TINS:Higher price yet lower volume - Mandiri Sekuritas

Indonesia, which its two main tin producers PT Timah and Koba Tin, was the country that recorded the biggest fall in tin production of 10.4% yoy last year. As the 2nd largest tin producer, Timah has successfully played its role creating a tailwind in the tin price hike. As reported by ITRI that some of investment funds are continuing to speculate on tin prices as a result of supply constraint. The only catalyst that could drive the company’s share price only come from outside the company, such as tin price hike, yet we remain skeptical with the company’s inefficient operations. We reiterate our Neutral rating with higher TP of Rp3,000 implying only 13.5x PER11F.

No clarity on what boost FY10 results. Timah reported unaudited FY10 revenue and net profit of Rp8.3tn and Rp802bn respectively, surprisingly above our estimates. We find some inconsistent numbers here since FY10’s ASP of US$19.5/ton and sales volume of 40.3k tons are in line with our estimates. We expect that non-core revenue or income should take place. We do not change our FY10 estimates yet since we still haven’t got the clarity from the management.

Lack of catalyst inside. Given its inefficient operations accompanied by dwindling tin reserves in the lower depth, Timah needs higher tin price in order to economically mine tin ore reserves at deeper level. Therefore, it needs advanced and new fleets to go deeper to increase its production capacity, while waiting for the Bucket wheel dredge (BWD) to start operations in 2012. Meanwhile, we still see uncertain and unproven market yet for its downstream output. Timah plans to produce 6k tons tin chemical this year. Both tin solder and tin chemical are slated to be commercially sold by March 2011. But we prefer to wait and see the results.

Higher price not necessarily higher earnings. We increased our average selling price assumptions to US$28.5k/ton onwards (+15%-21%), following the consensus forecasts. But we cut our production forecasts by 11-12% onwards following weak production guidance from the management with FY11 target of 38k tons. As results, we increased Timah’s FY11F net profit by 12.6% to Rp1,127bn but cut FY12F net profit by 11.3% to Rp1,526bn. Our sensitivity analysis suggests that for every 10% production shortfall, Timah needs around 16%-18% higher selling price to maintain its operating profit.

Reiterate Neutral. Based on our new forecast we increased our blended TP to Rp 3,000 per share implying 13.5x PER11F. We maintain our Neutral rating since we find minimal catalyst inside of the company. The main risks towards our call are tin price volatility, weather risk and supply-demand in market.