HKMU BUY TP 475
HK Metals Utama
Aluminium for the Nation
A rising manufacturing champion in downstream aluminium products
After more than two decades of trading aluminium as its primary business, HKMU (HK Metals Utama) ventured into aluminium extrusion manufacturing in 2017 and the company is set to go on an exponential factory expansion path from 6k tons capacity at end of 2017 to 22k tons per annum by end of 2019. We expect revenue to grow at 50% CAGR, gross profit to grow at 59% CAGR and net profit to grow at 92% CAGR in 2017-2020.
Expansion to aluminium extrusion is a fundamental sweet spot
We expect a bright outlook on HKMU’s aluminium extrusion business given:
1) *Strong aluminium extrusion demand for building materials as it substitutes expensive wood materials*,
2) *Strong demand from low-housing segment and new and renovated houses*,
3) *HKMU obtains incentives from being a strategic industry such as zero import tax for capex and raw material (ingot) supply priority from Inalum*,
4) *Strong competitive edge vs domestic competitors and imported products. HKMU’s aluminium extrusion products are on high demand given that its products are 18%-25% cheaper vs domestic competitors and imported products from China*. Unlike other Indonesia commodities that are struggling to compete against imported products, *HKMU’s aluminium extrusion products are able to charge competitive prices due to its cheaper shipping costs* thanks to its adjacent location to customers, relatively competitive raw material prices thanks to Indonesia’s large bauxite reserves (China lacks bauxite reserves, hence they import from Indonesia), *plant location that has significantly lower minimum wage vs most of its competitors (eg; Its Cirebon plant has minimum wage of Rp1.7m/month vs Bekasi’s Rp3.8m/month).*
Seasonality and quarterly earnings progression
According to company, *2H earnings are usually larger than 1H as housing construction is more active in 2H*. This makes sense as the bulk of wet season is almost always in 1Q. In addition, this year’s Eid Holiday season occurred in 2Q, which should skew the earnings even more to 2H.
Valuation: *BUY with target price IDR 475/sh*
Our target NAV is derived using 1-year forward net profit (using 2 months of 2018 net profit and 10 months of 2019 profit) mutiplied with target P/E of 10.4x, resulting target NAV of IDR1,531bn or target price of IDR475/sh. We use 1-year forward P/E target of 10.4x, which is 10% discount to global peers’ valuation to take into account smaller scale and liquidity. The global peers that we obtain as a benchmark have 70% aluminium portion to their revenue on average, similar with HKMU’s revenue breakdown. Our target price implies 9.4x PE 2019F.
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