T Timah (Persero) Tbk Still Struggling With Cost Reduction - AAA

± ASP Inline, But Only a Small Increase in Production
In today’s newspaper, TINS, the world third biggest tin producer expects that 1Q11 production could be higher than 1Q10, as weather disruption was less intensed. In 1Q10, TINS booked 9,986 million ton tin consisted of 10% inland and 90% offshore production. Averaging our FY11F production estimate on quarterly basis, 1Q11 production would come at 10,250 million ton, or an increase of only 3% yoy. We see total production in FY11F will only up by 2% yoy to 41,000 million ton which is due to TINS should struggle with around 300 illegal miners due to land legal status. With only a small increase in production, cost reduction will only be taken in slowly. Management also guided that ASP in FY11F was at US$23,000/ton, which is at par with our estimate, hence confirming our view that TINS will post net profit FY11F at Rp.1.2 trillion (+43% yoy).

± Valuation: TP at Rp3,100, HOLD (Unchanged)
On the valuation side, we assign our TP at Rp3,100, implying potential upside of 7.8%, or below our BUY threshold with a minimum potential upside at 10%. Our TP is also influenced by company’s poor cost management which during 2007-2010, gross margin dropped from 37% to 23% and net margin slumped from 21% to only 11%. ROE also plunged from 71% to 25%.