Malaysia Smelting Corp - UOB Kay Hian 2022-02-21: 4Q21 All-Time High Earnings Mark A New Phase For MSC

MALAYSIA SMELTING CORP BHD (SGX:NPW)

Malaysia Smelting Corp - 4Q21 All-Time High Earnings Mark A New Phase For MSC

Malaysia Smelting Corp's 4Q21 results beat our expectations 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 recovery growth entering 2022, supported by improved production output and better cost savings from the 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.

Malaysia Smelting Corp (MSC, SGX:NPW) reported a higher core net profit of RM64.3m (+119% q-o-q, +275% y-o-y) on the back of 4Q21 revenue of RM255.1m (+16% q-o-q, +9% y-o-y). This brought its cumulative 2021 core net profit to RM119.9m (+592% y-o-y), which is above our full-year estimate, forming 134% of our forecast. The all-time high earnings can be largely attributed to higher tin prices in 4Q21 of about US$38,000/mt (+11.7% q-o-q, +106.8% y-o-y).
Malaysia Smelting Corp also declared a first and final single-tier dividend of RM0.07 per share, representing a payout of 25%.
Expect stronger earnings ahead. Malaysia Smelting Corp achieved explosive earnings despite its smelting production dropping 26% y-o-y to 16,400mt. With the lift of force majeure, production recovery in 2022, we can expect stronger results going forward.

Malaysia Smelting Corp’s mine managed to increase its average daily mining output to 11mt/day (from 8mt/day) in 2021 as it explored new deposits and utilised new technology. Malaysia Smelting Corp will continue to boost its mining output to 12mt/day by 2022.
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 in the midst of finalising some potential JVs to expand its mining activities in the area surrounding RHT, which will further increase its mining output. However, since mining exploration is a time-consuming activity, we expect the earnings contribution will only be generated in the next 4-5 years.

Smelting’s margin improved q-o-q from around 4% to 7% in 4Q21, partly due to utilisation of the new plant. The eco-friendly plant at Pulau Indah is now fully operational as evidenced by our recent ground checks. It boasts production costs that are at least 20% lower than the old ones in Penang as it has better efficiency via its single-stage smelting (vs multistage smelting process used previously). The plant also has a 50% higher production capacity (60,000mt) while requiring > 40% less manpower.
Malaysia Smelting Corp has also commenced the smelting of about 7,258mt tin intermediates at its Butterworth smelter in 3Q21, which will take about two years to complete. This will help to gradually boost its smelting earnings going forward.

As of 18 Feb 22, tin prices continue to surge to new highs (over 100% y-o-y) to US$44,150/mt. In China, the temporary shutdown of some smelters for maintenance and the disruption of tin ore imports from Myanmar further disrupted China’s refined tin output.
In Indonesia, there have been delays to private smelter export licenses by the government that fueled speculation and pushed prices higher. Although global production in 2021 improved 11% y-o-y to 378,400mt, tin deficit is still expected to rise 24% y-o-y in 2022. As such, while prices may ease gradually in 2022 as supply improves, we believe prices will remain higher than the historical average of around US$18,000/mt.
The spike in production cost due to inflationary pressure and power crisis amid the decarbonisation agenda will lend further strength to tin prices.

We raise our 2022-23 net profit forecasts for Malaysia Smelting Corp by 21% and 15% to reflect better margins and we increase our tin price assumptions from US$34,000 and US$30,000 to US$36,000 and US$32,000 per mt respectively, reflecting the prolonged rally in tin prices. We also introduced our 2024 forecast with price assumption of US$30,000/mt. 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 12% a year.
Downgrade Malaysia Smelting Corp to HOLD despite higher target price of RM4.45, as Malaysia Smelting Corp's share price rally almost reflected the intrinsic value. Our target price implies 10x 2022F P/E (five-year mean PE). If tin prices remain at the current high of US$44,000/mt in 2022, it could result in a 10% upside to our target price at RM4.89 (8x 2022F PE).
Our blue-sky earnings suggest a potentially higher target price of RM5.37 for Malaysia Smelting Corp (8x 2022F PE), -1 standard deviation to its five-year P/E mean.
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Hazmy Hazin UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-02-21

SGX Stock Analyst Report HOLD DOWNGRADE BUY 1.45 UP 1.080