Quarterly Result (Malaysia) – LB Aluminium Berhad (Q4 FY17)

Last Traded Price RM 0.83
Target Price RM 0.94 (from RM 0.83)
Est. Return 13.1%
Rating Neutral (From BUY)
Price to Earnings* 11.5x
Price to Book* 0.7x

 

1) Earnings are largely in line with our FY17 forecast, but negative free cash flow disappoints.

LB Aluminium slightly exceeded our FY17 earnings estimation though disappoints with weak cash flow generation. We expect the free cash flow margin would be 7.5%, but adverse working capital swings and slightly higher capex have resulted in a negative margin of 0.8%. This is due to our overly-optimistic on working capital which turns out to be the bottleneck to the cash flow conversions.

The aggressive selling today was due to weaker reported profit was driven mainly by the recognition of taxation. The management explained that under-provision of deferred taxation. Indeed, the historical effective tax rate was 11% whereas FY 16 was 4%. Our effective tax rate estimation for all period is 10% which is slightly lower.

2) More optimistic on the near-term outlook underpinned by the favourable exchange rate.

Previously we opined that the Aluminium price might be bearish, but given the uncertainties involved, we see no positive catalyst. Aluminium price remained volatile and sustained at around USD 1,900 per tonne. Divergence in investment banks’ opinions on the future direction provide little guidance. Hence we stick to our previous views. Having said that, we see recent weakness in USD a potential indication of the better upcoming quarterly result though that is based on the premises that no material change in revenue generation.

3) Proposed 2sen dividend.

Based on the current price of RM 0.83, proposed dividend of 2sen translates into a dividend yield of 2.41%.

4) Downgrade the rating from BUY to NEUTRAL

We are of the view that the panic selling is driven by lower net income and provides good opportunity to buy on weakness. We have revised our target price from RM 0.83 to RM 0.94 after revising our valuation assumptions. We downgrade the rating from BUY to NEUTRAL as the suggested upside potential is circa 13%. The key risk to our buy call is discussed in the valuation section.

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Disclaimer: The views above are opinions based on facts and subjective judgements. Yield Mountain (including the contributors) does not take any responsibility (be in monetary or non-monetary) for any actions rely on the information discussed.
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