Summary

• Malaysia Smelting Corporation Bhd’s (MSC) 1QFY23 core net profit fell 45.0% YoY  to RM35.4m, impacted by lower average tin price that negated the higher sales  quantity of refined tin. Revenue for the quarter declined 5.4% YoY to RM340.1m.

• The reported earnings accounted to 34.5% of our forecasted net profit of  RM102.6m and 41.6% of consensus forecasted net profit at RM85.1m. The  variance was mainly due to the better-than-expected margins arising from the costefficiencies from the operations of Pulau Indah plant.

• Segmentally, 1QFY23 tin smelting pre-tax profit slipped 10.4% YoY to RM33.2m.  Menwhile, the tin mining segment pre-tax profit sank 62.2% YoY to RM23.7m,  dragged by the decline in average tin price (-35.5% YoY) to an average of  RM116,100/MT during the quarter. Nevertheless, tin price rebounded as of late by  18.3% QoQ. We note that net gearing remains fairly stable at 0.2x, whilst the group  continue to operate in a net operating cash flow in 1QFY23.

• On the mining segment, MSC remains committed to gradually improve its mining  efficiency, targeting an output of 11.0 tonnes/day of tin ore by end 2023. The move  will be supported by additions of new machineries (delivery of new crusher and  sorter to Rahman Hydraulic Tin (RHT) mine and development of additional  processing plants at Sg. Lembing tin mine.

• Meanwhile, the smelting segment will undergo a transition to hit full capacity in the  Pulau Indah plant, while gradually decommission of the Butterworth smelting plant  tentatively by mid-2024. After raking in 19,384 actual refined tin productions in  FY22, we reckon that production may surpass 20,000 in FY23f.

• We gather that tin prices have consolidated and traded between USD22,500- 27,500/MT over the past 2 months. We believe that tin prices may continue to  hover at current range and to average c.USD25,000/MT for 2023 as demand will be  supported by the revolution of technology (electric vehicles) and rising adoption to  generate environmental friendly electricity (solar PV). Current surpluses of  inventory in LME at 1,580MT in mid-May 2023 (down from 3,145MT in mid-February 2023) is expected to remain supportive on current tin prices. Still, we remain  cautious that the recent weakness in economic data across the globe and elevated  inflationary risk may continue to cap further recovery.

Valuation & Recommendation

• Despite the stronger-than-expected reported numbers, we made no changes to our  earnings forecast in anticipation of weaker performance in quarters when the group  performs their major annual plant maintenance. Also, 3-months tin futures  averaging at USD26,180 YTD is close to our expectations of c.USD25,000. A  potential re-rating are in the cards, should tin prices hovers above our expectations  in subsequent months.

• We re-iterate our HOLD recommendation on MSC with an unchanged target price of  RM1.96. Our target price is based on an assigned target PER of 8.0x to its FY23f EPS of 24.5 sen. The assigned targeted PER is based on +1.0 SD of 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 - 22 May 2023