Credit Flash

For Accredited Investors (AI) and/or Professional Investors (PI) ONLY. Friday, 27 October 2017

Press Metal Aluminium Holdings Berhad

Analyst: Neel Gopalakrishnan (neelg@dbs.com)

Press Metal Aluminium Holdings Berhad (Press Metal) is a Malaysia-based aluminium company with a smelting capacity of 760,000 tonnes per annum
(tpa) and an extrusion capacity of 160,000 tpa. The company was incorporated in 1986 and was listed on the Kuala Lumpur Stock Exchange in 1993.
The company attained meaningful size of operations only in the last three to four years, after it expanded its capacity from 120,000 tpa to 760,000 tpa.
As of 26 October 2017, it had a market capitalisation of around MYR15b (~USD3.5b). In 2010, Sumitomo Corporation acquired a 20% stake in the
companys smelter operations and today has a strategic partnership with the company. Press Metal is owned and run by the founding Koon family,
which holds a 48% stake in the company. Tan Sri Koon Poh Keong is the Chief Executive Officer of the company. Senior management of the company
owns a 12% stake while 40% is held by public shareholders.

Bond details
Bond ISIN Rating Amount Outstanding Recommendation Risk Rating*
(Moodys/S&P/Fitch)
PMALMK 4.8% 10/2022 XS1704655635 Ba3/BB-/NR USD400m BUY P4

* as of 27 October 2017
Summary and recommendation

Moodys: Ba3/Stable; S&P: BB-/Positive.

Malaysia-based aluminium smelting company, owned by the Koon family. Sumitomo of Japan has a 20% stake in the operating companies.
Cost-efficient operations (cost of production in first quartile globally) and improving financial profile.
Concentration of assets in a single location is the key business risk.

At its current indicative offer yield (of around 4.4% at the time of writing), the Press Metal bond trades in line with comparable BB category bonds in
Asia. While absolute yield is relatively low for a low BB-rated credit, investors could look at the bond for coupon clipping, especially given its expected
stable fundamentals. Moreover, the bond offers some rarity value (as sub-investment grade issuances from Malaysia are infrequent). Hence, the bond
should be technically well-supported in the secondary market.

Key credit highlights

Small scale but efficient operations

Press Metal Aluminium Holdings Berhad (Press Metal) operates two smelters (120,000 tpa and 640,000 tpa capacities) in Sarawak, Malaysia. It also
operates two extrusion plants, one in Sarawak and the other in Foshan, China, with aggregate 160,000 tpa extrusion capacity. Although small by
global standards (e.g. China Hongqiao has over 6 mtpa, Vedanta over 2 mtpa), Press Metal is the largest smelter in Southeast Asia and Oceania
(Australia and New Zealand).
Operations are not fully integrated and the company sources alumina from several suppliers globally and produces aluminium. Hence, its main
operations involve smelting alumina to aluminium through an electrolysis process. Its products include aluminium ingots and value-added products
such as alloy ingots, billets, and wire rods. Capacity utilisation of the smelters was close to 100% in 2016 and 1H17.
In 1H17, Press Metal reported a cash cost of production of USD1,397/tonne (2016: USD1,216), which places it in the first quartile on the cost curve
globally. The companys cost advantages come from low labour cost (minimum wage in Sarawak is around USD200/month), low power cost (see
below) and logistic advantages (smelter located at around 200km from port facilitating import of alumina and export of aluminium products). We
believe the companys cost of production has also benefitted from the depreciation of the MYR around 50% of the companys cost base is in MYR.
While this impact could be transient, it is fair to say that the companys cost of production is still competitive globally.
Aluminium production is energy intensive, especially at the electrolysis stage (most smelters require around 14,000 to 15,000 units (kWh) of electricity
per tonne of aluminium). Press Metal benefits from a stable hydropower electricity supply, through long-term contracts (until 2034 to 2040) with
Sarawak Energy Berhad. According to the company, the power supply is at fixed prices annually with an escalation built in. While the company has
not disclosed details of the tariffs, we estimate a tariff of around 2 US cents a unit (based on the total electricity consumption and electricity cost
reported), which we view to be a significant cost advantage.

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For Accredited Investors (AI) and/or Professional Investors (PI) ONLY. Credit Flash 27 October 2017
Strategic relationship with Sumitomo helps distribution
Sumitomo Corporation (Baa1/A-) has a 20% stake in Press Metals smelter operations (that is, in the companies operating the smelters, and not at
the listed company level see corporate structure at end of report). Sumitomo is also a key customer for Press Metal, accounting for 28% of total
sales and 39% of aluminium sales in 2016. While optically this results in customer concentration, we view this as a beneficial relationship as
Sumitomo, as a trader, only provides access to its network of customers and the end-user profile is more diversified.
In addition, Gerald Metal, an alumina supplier to Press Metal, is also a customer and accounted for around 15% of its sales in 2016.
The company believes these relationships (of over 14 years with Sumitomo and seven years with Gerald Metal) provide demand stability. As aluminium
is a globally-traded commodity, we believe offtake risk is not significant even if there were to be any change in the event existing arrangements with
Sumitomo and Gerald Metal change.
Geographically, the companys key markets are around Southeast Asia, which accounted for over 40% of 2015 sales. Korea is the other main market
accounting for 23% of 2015 sales. In 2016, the company benefitted from a free trade agreement with Turkey, which became its largest market
representing 30% of sales. The company expects Southeast Asia and Turkey to remain key markets in the near term.

