Malaysia Smelting Corporation Bhd (Trading Buy)

• MSC – a global integrated tin mining and smelting group – is a beneficiary of rising tin prices. Global tin prices have bounced up 34% from the March low to USD17,900 per tonne currently (up 6% YTD).
• The stock has rebounded from a trough of RM0.44 on 19 March to close at RM0.72 yesterday. This is still below its share price level of RM0.88 prior to the March market sell-down.
• Following yesterday’s 5% price increase, the stock has penetrated the upper trendline of a pennant formation. This bullish continuation pattern suggests that MSC’s share price could resume its uptrend to test our resistance thresholds of RM0.82 (R1) and RM0.89 (R2), which represents upside potentials of 14% and 24%, respectively.
• We have set our stop loss level at RM0.65 (-10% downside risk).
• Fundamentally speaking, the Group’s bottomline is fairly sensitive to tin price movements. Over the last three years, MSC – whose core operation covers both upstream and downstream activities of the tin value chain – recorded its strongest annual earnings (at RM34m) in FY18 when average tin price stayed high at ~USD20,000 per tonne during the period.
• Its 1QFY20 result slipped into a net loss of RM13.2m (versus 1QFY19’s net profit of RM8.6m), dragged down by lower tin prices (down 21% YoY to USD16,656/tonne during the quarter), inventory write-down (of RM14m) and Covid-19-related business disruptions. With tin prices on the recovery, earnings are expected to pick up in the subsequent quarters.
• Assuming MSC will post net earnings of RM25.2m in FY20 (being the average of the highest and the lowest yearly profit levels since FY17), the stock is currently trading at a forward PER of 11.4x (which is around its historical mean valuation).

Muda Holdings Bhd (Trading Buy)

• MUDA is involved in the production of industrial paper (from recycled fibre) and paper packaging products (such as paper boxes, paper boards and paper-based food packaging). The Group also operates more than 100 school bookshops and online bookstore in Singapore.
• The stock (which gained 5% on strong volume to close at RM1.72 yesterday) appears technically interesting after breaking out from a bullish symmetrical triangle pattern.
• On the back of the upward momentum, its share price will likely climb towards our resistance levels of RM1.95 (R1) (13% upside potential) and RM2.18 (R2) (27% upside potential).
• Our stop loss level is set at RM1.53 (representing a 11% downside risk).
• Fundamentally speaking, the Group made a steady net profit of RM17.5m (+14% YoY) in 1QFY20 in spite of the Covid-19- related business disruptions and lower selling prices encountered during the quarter.
• Based on an annualised net profit of RM70m for the full year, MUDA is currently trading at forward PER of 7.5x, which is at 0.5SD below its historical mean.

Source: Kenanga Research - 29 Jul 2020