Malaysia Smelting Corp (MSC) turned  around in 1QFY12, although its  RM5.7m core net profit represented only 6.5% of our full-year estimates.  We expect its smelting plant and mining operation in Malaysia to continue  to  generate promising return. However, PT Koba Tin  is still mired in losses  arising from the closure of expensive pits, which led to lower tin volume and higher unit costs. We see the losses easing on the commissioning of cheaper pits but the renewal of its mining right remains a hurdle. We see its  associate contribution improving after the resolution of shipment issues encountered in 1Q. Hence we maintain our BUY recommendation, with a FV of RM5.60.

Turning around in 1QFY12. MSC swung back to the black in 1QFY12 with a core profit of RM5.7m compared with a core loss of RM21m in the preceding quarter. Although the company's  bottomline only met  6.5% of our full-year estimates when annualised, we deem the results within our expectation, which already factors in a weaker start for 2012. Meanwhile,  its  revenue was largely in line owing to  higher sales  at its  Butterworth smelting plant.

Malaysia op chalks up good returns. On the back of strong volume, MSC's smelting plant in Butterworth in Penang posted another robust quarter, with a PBT of RM29.8m. As we indicated earlier,  the  smelting business has always been solid and stable unit, performance mainly reliant on  its plant utilization rate. Separately, its tin mining operation in Perak achieved moderately good results, posting a PBT of RM10.1m during the period. Meanwhile, Rahman Hydraulic Tin (RHT) managed to maintain its tin mining output at 535 tonnes q-o-q, which mitigated the impact of the lower average tin price of USD22,900 a tonne compared with our assumption of 24,000 for 2012. Moving forward, we expect the sound performance of its Malaysian operation to continue and remain the group's main income generator.

PT Koba Tin's losses narrow. MSC's Indonesia operation remained in the red with a loss of RM27.9m despite  a recovery in  tin price from  an  average of USD20,800 to USD22,900 a tonne q-o-q. The management's on-going efforts to turn around this unit have seen  the  progressive closure of expensive pits, which led to  lower tin volume in 1QFY12.  Given  PT Koba Tin's  legacy of high fixed cost of USD2.5m per month, the lower volume translated  into higher units, and consequently  a huge loss. With its turnaround plan well in progress plus the commissioning in stages of its cheaper costcum-higher quality pits, we expect  this subsidiary's  losses to ease in  the upcoming quarters. Nonetheless, the major hurdle remains in the ability of its new business partner to secure an extension of its mining rights, which are due to expire in March 2013.

Source: OSK188