PT Timah (Persero) Tbk Struggle With Cost Reduction - AAA Securities

Summary
We like TINS for its clean balance sheet but we see no margin improvement going forward. This means that by the time tin price goes into a correction toward 2012 (as currently price has reached an all time high level) TINS should be able increase production efficiency so as to prevent profit margins from declining further.

± FY10 Robust Performance on Higher ASP +55% yoy, Production Fell 10% yoy
Yesterday, in a presentation paper to the Indonesian Parliament, Wachid Usman, the President Director of TINS, said that the company has booked a robust financial performance in 2010. Revenue increased by 8% to Rp8,3 trillion and bottom line earnings jump more than 150% yoy to Rp865 billion. The figures were relatively inline with the market and our forecast. Total refined tins production fell to 40,413 metric tons, or 10% lower from earlier period at 45,086 metric tons. Thus, higher revenue was very much helped by the upsurge in average selling price (ASP) during 2010, which in our estimation was at US$21,000 a ton, or 55% up from previous year’s ASP.

± What We LIke
TINS has clean balance sheet, which since 2006 is always in net a cash position. As such, a small increase in revenue will have greater impact on earnings. TINS’s revenue is largely driven by its selling price not volume. Our sensitivity analysis has shown that for every 10% increase in ASP, revenue will be up by 9%, net income by 19% and valuation by 13%. While for every 10% increase in volume, revenue, net income and valuation will only increase by 7% respectively. Despite lower production volume in 2011, TINS could still book 16% yoy higher revenue thanks to tin price that shoot up to US$31,200, a highest level in history due to tight supply and an increase in world economic confidence. However, since only 20% of TINS’s product is priced using spot price, we expect ASP be around US$23,000 a ton in 2011F.

± What We Don’t Like
So if revenue is largely driven by ASP, TINS should be able to deliver higher ROE for the shareholders in the period of high tins price. Unfortunately, during 2007-2009, gross margin dropped from 37% to 15% and net margin slumped from 21% to only 4%. ROE also plunged from 71% to only a single digit 9%. TINS inefficiency was caused by its high maintenance production cost and carry over inventory cost. As the current ASP is already at an all time high level, we expect a correction toward 2012 or beyond. This means that to offset lower ASP TINS must boost production and but as aforementioned, higher production volume will only has little impact on earnings. We believe that the management has to put serious effort on reducing costs, so as to make production and inventory management more efficient.

± Valuation TP at Rp3,100, HOLD
We assign TP at Rp3,100 using blended valuation on which we put 50% weighting on PE valuation and 25% on DCF and EV/EBITDA valuation. Our TP implies, 13.1x PE 2011 or near its +1 standard deviation historical PE. HOLD