Aluminium Bahrain (Alba), one of the largest aluminium smelters in the world, is producing the second highest profit margins of any company in its industry globally, said a report.

And this is at a time when profit margins are being squeezed in the market as base metal prices have been under pressure.

According to a research note by Bahrain-based Securities and Investment Company (Sico), Alba has a profit margin of 18.4 per cent, beaten only by China Zhongwang Holdings, a relatively small player in the market.

Industry giants are facing far harder returns than the Bahrain operation.

Meanwhile, industry giants like Norsk Hydro in Norway, Alcoa in the US and Aluminum Corporation Of China are posting profit margins of 2.5 per cent, 1.2 per cent and 0.6 per cent respectively.

Yet, in spite of Alba's impressive returns, the company has seen its share price fall 30 per cent since September 21.

This has largely been on the back of a J P Morgan Cazenove downgrade on the stock on the back of its report that the company faced a rise in gas prices from 2012.

In its latest investment report on Alba, Sico has called on investors to take a reality check on this price increase concern.

"We believe that there are genuine concerns such as possible future gas price increases, possible aluminium price decline, and lack of share liquidity affecting investor sentiment," the report states.

"At the same time, we argue that the current panic reaction is not justified as it was along the expected lines though with an aggressive timeline.

"We attribute the sudden panic reaction to incorrect assumptions, conclusions, and views in a recent third-party note on Alba, rather than any serious fundamental factors.

"A peer group comparison based on data suggests that Alba's stock is currently trading at the lowest price earnings ratio multiples despite having one of the highest profitability," it added.

"Our analysis of Alba's cost structure suggest that natural gas costs account for around 10 to15 per cent of total cost of sales, while other materials like alumina and coke account for about 50-55 per cent of cost of sales," the report said.

"Accordingly, a 50 per cent increase in natural gas price will increase cost of sales by roughly 5 per cent to 7 per cent," he added.-TradeArabia News Service