Summary

• Malaysia Smelting Corporation Bhd’s (MSC) 2QFY23 core net profit declined 27.9% YoY to RM28.4m, dragged down by weaker contribution from the tin mining segment that was impacted by lower average tin prices. Revenue for the quarter fell 20.0% YoY to RM327.0m.

• For 1H23, cumulative net profit at RM63.9m makes up to 62.2% and 58.1% of our and consensus forecasted net profit of RM102.6m and RM110.0m respectively. The better-than-expected number was mainly due to stronger margins arising from the cost-efficiencies from the operations in Pulau Indah plant and lower effective tax rate at 25.9% vs. our expectations at 30.0%.

• Segmentally, 2QFY23 tin smelting pre-tax profit stood at RM21.6m vs. pre-tax loss of -RM8.2m recorded in the previous corresponding quarter. However, the tin mining segment pre-tax profit contracted 51.6% YoY to RM23.2m, dragged by the decline in average tin price (-26.7% YoY) to an average of RM116,500/MT during the quarter. Nevertheless, tin prices have turned stable, rising 0.3% QoQ. During the quarter, we note that the net gearing remains healthy at 0.1x, whilst the group continue to operate in a net operating cash flow.

• On the mining segment, we gather that MSC remains committed to gradually improve its mining efficiency, targeting an output of 11.0 tonnes/day of tin ore by end 2023. The move will be supported by additions of new machineries (delivery of new crusher and sorter to Rahman Hydraulic Tin (RHT) mine and development of additional processing plants at Sg. Lembing tin mine.

• Meanwhile, the smelting segment will be supported by better production efficiency and lower operational cost from the state of art technology at the Pulau Indah plant. Looking ahead, the Butterworth smelting plant will be gradually decommissioned by mid-2024.

• We gather that tin prices continues to demonstrate recovery trend; trading between USD25,400-26,800/MT over the past 2 months. Going into the remainder of the year, we believe that tin prices may hover at current range and to average c.USD26,000/MT as the prospects of stronger demand will be supported by the revolution of technology (electric vehicles) and rising adoption to generate environmental friendly electricity (solar PV).

Valuation & Recommendation

• Following the stronger-than-expected reported numbers, we raised our earnings forecast by 22.4%, 10.2% and 5.4% for FY23f to FY25f, to adjust for the better-than-expected margins.

• Following the recent appreciation in share price, we re-iterate our HOLD recommendation on MSC with a higher target price of RM2.20. Our target price is based on an assigned target PER of 8.0x to its FY24f EPS of 27.5 sen. The assigned targeted PER is based on +1.0 SD of 1-year mean average.

• Risks to our recommendation include the volatility in the tin prices which affect average selling prices and margins. Foreign exchange 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 - 9 Aug 2023