Malaysia Smelting Corp - UOB Kay Hian 2021-11-15: 3Q21 Stronger Earnings Riding On Global Tin Price Rally

MALAYSIA SMELTING CORP BHD (SGX:NPW)

Malaysia Smelting Corp - 3Q21 Stronger Earnings Riding On Global Tin Price Rally

Higher profits are mainly due to record-high tin prices that continue to remain elevated as global demand outstrips supply. Malaysia Smelting Corp is on track for a more meaningful growth recovery entering 2022, supported by improved production output and better cost savings from the full utilisation of its new eco-friendly smelting plant.
We expect tin prices to stay firm in the long run, albeit not at the current high, as structural supply issues may persist. Maintain BUY call on Malaysia Smelting Corp with a target price of RM3.33.

Malaysia Smelting Corp (SGX:NPW) reported a higher core net profit of RM29.2m ( > 100% q-o-q, y-o-y) on the back of 3Q21 revenue of RM218.5m (-33.2% q-o-q, -5.3% y-o-y). This brought 9M21 core net profit to RM55.6m ( > 100% y-o-y), which is above our full-year estimate, forming 82.5% of our forecast.

Despite the lockdown disruption, Malaysia Smelting Corp managed to post robust earnings year-to-date mainly due to the prolonged rally of global tin prices. Post-lockdown, Malaysia Smelting Corp is currently operating at 100% workforce capacity.
With the recovery in production and higher tin prices, we can expect stronger results in the coming quarters. We believe the drop in production this year will be partially mitigated by the lofty tin prices.

As of 12 Nov 21, London Metal Exchange (LME) tin price was at US$39,124/mt (+113% y-o-y), close to its all-time high of US$39,624/mt on 19 Oct 21. While other commodity prices took a hit from China’s latest aggressive measures in controlling its power crisis, tin prices remained relatively stable. A mix of factors (pandemic-led supply disruptions and growing pent-up demand) has led to the current extreme supply tightness, which contributed to the rally of tin prices this year.
Recently, the intensified production constraints in China due to its power cuts have put further pressure on the global supply chain. While prices may ease gradually entering 2022 as supply improves, we believe prices will remain elevated in the long run (higher than historical average of around US$18,000/mt) as the structural supply issues may persist.

Tin inventories in LME warehouses fell 85% y-o-y to merely 670mt while Shanghai Futures Exchange (SFE) tin stocks dropped to 1,256 mt as at 4 Nov 21. This level of inventory can barely support about two days’ worth of global demand. According to the International Tin Association (ITA), the global tin market deficit is expected to rise further by 24.5% y-o-y to 12,700mt in 2022.
Robust demand coupled with supply constrains has created a shortage of tin, pushing tin prices close to a record high in 3Q21.

Malaysia Smelting Corp is set to see a more meaningful growth in 2022 when its new eco-friendly smelting plant at Pulau Indah runs at 100% capacity next year (current utilisation rate: 30%). The plant boasts production costs that are at least 20% lower than the old one and it has 50% higher production capacity while requiring over 40% less manpower.
Malaysia Smelting Corp is expected to post a 3-year (2020-23F) 105% earnings CAGR as it is poised to benefit from the cost savings derived from the new plant, strong tin prices and robust structural demand from consumer electronics, electric vehicles and other next-generation technologies.
In 3Q21, Malaysia Smelting Corp has also commenced the smelting of about 7,258mt tin intermediates at its Butterworth smelter, which will take about two years to complete. This will help to boost its smelting earnings going forward.

We raise our 2021-23 net profit forecasts for Malaysia Smelting Corp by 32%/26%/13% respectively as we increase our tin price assumptions to US$31,000, US$28,000 and US$25,000 per mt for 2021-23 accordingly, reflecting the prolonged rally in tin prices. Based on our sensitivity analysis, every US$2,000/mt rise in our tin price assumptions would boost earnings by about 20% a year.
Maintain BUY call on Malaysia Smelting Corp with a higher target price of RM3.33, implying 11x 2022F P/E, close to its 5- year mean P/E of 10x. At the current share price, Malaysia Smelting Corp offers cheap valuations, implying 5x 2022 P/E at the spot tin price of about US$39,000/mt. If tin price remains at its current high in 2022, this could result in 20% upside to our target price of RM3.33 at RM4.01 (7x 2022F PE). Our blue-sky earnings suggest a potentially higher target price of RM4.35, implying 7x 2022F P/E, -1 standard deviation to its 5-year P/E mean.
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Hazmy Hazin UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-11-15

SGX Stock Analyst Report BUY MAINTAIN BUY 1.08 UP 0.980