A-Rank

Will It Benefit From Higher Aluminium Prices ?

Publish date: Wed, 23 Jul 2014, 11:09 AM 

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Yesterday, a local research house issued a bullish report on Press Metal Bhd. Bascially the storlyline is that Press Metal will benefit from higher Aluminium prices going forward.


Since A-Rank is also involved in upstream activities, will it also benefit from the strong aluminium prices ?

(Aluminium billets)




1. Aluminium Industry Value Chain


Upstream

(a) recycling of scraps to produce secondary ingots or billets; or

(b) bauxite mining and processing to produce primary ingots which are then processed into billets.


Midstream

(a) secondary ingots be transformed into end products through forging, die casting (into engine block, alloy wheels) or rolling (into sheets); or

(b) billets be transformed into end products through extrusion.


Downstream
all the end products (window frames, etc). In many cases, midstream players also involved in downstream activities.




2. Raw Materials (source : A-Rank 2004 IPO prospectus)

Major raw materials for producing billets are :-

(a) primary ingots;

(b) secondary ingots; and / or

(c) scraps

Malaysia is mostly importer of primary ingots. Local production is mostly secondary ingots.

Some of the larger primary ingots producers overseas are BHP, Alcoa, Alcan, Comalco and Norsk Hydro.

Some of the larger source of aluminium scraps for Malaysia are Philippines, US, Singapore and UK.




3. Domestic Billets Competitive Landscape (source : A-Rank 2004 IPO prospectus)


In general, competition based on :-

(a) quality of products and services;

(b) cost;

(c) prompt delivery; and

(d) production capacities and capabilities.


Factors that increase competition :-

(a) billets are commodities with low product differentiation; and

(b) competition from imported billets.


Operators producing aluminium billets are Press Metal Bhd and A-Rank Bhd (as at 2013, A-Rank is the largest aluminium billets producer in Malaysia).


Operators producing secondary aluminium ingots are

(a) Ye Chiu Metal Smelting Bhd;

(b) Hong Poh Metal Sdn Bhd;

(c) Amalgamated Aluminium& Alloys Sdn Bhd;

(d) Sumimetal Industries (Malaysia) Sdn Bhd; and

(e) others



4. Background Info on ARank


ARank is principally involved in upstream activities :-

(a) produces aluminium ingots from primary ingots and aluminium scraps; 

(b) converting primary ingots into billets through Tolling Services; and

(c) converting clean scraps into billets through recovery services.


According to FY2013 annual report, ARank exports 40% of its production.


Based on 120 mil shares and market price of RM0.65, market cap is RM78 mil.

Based on historical net profit of RM8.4 mil, PE multiple is 9.3 times.

Based on net assets of RM78 mil, cash of RM4.7 mil and loans of RM53 mil, net gearing is 0.62 times.

5. Historical Profitability

FYE July	2006	2007	2008	2009	2010	2011	2012	2013	2014E
Revenue	239	279	478	341	365	421	400	431	492
Net profit	6.8	7.4	8.9	-8.2	6.2	7.1	7.2	7.4	8.4
Net margin (%)	2.8	2.7	1.9	-2.4	1.7	1.7	1.8	1.7	1.7
EPS (Sen)	8.6	9.3	11.2	-10.3	7.8	8.9	6	6.2	7
DPS (sen)	3.5	3.5	0	0.02	0.03	0.03	3	2.3	n/a
payout ratio (%)	40.7	37.6	0.0	-0.2	0.4	0.3	50.0	37.1	n/a
Div yield (%)							6.7	5.4	n/a

Despite revenue doubling from RM239 mil in FY2006 to RM492 mil in FY2014, net profit more or less remained the same. 

During the same period, net margin declined from 2.8% to 1.7% (almost halved). This explained why the doubling of revenue failed to deliver increase in profit.  


There are two possible explanations for the above mentioned observations. Either :- 

(a) increase in revenue was due to rise in aluminium selling price. However, raw material cost has also gone up. As such, the amount of profit made by ARank remained the same (similar to Thong Guan's case in plastic sheet manufacturing); or

(b) volume sale increased thereby resulting in higher revenue. However, due to competition, the group was forced to lower profit margin.




6. Concluding Remarks



Unlike Press Metal Bhd which will enjoy bigger profit margin when global Aluminium price goes up, it is likely that ARank derives a fixed processing margin and is not so sensitive to Aluminium price fluctuation. 

One possible explanation is that A-Rank uses scraps and ingots as raw materials. The price of these material will also go up when Aluminium price is strong, thereby offsetting any potential gain from higher selling price.


(note : the above conclusion was arrived at based on casual observation of A-Rank's historical profitability and is preliminary in nature. Further study is required to confirm our understanding of the group's business model)