Summary

• Broadly in-line. Malaysia Smelting Corporation Bhd’s (MSC) recorded 1QFY24 core net profit of RM18.3m (+66% QoQ, -48% YoY). Although the core PATMI amounting to 19% and 17% of ours and consensus estimates of RM95.4m and RM110.5m, respectively, we deem it is broadly within expectation as earnings could be back loaded following the recent rally in tin prices.

• QoQ/YTD. In 1Q24, revenue dropped 10% to RM362.5m due to lower sales quantity of refined tin and lower smelting revenue, but the core PATMI jumped 66% to RM18.3m as higher average tin price of RM124.9k/MT (4Q23: RM116k/MT) was observed during the quarter. Also, the smelting arm recorded a net profit of RM9.9m due to favourable tin price movements and forex gains.

• YoY. Revenue saw an increase of 7% as compared to 1Q23 due to higher average tin price. However, core PATMI plunged -48% mainly due to the absence of sale of refined tin derived from the processed tin intermediates and sale of by-products, and lower smelting revenue. Meanwhile, the tin mining segment recorded softer profit due to lower tin production quantity.

• Outlook. MSC will be relocating entire smelting operations from Butterworth (will be decommissioned by 2025) to Pulau Indah and the group anticipates cost savings of up to 30% due to higher efficiency from lower operational and manpower costs, and its energy saving initiatives. Meanwhile, the subsided tin ore supply disruption at Wa State, Myanmar, coupled with the Indonesian Government lifting restrictions on their tin export may bode well for the group.

• Tin price outlook. We believe the LME 3-month Forward Tin price have turned more positive, trading above USD33k/MT at this moment after hovering sideways during Aug-Dec 2023. We expect the tin prices to have limited downside risk with the support from surging demand in EV and E&E industries as well as the rising adoption of solar energy on the path towards a greener environment.

Valuation & Recommendation

• Forecast unchanged. As the core PATMI came in broadly in-line with our expectation, we keep our forecast unchanged.

• Upgrade to HOLD, with higher TP of RM3.40. We upgrade to HOLD (from Sell) and revised the TP higher to RM3.40 (from RM1.82). Our TP is based on an assigned P/E of 15.0x (revised from 8.0x) pegged to its FY24f EPS of 22.7 sen. The 15x P/E is justified at a 30% discount to its 5Y average P/E 21.3x as we are in a commodity upcycle phase with rising investments in the EV, Solar and E&E and the recent China recovery. The ongoing supply constraints of tin ore in Indonesia and Myanmar and the highly correlated MSC price with tin price despite earnings volatility may drive the P/E elevated going forward.

• Risks to our recommendation include the (i) volatility in the tin prices - which affect ASP and margins and (ii) forex 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 - 27 May 2024