Press Metal disposes of loss-making unit

Press Metal disposes of loss-making unit
Business & Markets 2013
Written by RHB Research
Tuesday, 17 September 2013 09:24

PRESS METAL BHD []
(Sept 13, RM2.10)
Maintain buy with an unchanged target price of RM2.77: Press Metal’s 90% owned subsidiary Hubei Press Metal Huasheng Aluminium & Electric Co Ltd (PMH) has entered into a final asset settlement agreement with Hubei Hashing Aluminium and Electric Co Ltd (HHAE) and Qianjiang City Qiansheng State-Owned Enterprise (QCQ).

Press Metal will dispose of its 90% stake in the 88,000 tonne per annum (tpa) smelting plant, together with its 180mw coal-fired power plant (the Hubei smelter), to HHAE in exchange for a 10% stake in PMH. Press Metal will then completely own PMH’s remaining asset, a 30,000 tpa aluminium extrusion plant located adjacent to the Hubei smelter.

The Hubei smelter was an important stepping stone for Press Metal, having enabled it to gain access to electrolysis TECHNOLOGY [] and the necessary experience in the general operations of a smelting plant. We believe its track record in running the smelter was the main consideration behind the Sarawak government’s approval for the group’s Mukah plant, followed by the Samalaju smelter.

The high power tariff scenario in China, meanwhile, is likely to worsen. As the Hubei smelter recorded a RM12.8 million loss in the first quarter of 2013 (1Q13), disposing of it will certainly end Press Metal’s losses incurred from this upstream unit, while allowing it to enjoy stable, albeit minimal, earnings from the extrusion plant.

The divestment plan was made known in 4Q12, when Press Metal reclassified the smelter as an asset for sale. We removed its outstanding book value, amounting to RM41.7 million from our valuation since initiating coverage in June. Note that its RM50 million one-off disposal loss is slightly more than its net realisable value, although this has largely been priced in.

Furthermore, it is non-cash in nature, hence it does not impact our RM2.77 fair value (a 30% discount to our fully-diluted discounted cashflow valuation). The fair value also implies an undemanding 4.9 times price-earnings ratio and 0.9 times price-to-book value, based on 2014 financial year estimates. Maintain “buy”. — RHB Research, Sept 13


This article first appeared in The Edge Financial Daily, on September 17, 2013.