Timah; Riding on strong tin price outlook; Hold (upgrade from Fully Valued); Rp2,875; TP Rp2,700 prev Rp2,300; TINS IJ - DBS Vickers

Riding on strong tin price outlook
• 1Q11 earnings above expectation on higher price.
• Expanding offshore production to improve margins.
• Raised FY11-13F earnings by 8-19% mainly on higher ASP. Upgrade to Hold, TP raised to Rp2,700.

Strong tin price lifted earnings. Timah (TINS) 1Q11 net profit of Rp335bn (+150%y-o-y) was above our estimates, making up 30% of FY11F. Earnings growth was supported by 85%y-o-y higher ASP of US$29,695/ton even though sales volume fell by 18% to 7,992 tons due to lower offshore production as a result of unfavorable weather conditions. On a quarterly basis, net profit fell by 25% due to rising production cost as reflected in lower gross margin of 29% in 1Q11 (from 35% in 4Q10.).

Expanding offshore production to improve margins. Timah plans to expand its offshore production to improve margins and reduce dependency of third party purchases. We estimate production cost from offshore to be lower at US$12,000-14,000/ton versus US$21,000/ton (assuming US$30,000 spot price) for third party purchases. If successful, Timah should be able to reap higher benefits from strong outlook for tin prices.

Upgrade to HOLD, TP raised to Rp2,700. We have raised our FY11/12/13F earnings by 19%/14%/8% as we upgrade our ASP by 9%/5%/2% and lowered tax rate assumption to 25% (from 27%). Upgrade to HOLD following the earnings upgrade and as we roll over valuation base to FY12F. TP is raised to Rp2,700 (from Rp2,300) based on blended valuation of DCF, 11x FY11F PE and 2.3x PBV.