Malaysia Smelting Corporation (MSC)’s net loss of RM44.1m in 2QFY12 and cumulative losses of RM38.5m in 1HFY12 caught us by surprise. Such massive losses were mainly attributed to the RM38.5m tin inventory write down due to the plunge in tin prices. Together with losses from its associates, MSC bled red this quarter. As news flows are indicating that PT Koba Tin may not win the extension of its mining concession, we are revaluing MSC based on worst case scenario, thus deriving a new FV of RM3.62. Downgrade to NEUTRAL.
Surprise losses caught us off guard. MSC reported core net loss of RM44.1(>-100% q-o-q, >-100% y-o-y) mainly due to massive losses in PT Koba Tin of RM68.9m, including a write down of RM33.0m on the carrying value of its tin inventory. The group’s Butterworth international tin smelting operations had also incurred a loss of RM9.57m, which included a write down of RM5.5m on tin stocks and a net foreign exchange loss of RM4.0m due to the weakness of the Ringgit. In addition, its associates and jointly controlled entities also reported a net loss of RM1.5m due to lower commodities prices and production. Although Rahman Hydraulic Tin managed to record pre-tax profit of RM5.9m, the figure is still lower compared with RM17.2m in 2Q last year and as such, does not help mitigate the losses from the other business units.
Sluggish prices led to massive write down. Tin price has plunged in 2012 and hit a low of USD17,125 per tonne recently. This has forced MSC to write down its tin slag inventory mainly for PT Koba Tin, which has an inventory book value that is significantly lower than the latest tin prices. According to our market intelligence, the massive writedown of RM38.5m may have brought down that inventory to around USD18,500 a tonne. Now that the cost of tin inventory is near our projection of USD18,500 in 2H, we decided to only incorporate the write-down as part of the group operating cost but maintain the other variables unchanged.
Associates also slid into red. Apart from the tin related operations, MSC’s associate and jointly controlled entity, KM Resources, also failed to generate any profit. This was mainly due to the floods in Rapu-Rapu Island, Philippines which had disrupted production schedule. While production is expected to return to normal come 2H, the declining copper price will certainly limit the contribution from this unit. Also, the JV with Guilin Hinwei Tin Co Ltd did not pan out as planned. With that, associates accounted for an accumulated loss of RM1.3m in 1HFY12. As such, we are slashing our profit estimates from associates to only RM2.9m for FY12.
Negative voices haunting PT Koba Tin’s extension. There has been a lot of negative news flowing out from Indonesia stating that MSC’s 75% owned PT Koba Tin may not be able to win an extension to its mining concession in Bangka Island. Although no official statement has been made by the authorities, the bombardment of negative voices may indicate that MSC could be losing out in the bidding for an extension.
Downgrade to NEUTRAL. In light of the necessary adjustment to reflect MSC’s tough situation in 1H, we are now projecting a loss of RM28.2m for FY12 and a lower profit of RM58.7 for FY13. We have also decided to revalue MSC based on 1x FY12 BV of RM3.99 and deduct i) RM0.341 for the write down of PT Koba Tin based on the worst case scenario that PT Koba Tin may not win the extension, and ii) RM0.025, the write down of Guilin Hinwei Tin Co Ltd, in which we had earlier accounted in our valuation; to derive at a new FV of RM3.62. We downgrade MSC to NEUTRAL on the premise of weakening tin prices and uncertainties in its PT Koba Tin operations.
Source: OSK
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