Quarterly Result (Malaysia) – LB Aluminium Berhad (Q1 FY18)

Last Traded Price RM 0.775
Target Price RM 0.82 (from RM 0.94)
Est. Return 5.3%
Rating Neutral (Maintain)
Price to Earnings* 11.7x
Price to Book* 0.65x

 1) Bullish Aluminium price would hurt the bottom-line.

Rise in aluminium price without material appreciation in MYR would impact the operating costs. We expect the operating margins to squeeze further in Q2 FY18 based on the premise that the aluminium price surged up from USD 1,900 to close to USD 2,100 (since Aug 2017). To recap, our base case assumes aluminium price to be around USD 2,000. Despite this, we still uphold our bearish view on the aluminium price thus leaving our assumptions unchanged (read page 3 for more information).

2) Income generation is in line with our estimation, but cash flow disappoints on the back of working capital swings.

Robust revenue growth underpinned by stronger overseas demand and current quarter’s profit generation was dragged down by lower operating income (dropped by 30% YoY). Better Q1 FY17 operating income was driven by the reversal of receivables impairment which is considered ‘inorganic’. We are not too concerned about the negative cash flow as it is due in large part to payment to trade payables.

3) Revised our capex assumption upward.

When we revisit the FY17’s annual report, the management indicates that FY18’s capex is likely to be RM 28.1mil (44% higher than our initial estimate) and we have amended it accordingly in our DCF model.

4) Maintain Neutral rating with a lower TP of RM 0.82.

After we have factored in the change in capital structure and capex assumption, our DCF model indicates a lower Target Price of RM 0.82, decreased from RM 0.94 on the back of poorer cash flow generation in FY18. Change of capital structure has resulted in lower discount rate (from 8.3% to 7.95%). However, discount rate would be increased if the leverage as measured by Debt / EBITDA sustain at above 4x due to greater financial risk.
The company is currently trading at a P/E of close to 12x while its share price is at 35% discount to its net assets. Overall, LB Aluminium may report a much lower operating profit for next quarter. The risk of our rating is aluminium price sustains at above USD 2,000. We acknowledge that majority bullish views on Aluminium price would continue to fuel the upward momentum of the commodity price resulting in poorer operating profit and more expensive to hedge.

Please click here for full investment research report.

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.
We have obtained the latest risk free rate and equity risk premium but have not updated

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