,Kenanga Research believes that the upcycle of aluminium prices would persist as supply still trails the robust demand from the reopening of economies.(Aluminium ingots stored at Port Klang - Filepic)
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PETALING JAYA: Prices of buildings materials such as aluminium are enjoying a “supercycle” or a lengthy period of rising prices.
An impetus driving this is the massive stimulus spending by governments as they pump prime their economies, among others, through the rollout of infrastructure projects following pandemic lockdowns.
One of the major beneficiaries is Press Metal Aluminium Holdings Bhd.
Shares of the company, which manufactures extruded aluminum and other aluminum products, continued its uptrend and has rallied another 20% year-to-date after an 80% jump in 2020, largely driven by the aluminium price rally.
There are a few things going for Press Metal.
New capacity from phase three of its Samalaju smelting plant, coupled with logistic cost savings and favourable raw material costs are expected to fuel its earnings over the next two years.
This optimism over its prospects has research houses such as Kenanga Research to upgrade the buildings materials sector to “overweight” from “neutral” and setting a new target price of RM13 for Press Metal. The stock closed six sen up to RM10.10 yesterday.
Kenanga believes that the upcycle of aluminium prices would persist as supply still trails the robust demand from the reopening of economies.
On the other hand, the pace of the rise in raw material was not as much as alumina prices only grew 4% quarter-on-quarter (q-o-q) to US$306 (RM1,263) per tonne on average in the first quarter of calendar year 2021 as opposed to the 9% jump in aluminium prices.
According to Kenanga, the cost of alumina made up 14.6% of aluminium prices in Q1CY21 from 15.4% in the preceding quarter – both below the normalised range of 16%-17% it used to be.
Given the favourable raw material cost, Press Metal is likely to see further margin improvements, said the research firm.
Meanwhile, the upstream acquisition of two supply chain refineries will ensure raw material supply certainty while the acquisition of PT Bintan Alumina Indonesia has also enabled transportation cost savings for the group.
As for flat steel player, United U-Li Corp Bhd, Kenanga sees earnings remaining resilient as most of the smaller competitors had diminished during the pandemic, allowing the company to regain market share and pricing power.
It believed that ULICorp should see profitability revert back to pre-competition years given the favourable environment. Coupled with its current net cash position of RM52mil as of Q4’20, Kenanga foresees potential dividends of 11.5 sen in FY21E – translating to a lucrative yield of 12% based on 95 sen closing price at the time of its report.