Friday, December 23, 2011

Timah Tbk - Declining Global Tin Prices + Sales Volume

by Trimegah Securities

As described in our base metals sector outlook, global tin prices will temporary ignore the fundamental and focus more on global economic slowdown in 2012.

We’ve reduced our 2012 global tin price assumption by 4.0% to USD24,000/ton. On the other side, we believe that being the world’s largest tin exporters, TINS plays a vital role on global supplydemand balance. The company has joined other smelters in Bangka to temporary halt the spot exports until prices reach consensus of USD25,000/ ton, which we believe to drag down the company’s sales volume. Both of these combinations are definitely negative to company’s earnings going forward. Management is guiding for 35,500 tons of sales volume in 2011, which is 6.6% lower than our estimation. 9M11 sales reached 25,266 tons, declined 13.6% YoY. Refined tin production reached 28,532tons, down by 3.7% YoY. Inventory shoot up, with the stock of refined tin reached 5,848 tons, jumped 78.3% YoY, indicating the slower demand. We foresee sales volume to reach 35.3k tons in 2011 and 39.4k tons in 2012. Inventory days have reached 180 days in 9M11, near its peak level in 2006 and 2008. As we believe that the sales volume to remain slow going forward, management’s policy to gradually reduce inventory days from 3 months to 1 month will face significant hurdle and at the same time impose some risks to the bottom line due to the inventory lag.

Going Offshore Project to Continue

After disbursing low capex in 1H11 (25%-30% of total Rp1.3tr capex), management plans to boost its capex realization going forward, which most of it will be designated to strengthen it offshore fleets. Five suction vessels, which are expected to complete in early 2012. In parallel, the company will also modify five units of Bucket Wheel Dredges until 2014, one of which is due to finish by early of 2012. At the mean time until the project is finished, we think that the company’s dependency on the on-shore small scale miners would be relatively high. In 9M11, the portion from inland tin ores rose to 51.8% vs. 45.7% in 2010.

Downgrade to HOLD, TP of Rp2,100

We downgrade our call to HOLD on the back of our lower price target calculation along with our less sanguine outlook on base metals sector in 2012. We incorporate our new tin price assumption, which reduce our 2011-2012 ASP assumption by 4.3%-4.5%. We also cut our sales volume as well as margin due to more inland tin mined expectation. All of these revisions have reduced our FY12-FY13 EPS by 27.9% and 25.1%, respectively. Our new target price implies 8.2x 2012est PE ratio.

Key Risks: Fluctuation on global tin prices, delays on its offshore project, illegal mining activities and tin smuggling especially during the high tin prices.

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