MSC, the world’s largest toll smelter, has experienced gyrations in its share price of late given the easing of tin prices following the strong rally in 1QFY22. Having said that, tin prices are likely to stay elevated given the persistent supply-demand imbalance. And, this should benefit MSC in the near to medium term. MSC is likely to see another record earnings year in FY22. Still a Trading Buy with a FV of RM5.55.

Share price off all-time-high. After we issued our Trading Buy report on Malaysia Smelting Corporation Bhd (MSC) in late-Feb, its share price had since hit all-time-high at RM5.43 on 21 April, thanks largely to the commodity rally on supply-demand imbalance which was further fuelled by the Russia-Ukraine war. However, share price has fallen to RM3.69 yesterday as tin prices has tapered to USD34,000/MT level currently from above USD40,000/MT last month, as prices are softening as earlier fears of supply disruptions are easing on the back of rising inventories.

Earnings soared 2-fold from last year… On Wednesday, MSC reported 1QFY22 net profit which jumped 191% to RM64.3m from RM22.1m in 1QFY21 as revenue leapt 30% to RM359.5m from RM275.9m previously. The performance is in line with our expectation, making up 36% of our full-year projection of RM176.4m as we expect earnings to taper in 2HFY22 as tin price eases. The strong 1QFY22 results was largely thanks to the said solid tin prices with average spot price surging 80% over the same period to USD42,909/MT in 1QFY22 from USD23,708/MT in 1QFY21. QoQ, despite revenue rising 40%, 1QFY22 net profit was flattish due to lower mining production volume by c.10% owing to production disruption caused by COVID-19 infection among its workers. The higher revenue was due to a 13% hike in average tin prices from USD37,815/MT in 4QFY21.

…boosted by solid tin prices. Strong tin prices continued to benefit MSC especially its Tin Mining segment which saw its PAT margin improving QoQ to 59% from 56% despite lower production volume while Tin Smelting reported strong jump in PAT to RM41.5m from RM17.6m due to sale of refined tin derived from the processed tin intermediates. This lifted Tin Smelting segment’s PAT margin to 12% from 7%. Meanwhile, the new Pulau Indah Plant posted 75% utilisation and it is expected to achieve full capacity this year. This is expected to improve efficiency, and with newer technology, better overall margin is anticipated.

Albeit off recent high, tin prices will stay elevated in the near term. While the market is experiencing corrections of late as fears of supply disruption allay, tin prices are expected to stay elevated give the increased global demand in the EV segment. QTD, 2QFY22 average tin price has fell 5% to USD40,575/MT, against current price of USD34,000/MT, from USD42,909/MT in 1QFY22 and consensus forecast of USD41,100/MT for FY22 and forward price of USD36,553/MT for FY22. To recap, our FY22/FY23 earnings projections for MSC of FY176.4m/ FY206.7m are based on tin prices assumption of USD34,750-32,438/MT. For now, we are keeping our projection unchanged.

FY22 is likely to be a record year. While prices have eased off, tin price is expected to stay higher than pre-COVID level given the supply-demand imbalance. Thus, this could lead to solid earnings for industry players like MSC. Hence, its recent share price correction could provide a buying opportunity. We have previously valued the stock at a range of RM4.62 (based on consensus tin price forecast) and RM6.48 (based on forward tin price) and settled at a fair value of RM5.55 which is the mean. We are keeping the valuations unchanged for now. As such, investors who have the view of sustainable tin prices should consider a Trading Buy stance.

Source: Kenanga Research - 20 May 2022