MY ER LB Aluminium Berhad – Apr 2017

Stock Code 9326.KL
Investment Rating BUY (Initiate Coverage)
Current  Price RM 0.725
Target Price RM 0.880
Estimated Return +18.3%
Market Cap RM 180.0m (as of 29/04/17)

Company Profile:

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.

Investment Considerations:

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

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