Summary

• Malaysia Smelting Corporation Bhd’s (MSC) 2QFY22 net profit soared 13.5x YoY to RM39.5m, mainly driven by the higher average tin prices and higher tin production quality. Revenue for the quarter increased 25.0% YoY to RM408.8m.

• For 1HFY22, cumulative net profit surged 314.3% YoY to RM103.8m. Revenue for the period rose 27.4% YoY to RM768.3m. The reported earnings came at 59.2% of our forecasted net profit of RM175.5m and 62.3% of consensus forecasted net profit at RM166.7m. The figures are deemed to be in line in anticipation of tapering in average tin prices would attribute to weaker performance in coming quarters.

• Segment wise, the tin smelting pre-tax loss narrowed to RM8.2m, from pre-tax loss of RM17.2m recorded in 2QFY21 that was affected by the implementation of MCO 3.0. Meanwhile, the tin mining segment pre-tax profit jumped 112.5% YoY to RM47.6m, on higher average tin prices.

• In 2Q22, Pulau Indah smelting plant is operating at 75.0% capacity (unchanged from end-1Q22), which is on target for full capacity by end-2022. Upon full production, their Butterworth plant operations will be re-located to Pulau Indah and the move is expected to generate cost saving of close to 30.0% per annum.

• Despite the softer tin prices, MSC remains committed to gradually improve their daily mining output level through further automation process and deploying new machineries to ramp up production efficiency. On their ESG efforts, the upgrading of mini hydro plant which is currently generating 0.75-5.00MW will lead to zero carbon energy to the existing mine.

• We note that average tin prices in 2Q22 fell to USD36,828.08/MT (-15.2% QoQ) and has further deteriorated in recent months. We reckon that concerns over the global recession will continue to dampen the demand outlook for industrial metals, which we have now revised our tin price assumption lower to USD30,000 and USD25,000 (from USD35,000 and USD30,000) for 2022f and 2023f respectively.

• Amid the weaker average tin prices, key players in China have slowed down their productions and have now brought forward their maintenance plans. Hence, we expect current surpluses of inventory in LME warehouses to keep in check at current levels, which recorded close to 4,000/MT in early August 2022.

Valuation & Recommendation

• Although the reported earnings make up to 59.2% of our forecast, we trimmed our core net profit by 6.0-13.0% to RM163.6m, RM175.2m and RM180.2m for FY22f, FY23f and FY24f respectively after taking into account of the quicker and larger-than-expected pullback in tin prices.

• Nevertheless, we maintained BUY on MSC with a lower target price of RM2.93. Our target price is based on lower assigned target PER of 7.0x (from 10.0x) to its revised FY23f EPS of 41.7 sen. The downward revision in PER is in line with the generally weaker PER of industrial materials companies listed on Bursa Malaysia amid their softer outlook and recent share prices correction.

• 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 - 5 Aug 2022