MSC is poised for improved efficiency (via the consolidation of its tin smelting operations) and higher output (by exploiting the eastern boundary of its existing tin mine in Perak, which will be made possible with the acquisition of neighbouring land). We value MSC at RM3.13 based on DCF (WACC: 8.1%; TG: 2%) which implies FY22E PER of 8.6x ADD.

Key takeaways from our recent engagement with the company are as follows:

1. Despite the sharp fall from a high of USD48,865/MT in March to USD25,000/MT currently, the spot tin price is still significantly above MSC’s cash cost with levy of USD15,000-16,000/MT;

2. MSC expects to still realise super good tin prices in 2QFY22, despite prices seen to moderate from 3QFY22;

3. MSC is in the midst of consolidating its entire tin smelting operations under the new plant in Pulau Indah. It is in the process of shutting down the older plant in Seberang Prai, by end-2023. In terms of cost savings, the low-lying fruits would be a 30% reduction in headcount (from 600 to 390), coupled with better utilisation rate of the more efficient Pulau Indah plant as well as internally generated solar energy.

4. MSC is getting two bites of a cherry from the recently proposed acquisition of Asas Baiduri which owns a piece of land adjoining the eastern border of MSC’s existing tin mine in Perak. Firstly, MSC could raise its mining output by 67% to 15MT/day in FY23 from 9MT/day currently by exploiting the eastern boundary of its existing tin mine in Perak, which would be made possible with the acquisition of neighbouring land. Secondly, it would be able to expand its tin mining operation to the land to be acquired within the next five years.

A record year in FY22. MSC guided for a record year in FY22, backed largely by: (i) super good tin prices realised in 1HFY22; and (ii) additional mining output from the eastern border of its existing tin mine in Perak from 4QFY22 (which will continue to drive mining output growth in FY23). Meanwhile, it guided for reduced profits from tin smelting operations from 3QFY22 as its smelting capacity will be deployed largely for the smelting of third-party tin ores (which commands lower margins) as compared smelting of internal tin intermediates (which commands better margins) during 1HFY22. We project FY22-FY23 net profit estimates of RM152.3m-RM127.3m (vs. RM118.1m actual net profit in FY21) based on 2022/2023 consensus tin price forecasts of USD31,784/USD24,650 per MT.

Valuations and recommendation. We value MSC at RM3.13 based on DCF (WACC: 8.1%; TG: 2%) which implies FY22E PER of 8.6x. There is no adjustment to fair value based on ESG (3-star ESG rating as appraised by us). ADD.

Source: Kenanga Research - 20 Jul 2022