|Investment Rating||BUY (Initiate Coverage)
|Current Price||RM 0.725
|Target Price||RM 0.880
|Market Cap||RM 180.0m (as of 29/04/17)|
LB Aluminium is one of the leading suppliers of aluminium extrusion and has a presence in ASEAN. Over 20% of the revenue is from export to countries such as Europe and North America.
1) China’s Ban is expected to drive the aluminium price though far from certainty at the moment due to the systematic importance.
The decision to the shutdown of 30% of aluminium smelting and half of alumina refining have resulted in the price of Aluminium skyrocket by close to 12% (YTD 2017). The general market has a stronger reason to not bet against the Chinese government. However, the situation could be softer than expected as it could potentially jeopardise the Chinese economy that results in higher bankruptcy. Nevertheless, our base case assumes the Aluminium price to be USD 2,000 per tonnes (Citigroup and ANZ predicting the price to trend in the range of USD 1,650 in 2017).
2) Strong Aluminium price is a major risk in near-term.
Having said that, the stronger Aluminium price will drive raw material costs higher thus resulting in lower profit margins. We expect the revenue can be sustained at the current level through higher selling price. Relationship with A-Rank, thanks to the single largest shareholder (Leow Chong Howa), may result in better pricing and uninterrupted supply.
3) Capital Intensive business with unpredictable spending pattern.
Capex is one of the biggest constraints especially its historical pattern fluctuates widely (refer to the appendix). Our base case assumptions assume capex spending spreads evenly across the periods (on average, project capex/sales equals to 4.6%). In absolute terms, it is almost in line with the historical average. The key risk to our projection is a sudden elevation in capex.
4) Growth supported by global demand for extruded products.
The highest growth of extruded products is likely coming from transportation (3% to 4%) and construction (2% to 3%), according to Hydro Analysis. The consumption is partly driven by the population growth. As for rolled products, the largest segments are packaging and transport which should see a steady growth.
5) Initiate LB Aluminium with a BUY.
We have utilised DCF as there is a limited relevant peer to provide a meaningful relative valuation. Our DCF has factored in a potential decline in margins attributable to stronger Aluminium price. However, earnings visibility is supported by the on-going demand for extruded products from various industries. Our DCF-derived Target Price of RM 0.86 (+18.3% upside).
|Financial Summary||FY 14||FY 15||FY 16||LTM
|Price to Earnings||6.07x||9.32x||9.67x||7.98x|
|Price to Net Tangible Assets||0.52x||0.46x||0.54x||0.61x|
|Price to FCF||3.96x||neg.||3.74x||n.a|
|EV / EBITDA||4.01x||6.17x||5.86x||6.07x|
|Net Profit Margin (in %)||5.30%||2.90%||3.53%||4.98%|
|Free Cash Flow RM’m||33.9||-48.5||40.7||n.a|
Please click here for full investment research report.
Investment Research Disclaimer:
The opinions and views presented in this website and equity research reports are based on facts (which Yield Mountain believes to be reliable and correct) and subjective judgements. It is only for information purpose and does not consider the unique circumstances of the readers. It is not intended as an offer to buy or sell the securities discussed. All the information is based upon publicly available information. Whilst every effort is made to ensure the opinions and views are accurate, we are not auditors and do not independently verified every source used. Past performance is not necessarily an indicative of future performance and the contributors at Yield Mountain will not accept for any losses arising from information contained in this report. The contributors may form forward-looking views (projections and estimations) of the companies which may not necessarily be true. Market conditions and unforeseeable events may lead to materially different outcomes. Yield Mountain strongly recommends the readers to seek independent advice from their brokers to understand the investment risks arising from taking investment actions based on the Yield Mountain’s equity research.