Malaysia Smelting Corp
Target Price: MYR4.20
Back To a Smoother Path
MSC’s net profit of MYR14.7m in 1QFY14 was slightly ahead of our estimate, thanks to improved smelting volume at its Butterworth smelter and the end of a prolonged loss from its Indonesian unit. Due to the fact that we have turned bullish on the tin market and that tin price is remaining firm at around USD23,000 a tonne, we raise MSC’s FV to MYR4.20 (from MYR3.09), based on 7x FY15 P/E. We upgrade to BUY.
Early signs of a smoother path ahead. Malaysia Smelting Corp (MSC) posted a net profit of MYR14.7m in 1QFY14, which was lower y-o-y/q-o-q. It represented 26.7% of our full-year estimates, which was slightly ahead of our projection. The average tin price of USD22,905 a tonne in 1QFY14 was lower q-o-q/y-o-y, and coupled with higher mining cost, these factors lowered the earnings of Rahman Hydraulic Tin SB‟s mining operations. However, a strong set of profits, with smelting volume in the Butterworth plant increasing by 18.7% q-o-q, helped keep its overall results decent. In addition, the winding up of PT Koba Tin helped minimise losses from this subsidiary.
Improved outlook. Tin production remains constrained in key tin-producing countries globally, save for China, where production growth should moderate over the next few years. On the demand side, global semiconductor sales and China‟s semiconductor production are rising due to the growing use of solders in electronics. Therefore, tin market fundamentals are likely to improve in the short term. That said, we are keeping our in-house tin price estimate at USD23,375/USD24,125 a tonne for 2014/15. Also, we make no changes to our MSC earnings estimates after it reported commendable 1QFY14 results.
Upgrade to BUY. The bullish tin market, MSC‟s better-than-expected results for two consecutive quarters and a firm tin price of around USD23,000 a tonne have prompted us to upgrade the stock to BUY from Neutral. In view of MSC being the only pure tin player listed on Bursa and its key earnings coming from its smelting business, we ascribe a valuation of 7x FY15 P/E, which is a lower range of P/E multiple for manufacturers‟ 7-10x, and our previous 1.0x FY15 P/BV, derived from its new FV of MYR4.20. We keep our valuations prudent, pending the liquidation of its associate stake in KM Resources (KMR)
Publish date: 08/05/14