Summary

• Malaysia Smelting Corporation Bhd’s (MSC) wholly owned subsidiary, Rahman Hydraulic Tin Sdn Bhd (RHT) has proposed to acquire the entire equity stake in Asas Baiduri Sdn Bhd (ABSB). The proposed acquisition will see RHT issuing 272,250 new ordinary shares and of that, 250,000 new ordinary shares in RHT, representing 20.0% stake in the enlarged share capital of RHT will be sold to ABSB. Following the completion of the corporate exercise, RHT will cease to be wholly owned subsidiary of MSC and instead will be 80.0% owned by the latter with the remainder to be held by ABSB.

• The proposed acquisition of ABSB will enable RHT to (i) construct additional tailings ponds or storage and waste rock storage on ABSB’s land, (ii) expand existing mining pit in Hulu Perak further eastward so that RHT will be able to mine additional tin resources within its own land and (iii) mine the tin resources within ABSB’s land. The proposed acquisition is expected to be completed by 3Q22.

• We gather that ABSB is principally engaged in the business of mining and related activities. The company has been granted a mining lease over a parcel of land (which is adjacent to RHT land) measuring approximately 568.4-ha for a lease period of 21 years, commencing from 8th June 2012 until 7th June 2033.

• Upon completion of the proposed acquisition, RHT is expected to expand its current mine pit eastward to ABSB Land, which in turn is expected to allow RHT to mine additional resources with inferred tin resources of 2,690 tonnes. The move will beef up RHT’s contribution of 3,428 tonnes of gross tin ores in FY21 (representing more than 10.0% of the raw material) to the tin smelting activities.

• Although tin prices have softened in recent months, we reckon that tin prices to remain above the pre-pandemic levels on the back of (i) robust demand in industrial usage such as electric vehicles (EV), solar panels and electronic devices, (ii) supply chain disruptions due to port congestions and (iii) persistently high inflationary pressure in commodity prices due to unresolved Russia-Ukraine tension. We re affirmed our expectations that tin prices to average around USD30,000/MT over the foreseeable future.

Valuation & Recommendation

• Although there would be a dilution effect from the divestment of 20.0% stake in RHT, we expect a net positive earnings impact from boost of the tin mining business segment. Therefore, we raised our earnings forecast by 5.0-18.0% to RM 174.9m, RM203.0m and RM208.3m for FY22f-FY24f.

• We retained our BUY recommendation on MSC, but with a lower unchanged target price of RM4.83 (from RM5.36) as we assigned a lower PER of 10.0x (from 13.0x) to its revised FY23f EPS of 48.3 sen. The downward revision in target PER is to reflect the softening tin prices which we cut our assumption to USD30,000/MT (from USD35,000MT) in both FY23f and FY24f.

• We believe that the proposed acquisition will be earnings accretive over the long run, in view of the elevated tin prices and will solidify MSC position as one of the largest tin producers in the world. We also continue to favor MSC that position as the world’s largest custom toll smelter.

• Risks to our recommendation include the volatility in the tin prices which affect average selling prices and margins. Foreign exchange fluctuation risk; given that the tin prices are traded in USD and MSC purchased most of their raw material from other miners.

Source: Mplus Research - 7 Jun 2022