Wednesday 7 November 2012

Malaysia Smelting Corporation - Gradually on The Mend


Malaysia Smelting Corp (MSC) reported a 98% improvement in 3QFY12 earningsalthough it is still seeing losses YTD FY12, mainly due to the positive improvement from all its businesses. MSC has ceased production at PT Koba Tin to minimize the bleeding pending approval of the Contract of Works (CoW). Meanwhile, as tin price has rebounded from the low in Aug 2012, MSC may be able to post better numbers in the next quarter. Maintain Trading BUY, with our RM3.62 FV unchanged.

Positive turnaround. MSC recorded a core net loss of RM0.9m for its 3QFY13 (vs core net loss of RM44.1m in 2QFY13), which was indeed a great improvement. The improvement was mainly due to: i) the Butterworth smelting plant recording operating earnings of RM22.1m vs an operating loss of RM9.6m in the preceding quarter, ii) a stock valuation gain of RM5.5m in the quarter under review compared to a stock valuation loss of RM5.5m in the last quarter, iii) PT Koba Tin reporting a smaller loss owing to a stock valuation gain of RM12.2m in the quarter under review, and iv) the associated and jointly controlled entity contributed positive earnings of RM2.4m for the current quarter compared to losses in the previous quarter.
Halting production at PT Koba Tin. Due to continuous losses from PT Koba Tin, MSC decided to suspend its entire mining and smelting operations pending the renewal of the CoW. With a few months left until the current CoW expires in March 2013, we believe that such a decision may help MSC to minimize the losses from PT Koba Tin as the subsidiary has been facing problems of low production and high operation costs, which will ultimately hurt MSC’s bottomline.

Brighter outlook for upcoming quarter. Although the operating environment remains challenging, the recovery of tin prices since the end of August 2012 coupled with the resumption of operations at its associates and jointly controlled entity may make it possible for MSC to report positive earnings for 4QFY12.

Maintain Trading BUY, FV unchanged. We deem the results for the quarter under review within our expectations. As we see MSC possibly reporting positive earnings in the upcoming quarter, we are comfortable maintaining our forecasts for its FY12. We retain our Trading BUY recommendation for MSC due to the possible earnings turnaround next quarter but embedded with risks arising from the uncertainty of PT Koba Tin. We also keep our FV at RM3.62, which was based on the worst-case scenario, based on 1x FY12 BV and subtracting the BV of PT Koba Tin and Gulin Hinwei.
Source: OSK

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