KUALA LUMPUR: Southeast Asia’s largest aluminium smelter, Press Metal Aluminium Holdings Bhd, seeking to expand quickly in both the upstream and downstream segments, is on the prowl for companies to acquire or partner.

Over the past 16 months, it acquired alloy rod producer Leader Universal Aluminium Sdn Bhd, and more significantly, Japan Alumina Associates (Australia) Pty Ltd (JAA) — a purchase which, according to group chief executive officer and co-founder Tan Sri Paul Koon Poh Keong, “only covers about less than 20% of our [alumina] needs”. It is understood that JAA will only start supplying alumina to the company next year.

In any event, Press Metal is already engaged in talks with two or three other parties, including an Australian firm.

“There are a lot of areas of growth for us... [and] other areas to complement our operations, [and] areas to extend our margins. We are looking at all directions [upstream and downstream],” Koon said in an interview after the company’s recent annual general meeting.

Although acquisitions or joint ventures closer to its aluminium plant in Samalaju would be more ideal as logistics would be easier given that Press Metal imports supplies in huge volumes, he does not rule out prospects even as far as Africa.

“We have always been [and are] still looking for opportunities to expand. But, the situation is that it depends on the availability of the power and resources. We will continue to discuss and find opportunities where we can grow,” he said.

At the end of May, Press Metal inked a memorandum of understanding to negotiate the details of its subscription of approximately 25% equity interest in PT Bintan Alumina Indonesia (PT BAI). If successful, the deal would be its third in a short space of time.

PT BAI is principally involved in the production of non-ferrous metals and is currently in the midst of constructing a one million-tonne alumina refinery plant together with the necessary facilities in Galang Batang, with plans for a second phase.

Press Metal had been excited about the “synergistic benefits of this opportunity” as it would allow it “to secure a substantial portion of our long-term alumina needs.”

“We are still in expansion mode and have the intention to tap into the debt market to fund our growth. Our current net gearing is at a reasonable level. The capital injection for this asset is progressive in nature and therefore our gearing will continue to be manageable with our anticipated strong cashflow,” Koon said in a statement then.

The potential acquisition could possibly be funded via a sukuk or bond issuance to raise cash, he said, “but one thing for sure is that it’s not a rights issue.”

As at March 31, Press Metal’s gross gearing stood at 1.05 times, with total borrowings of RM3.56 billion, while deposits, cash and bank balances amounted to RM213.04 million.

Koon said Press Metal “still has room” to increase its gearing, noting its gross loan convenants are up to 1.5 times because it is in a capital-intensive industry. As such, Press Metal has a debt headroom of up to RM1.55 billion.

“But of course, at the same time we want to be mindful of how we handle it on balancing our balance sheet. Our industry is quite capital-intensive so we have to manage it ... make sure our balance sheet is still under control,” he said.

Expects better second half as raw material supply improves

Although unfavourable raw material and metal prices are still putting some pressure on Press Metal’s earnings, Koon expects the full resumption of operations at Brazil’s Hydro Alurnote refinery plant, which will add another three million tonnes to the global alumina supply by year end, to help ease raw material costs in the second half.

As disruptions in raw material supply taper off and prices ease to the current level of US$360 (RM1,497.60) to US$370 per tonne, against US$400 to US$420 per tonne earlier this year, he believes Press Metal’s performance in the second half of financial year 2019 (FY19) will be better than the first half.

In the first quarter (1Q) ended March, net profit tumbled nearly a fourth to RM115.11 million from RM150.48 million in the same period last year, even though revenue inched up 2.16% to RM2.17 billion, against RM2.13 billion in 1QFY18.

On the 2Q performance, he remarked, “We cannot discount the fact that, in 2Q, we will still face high raw material prices because we have to buy the alumina earlier.”

On the Sino-US trade tensions which have caused aluminium prices to be volatile, he observed that the weakening of the ringgit is “to some extent helping” given that 90% of Press Metal’s sales are exported.

To increase profit margins, Press Metal wants to focus more on higher-value products, which it targets to comprise at least 60% of its production mix by the end of the year, from about 50% at present.

Currently trading at about RM4.40, Press Metal is valued at some RM17.7 billion after rampant growth in earnings over the last few years.

But after reaching an all-time high of RM5.70 in January last year, its share price has hovered below the RM5-level since the beginning of the year.

There are six research houses covering the stock, according to Bloomberg, and all have a “neutral” call with target prices between RM3.60 and RM4.50.