Adequate financial profile

Press Metal has reported largely stable profitability with earnings before interest, tax, depreciation, and amortisation (EBITDA) margins in the 16%-
19% range over the past four years. The companys operating profit margins are not strictly dependent on the level of aluminium prices, given that
alumina and aluminium prices are generally correlated (over the past year, alumina prices have been in a range of 15-20% of aluminium prices). The
company also has a policy of hedging up to 65% of its aluminium production for up to two years, which it believes gives it some predictability in
terms of sales/cash flow. For the remaining 35%, the linkage between alumina and aluminium prices implies no significant deviation in margins. The
company also expects future profit margins to be supported by a better product mix. Value-added products are expected to account for 50% of
production in 2018, up from 30% in 2016.
The companys leverage has declined lately following the completion of the companys expansion plan. It spent about USD600m in capital expenditure
between 2014 and 2016 to expand its capacity, with USD430m in 2015 alone. Although debt levels remain largely unchanged over the past couple
of years, leverage has improved supported by growth in earnings from the increased production volumes. Current debt is around USD760m, with
a gross debt/EBITDA of around 2.5x, which we view to be fairly low. Unless the company comes up with new growth projects, we believe the
companys leverage and credit profile should improve going forward. EBITDA/interest is also fairly comfortable at around 7x in 1H17.
According to the company, its production capacity is currently constrained by the amount of electricity available and, hence, there is no further
expansion plan. Hence, its strategy would be to increase value-added products, where current plans require a capex of only around USD20m. S&P
expects total capex including maintenance capex to be no more than USD60m per year. We believe actual capex will be lower than this.
The company is also contemplating a joint venture to manufacture anodes in China but this is also expected to be a small investment (around
USD10m). The company said that investment in an alumina refinery is currently not planned as it would be quite a large capital outlay. Hence, in the
absence of major investment plans, we believe the company could step up shareholder returns. Bond covenants, however, largely cap dividend
payouts at 50% of net income.
Press Metal has adequate liquidity. As of 30 June 2017, the company had around USD320m of debt due between June 2017 and December 2019.
A large part of this debt would be refinanced through the bond issue. Hence, there will not be any major debt maturity post the bond issue, until
the bond maturity. After the bond issue, the company would have around USD400m of bonds and around USD350m of bank loans.

Asset concentration risk

Almost all of Press Metals assets are located in Sarawak, exposing the company to high operating risk. In June 2013, a state-wide power outage in
Sarawak resulted in a significant disruption in operations. It took nearly five months for operations to normalise and the company reported a 50%
decline in production. However, according to the company, Sarawaks Energys hydropower project itself was on a ramping up phase at that time.
A disruption of this magnitude is not likely again, in its view.
Another incident the company has faced was a fire in one of its smelters in 2015 resulting in a shutdown for around two months.
The company has adequate insurance for its assets including insurance to cover loss of business. However, in the case of an incident, there would be
uncertainties that could lead to significant volatility in bond prices. That said we view operational risk at Press Metal to be lower than that we have
witnessed recently in some other Asian credits (e.g. disruption at an Indonesian geothermal power asset, where potential uncertainty is higher).

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 For Accredited Investors (AI) and/or Professional Investors (PI) ONLY. Credit Flash 27 October 2017

Corporate Structure

Source: Press Metal Aluminium Holdings

Key Financials and Ratios

M Y R million 2014 2015 2016 1H17

Revenues 4,091 4,321 6,650 4,101
EBITDA 807 683 1,307 667
Interest expense 154 98 160 93
Net income 215 132 484 298
Total debt 2,350 3,415 3,382 3,277
Cash 355 305 378 378
Shareholders' equity 2,181 2,368 2,716 2,599
Operating cash flow 412 967 936 236
Capital expenditure 274 1,815 459 2
Free cash flow 138 -848 477 234
Dividends paid 97 117 155 162
Rat ios
EBITDA margin 19.7% 15.8% 19.7% 16.3%
EBITDA/interest 5.3 7.0 8.2 7.2
Total debt / EBITDA 2.9 5.0 2.6 2.5
Net debt / EBITDA 2.5 4.6 2.3 2.2
Total debt / capital 52% 59% 55% 56%
1 USD = 4.29 MYR as of 30 J une 2017
Source: Press Metal Aluminium Holdings, DBS

Worst Case Scenario: Investors take on credit risk of the issuer when investing in these products. Market prices can drop significantly if any credit event occurs.
Note: Please approach your relationship managers (RMs) if you have any doubt on product suitability and risk rating.

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and should not be disseminated or distributed to third parties without our prior written consent. Please refer to the relevant
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For Accredited Investors (AI) and/or Professional Investors (PI) ONLY. Credit Flash 27 October 2017

DBS Group Research Ratings

BUY the bond is expected to outperform its peer group over the next 6-12 months
HOLD the bond is expected to perform in line with its peer group over the next 6-12 months
SELL the bond is expected to underperform its peer group over the next 6-12 months

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For Accredited Investors (AI) and/or Professional Investors (PI) ONLY. Credit Flash 27 October 2017

Company-Specific / Regulatory Disclosures

1. DBS Bank Ltd., their subsidiaries and/or other affiliates do not have a proprietary position in the equity securities of Press Metal
Aluminium Holdings Berhad as of 29 September 2017.

2. DBS Bank Ltd. performs or is expected to perform market making activities in fixed income securities of the issuer(s) or company(ies)
mentioned in this Research Report.

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