 times, where FSCR equal to the subsidiary’s net operating cash flows for the year plus opening cash balance divided by total facility payment due for the current year;
iii) no material change in the business plan of the subsidiary and Press Metal Berhad Group; and
iv) the Company shall maintain its shareholdings in the subsidiary more than or equivalent to 80% throughout the tenure of the facility.
I don't know about you, but these covenants speak volume about their committment for the long haul to create great value for the company over the medium to longer term.

So, this is no longer an airy-fairy concept stock. It has successfully rolled out Phase 1 and making good money at it. They now are quietly raising funds for the second phase and that can only enlarge the successful platform they have. They are not the types that have suddenly bought a mine (when they do not know anything about mining logistics and distribution) or they are waiting to sign a big contract from the government or they are waiting for a casino license in East Malaysia. Press Metal is a direct play on the debasement (gradual devaluation) of the US dollar and its associated reflationary pressure on base metal prices. Things are already in place and have been jump started, and profits are flowing.

The two biggest hurdles, balance sheet strains and PPA, have just been swiftly addressed. They are not going into something new, they have already proven that they can deliver Phase 1 well. Multi bagger stocks will go through a period of "sure or not, sure can or not". Many have lofty projections and hearsay ambitions. Press Metal has been relatively quiet, while steadfastly delivering. They are also not your fly by nights who suddenly got something out of the blue and promises so much. Press Metal just went upstream in a gradual big way. Knocking off target KPIs one by one with aplomb and the assuredness of a seasoned business group, how not to ride along. Its not fair to put a target price, as just the Phase 1 alone should see it solidly valued at RM3.40. If they replicate Phase 2, we are looking at RM6.00 in 12-18 months. I would recommend to buy and subscribe to the proposals for full value on the upside.

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NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). I may have a position in the counter already. The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

12 comments:

jeremy tan said...

Fitters would be another multi bagger in the making Dali : )

James said...

TIV (AMEX stock)would be another multi bagger.....

Eclectic Investor said...

Thanks for your recommendation on PMETAL.

Is this a very profitable business?

I checked the Return of Equity, which is around ~10%. Could you share with us about the ROE of aluminium producer? Is this a good ratio to determine the profitability of this business?

janitor said...

Is this Koon family related to Koon Yew Yin?

I agree with you that pmetal is a good play on metals and usd. LME Alu has moved from 1 to 1.24 last 6 months. Like silver with industrial use, better bet on alu than gold ;)

Salvatore_Dali said...

janitor,

no, they are not related

Tom Koshy E said...

Appreciate the highlight. But I beg to differ. With current global “excess” capacity and such “high” leverage, it is a real concern indeed unless one’s view is for the long term [whereby its outcome is up to anyone’s guess]. As mentioned, the global surplus, while “projected” to ease, it is still a “surplus”. Also, global aluminum players are increasingly facing threats to their profitability due to more competitive global cost structures of other producers (from lower cost countries-which have left some smelter plants in the US idle) as well as greater emphasis on environmental sustainability. Moreover, "aluminium" whose sources are not "scarce" [unlike gold, silver or platinum], I therefore have reservations about it being a "good" play on the debasement of US or any other currencies.

Can understand efforts made to drum up demand for its impending corporate fund raising exercise. However, in these times of uncertainty why not consider counters in other sectors/industries with more resilient earnings and stronger balance sheets. It is hence little surprise not much coverage given by research houses.

ronnie said...

The photo of Venice is absolutely breathtaking.

kine said...

Hope it will not turn into
multi-beggar

simon_alibaba said...

i am with you on this! i have not seen anything like this for a very long time in malaysia.

Ken Huei said...

Hi what is your advice? Now the details are out and today's Pmetal closed at 2.28.

Tristan said...

damn... i can't read your article with those girl's photo there -.-"

kitoengineering said...

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