Malaysia Smelting Corp -
Target Price: MYR2.35
More Bumps Ahead?
Smelt’s MYR1.1m 2QFY13 core net loss, mainly due to losses at PT Koba Tin, and lower tin prices, was a letdown. Hence, we are cutting our FY13/FY14 estimates by 43.4%/22.8%. Be aware of a potential impairment on its KM Resources (KMR) investment. Thus, we set aside MYR0.50 per share from our 1.0x FY14F book-based valuation and derive a new FV of MYR2.35. We also downgrade the stock to SELL.
- Worst than expected. Falling average tin prices, which plunged 13% in 2QFY13 to USD20,946, gave early indications of possible lower profits for Smelt. Nonetheless, the MYR1.1m core loss was worst than originally estimated. The key reason is the MYR12.9m loss in its PT Koba Tin unit. It undertook a MYR7.2m write-down in its tin inventory’s net releasable value on top of its regular overhead costs despite a stoppage in operations. The lower tin prices and production volumes also resulted in less contribution from its Malaysian smelting and tin mining units.
- Impairment after impairment? Smelt has prepared for the worst for PT Koba Tin by making a MYR112.5m impairment and provision in FY12 on uncertainties over a Contract of Works (CoW) renewal with the Indonesian Government. We understand the Government will take extra two months to evaluate the CoW extension application. This quarter also saw the group made a MYR3.7m impairment on its Asian Mineral Resources (Not Rated, ASC CN) and Alphamin Resources Corporation (Not Rated, AFM CN) investments, following a prolonged decline in their share prices, which we deem as exceptional. We remain watchful too on Smelt’s investment in KMR, whose limited proven mine reserves, coupled with lower gold and copper prices, suggests a potential impairment risk.
- Downgrade to SELL. The poor result prompted us to slash FY13/FY14 estimates by 43.4%/22.8%. Among others, we have reduced Butterworth Smelting’s production volumes, lowered contributions from Smelt’s associates and cut 2013 tin price estimates by USD500 to USD21,500 per tonne. Aside from lower earnings, we also decided to set aside MYR0.50 per share from our 1.0x FY14 P/BV valuation – factoring in the potential impairment in KMR – that lowers our FV to MYR2.35 (from MYR3.21). We downgrade the stock to SELL.
Publish date: 07/08/13