Timah (TINS IJ; NEUTRAL; TP IDR2,900) Initiation of coverage - Good Value, But Lacks Excitement - OSK

Our 2011-12F benchmark price of USD27,500-USD27,000/tonne and long-term assumption of USD26,000/tonne suggests that tin price's downside would be limited given that a worldwide supply shortage still persists. The 2011 strong net profit growth of IDR1,643bn (73% y-o-y) should ride on the uptrend in LME tin price averaging USD30,223/tonne YTD, before an anticipated 4% fall in the 2012 bottom line due to a drop in our benchmark price assumption. Hence, we are NEUTRAL on the stock. It is worth noting that we see an inverse relationship between tin price and inventory for the last 1 month (exhibit 3), which suggests a near-term pick up for tin price.

Flat production growth. We set our 2011F production volume (-1% y-o-y) at 40k tonnes based on management's guidance. According to management, the flat production growth going forward is based the company's prudent use of its reserves mining life. It is worth noting that TINS' 2010 reserves amounted to 394k tonnes, up 13% y-o-y.

Production still on track.TINS' 1Q11 production progress is on target, accounting for 21% of our 2011 production volume of 40k tonnes (-1% y-o-y) amid typical weather disruptions. Furthermore, we see TINS' strategy of increasing offshore mining to 60% (previous year 54%) this year making progress given that in 1Q11 offshore production stood at 43%, an improvement from 29% in 1Q10. We take comfort on TINS' strategy to increase offshore proportion as this would reduce its variable costs. Note that TINS' production cost is sensitive to its land mining activities as the company has to purchase tin ore from small-scale miners (normally 70% to LME).

Share price performance highly correlated to LME tin price. TINS' share price has the highest correlation of 0.92 to LME tin price compared to its closest peers. Hence, the price of the commodity could be a proxy to Timah. Furthermore, we see an inverse relationship between tin price and inventory for the last 1 month (exhibit 3), which suggests a near-term pick-up in tin price.

Going downstream a wise move. Given that TINS holds a global market share of some 13%, which undeniably makes it the largest tin producer in Indonesia and the largest exporter in the world, a streamlined strategy to the tin chemical business is a wise move since it fetches better margins than its upstream business. However, since no further details are provided, we have not taken this into account in our model.