MALAYSIA SMELTING CORP BHD (SGX:NPW)
Malaysia Smelting Corp - Entering A New Dawn
- Tin prices have hit an all-time high thanks to historically low inventory levels in exchange warehouses due to the ongoing supply constraints coupled with rising demand. Strong prices may remain, at least in the near term, as power cuts in China persist.
- Malaysia Smelting Corp (SGX:NPW) features cheap valuations (implied 4x 2022F P/E at the current spot tin price). The company’s growth will be further supported by the full utilisation of its new eco-friendly smelting plant next year. Maintain BUY. Target price: RM3.02.
Tin is the best performing base metal this year.
- As of 24 September, London Metal Exchange (LME) tin prices have risen to an all-time high of about US$37,000/mt (+14% m-o-m, +116% y-o-y). A mix of factors (pandemic-led supply disruptions and growing pent-up demand) has contributed to the rally of tin prices this year. Recently, the intensified production constraints in China due to power cuts across the country have put further pressure on the global supply chain. While prices may ease gradually entering 2022, we believe prices will remain firm in the long run, albeit not at the current high, as the structural supply issue may persist. At the current share price, Malaysia Smelting Corp (MSC) features cheap valuations (implied 4x 2022F P/E at the spot tin price of ~US$35,000/mt). If tin price remains high at this current level in 2022, this could result in a 20% upside to our target price of RM3.02 at RM3.61.
- Structural supply squeeze to further support tin prices. The global tin market is still facing supply-demand imbalance with an increasing reliance on artisanal mining as supply cannot catch up with growing demand. Even prior to the pandemic, the refined tin market had registered a supply deficit for at least the past five years. Today, the pandemic and global decarbonisation trend have further worsened the structural supply issue. The strength of the rebound in demand post-pandemic, especially from the automobile and electronics industries, has caught tin producers off guard, with a slow supply response compounded by the challenges faced by freight players. Note that tin inventories in LME warehouses fell 79% y-o-y to 1,180mt on 22 September. According to ITA, the global tin market deficit is expected to rise 24.5% y-o-y to 12,700mt in 2022.
- Expect gradual recovery in quarters ahead. Despite the MCO disruption, Malaysia Smelting Corp posted a healthy net profit of RM25m for 1H21 (vs a net loss of RM12.3m in 1H20). As the MCO eases, Malaysia Smelting Corp is currently operating at 100% workforce capacity. As such, we can expect stronger earnings moving forward as Malaysia Smelting Corp ramps up its production. We believe the drop in production this year will be partially mitigated by the lofty tin prices. A more meaningful growth will be seen in 2022 when its new eco-friendly plant runs at 100% capacity next year. Malaysia Smelting Corp is expected to post a 3-year (2021-23F) 97% earnings CAGR as it is poised to benefit from strong tin prices and robust structural demand from the potential adoption of next-generation technologies amid the market’s supply shortage. Malaysia Smelting Corp’s future growth will be further supported by exploration of new mines and development of its Butterworth land.
STOCK IMPACT
- New plant to boost margins moving forward. 100% of Malaysia Smelting Corp’s production will be done at its new smelting plant in Pulau Indah in 2022 as it shuts down its 100-year-old reverberatory furnaces in Penang. The new smelter boasts production costs that are at least 20% lower than the old ones. This is due to the state-of-the-art technology which uses a top submerged lance (TSL) furnace that provides better efficiency via its single-stage smelting (vs multi-stage smelting process used previously). The plant will also have 50% higher production capacity while requiring > 40% less manpower. This will also help reduce Malaysia Smelting Corp’s carbon footprint through the use of natural gas, solar panels and waste heat recovery. In addition, Malaysia Smelting Corp’s smelter is strategically located close to its Port Klang and LME warehouses, allowing vessels to have easy access to shipping routes.
- Higher mining production further enhances outlook. In 2021, Malaysia Smelting Corp’s Rahman Hydraulic Tin (RHT) Mine in Perak (largest tin mine in Malaysia) managed to increase its average daily mining output to 11mt/day (from 8mt/day) as it explored new deposits and utilised new technology. Malaysia Smelting Corp will continue to boost its mining output to 12mt/day by 2022. Having secured a comfortable tin mining lease until 2034, Malaysia Smelting Corp can access more than 40,000mt of tin resources worth over RM7b. In addition, Malaysia Smelting Corp commenced mining activities at Sungai Lembing, Pahang last year with minimal average production of 100-200kg/day. In the next 1- 2 years, the mine is expected to gradually produce over 1,000mt/year. Malaysia Smelting Corp is also exploring potential JVs to expand its mining activities.
- Strong ESG integration in producing greener tin. Malaysia Smelting Corp is well-placed to reap the positive spillover effect of structural demand for environmentally-friendly commodities. Malaysia Smelting Corp is doubling its efforts to integrate ESG practices across its businesses, especially through the new plant. The plant uses 1.26MWp solar PV panels and a waste heat recovery function that will harness thermal energy from the furnace’s flue gas to generate power. The use of natural gas and the new TSL furnace will help raise efficiency and reduce carbon emissions by at least 1,000mt/year, which means Malaysia Smelting Corp’s smelter will have one of the lowest carbon footprints globally. Its RHT mine is the only tin mine in Malaysia that operates using two of its own mini hydropower stations. These practices could result in Malaysia Smelting Corp becoming the preferred ESG investing target, besides benefitting from growing demand for eco-friendly tin products.
- Robust demand to support earnings growth. As the world’s third-largest tin producer, Malaysia Smelting Corp is strategically positioned to benefit from growing demand for tin solders globally in consumer electronics, semiconductors, home appliances, photovoltaics, automobiles and lithium-ion batteries. Malaysia Smelting Corp is a potential beneficiary of the structural adoption of next-generation technologies as tin has been identified as the metal with the most to gain from new technologies such as computing, robotics, 5G-related markets, electric vehicles and energy storage, playing a role in binding machines and appliances together, according to a study done by Rio Tinto and MIT. This structural demand will also act as a catalyst to provide strength to the prices.
- Asia to lead tin industry growth. Global tin market’s value is expected to achieve >6% CAGR to US$6.5b over 2021-27. This is supported by growing demand from the automobile and electronics industries, especially from China, which consumes >50% of global tin. Emerging economies in ASEAN are expected to propel the tin market’s growth as the region is the biggest market for tin-based solders, due to rising demand in electronics industry, along with a growing production base as electronics manufacturing is a prominent sector in the region (30-35% of total exports). Most global consumer electronic products are also manufactured and assembled in the ASEAN region.
Malaysia Smelting Corp - Earnings revision
- None. Our tin price assumptions are US$30,000/mt, US$25,000/mt and US$24,000/mt for 2021-23 respectively. Based on our sensitivity analysis, every US$2,000/mt rise in our tin price assumptions would boost Malaysia Smelting Corp’s earnings by about 20% a year.
Malaysia Smelting Corp - Valuation & Recommendation
- Maintain BUY with an SOTP-based target price of RM3.02, which implies 13x 2022F P/E, +1 standard deviation to its 5-year mean P/E of 10x. At the current share price, Malaysia Smelting Corp offers cheap valuations, implying 4x 2022F P/E at the spot tin price of ~US$35,000/mt. If tin price remains high at this level in 2022, this could result in a 20% upside to our target price of RM3.02 at RM3.61 (6x 2022F PE).
- See
- Our blue-sky earnings suggest a potentially higher target price of RM4.16, implying 6x 2022F P/E, -1 standard deviation to its 5-year P/E mean.
Hazmy Hazin
UOB Kay Hian Research
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https://research.uobkayhian.com/
2021-10-08
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