Summary

• Malaysia Smelting Corporation Bhd’s (MSC) 4QFY22 core net profit fell 59.6% YoY to RM25.9m, mainly dragged by lower average tin price that negated the higher sales quantity of refined tin. Revenue for the quarter, however, gained 53.4% YoY to RM391.2m. A single tier interim dividend of 7.0 sen per share was proposed, subject to shareholders approval at the forthcoming annual general meeting.

• FY22 core net profit at RM98.4m amounted to 112.1% of our forecasted net profit of RM87.8m and 112.3% of consensus forecasted net profit at RM87.6m. The variance was mainly due to the better-than-expected sales volume and lower depreciation charges.

• Segmentally, 4QFY22 tin smelting pre-tax profit rose 88.3% YoY to RM25.6m. However, the tin mining segment pre-tax profit sank 77.3% YoY to RM13.1m, dragged by (i) the decline in average 3-month futures tin prices (-8.5% YoY) to an average of USD21,412/MT during the quarter, (ii) longer-than-expected furnace outage at Pulau Indah and (iii) higher operational costs from labour, energy and fuel. We note that net gearing was pared down to 0.2x in FY22 vs 0.6x in FY21.

• For now, MSC remains committed to gradually improving their daily mining output level. However, we remain cautious that the rising natural gas price may continue to impact bottomline margins. Hence, we expect net margins to stay around mid single digit over the foreseeable future.

• We gather that the extended normalisation of tin prices appears to have found stability in early-November 2022 before staging a rebound, on the back the better outlook from the easing of Covid-19 restrictions in China. We opined that tin prices may hover around USD25,000/MT as the potentially softer demand from the consumer electronics sector may be well cushioned by the global energy transition following the rising green technologies adoptions (solar panels and electric vehicle components such as batteries).

• Moving forward, we expect current surpluses of inventory in LME at 3,145MT in mid-February 2023 (down from 4,430MT in early November 2022) to remain fairly stable. We note that Indonesia’s plans on tin export banning (which has no tentative timeline for the implementation) may encourage investors to set up productions facilities and develop its industries, which may drive prices higher, going forward.

Valuation & Recommendation

• We tweaked our net profit forecast higher by 5-8% to RM102.7m, RM114.4m and RM117.6m for FY23f-FY25f, after taking adjusting to the pace of recovery in tin prices and lower depreciation chargers.

• Following the earnings revision, we maintain HOLD recommendation on MSC with a higher target price of RM1.96. Our target price is based on an assigned target PER of 8.0x to its revised FY23f EPS of 24.5 sen. The assigned targeted PER is based on the historical 1-year mean average.

• 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 - 20 Feb 2023