Our site visit to Timah’s facilities in Bangka Island left a positive impression on us that the company should be successful in its cost -cutting agenda. The government’s new regulation provides a strong basis to convert expensive mining subcontracting with cheaper outsourcing scheme. The company’s strategy to focus on deeper offshore exploration is also supported by its owned dockyard facility. Interesting information came from a casual conversation with an ex illegal tin collector who said that illegal minin! g is “get ting more difficult”. We maintain Buy on TINS with TP of Rp3,000/share, providing 39.5% upside potential from the current price in the market.
Outsourcing, a cheaper partnership scheme. Government regulation No. 22 & 23/2010, issued on February 2010, becomes a basis for the company to terminate mining subcontracting and replace it with outsourcing. Under subcontracting scheme, the company pays subcontractors a variable amount based on tin ore volume mined and LME price, as if it is tin ore purchase. On the other hand, outsourcing means that it will outsource labor and equipment from existing subcontractors, so that the payment will depend on neither tin ore volume nor LME price. Timah estimates outsourcing scheme will save tin ore cost by around 35%. Based on the ! regulatio n, subcontracting termination should be completed in 3 years. We have not factored it in our forecast as they are still assessing the distribution of subcontract termination date.
Focus on deeper offshore mining. The company currently operates only the remaining onshore open pit mining and does not plan to open new onshore mining. It plans to build 4 cutter suction ships (Rp120bn) because (1) it operates at deeper sea with higher tin ore contents, (2) it has 40% cheaper operational costs, and (3) it deters illegal miners due to its high mobility.
View from the ground. An ex-illegal tin collector told us that illegal mining is “getting more difficult” due to Timah’s strategy to “Go offshore, go deeper”. Offshore alternatives mean illegal miners will have difficulties in spotting land area rich in tin ore content as illegal miners do not have exploration capability. Moving to deeper offshore areas also erects a barrier for illegal miners with limited investment in ships.
Reiterate Buy. We reiterate our Buy recommendation as efforts toward raw material cost reduction shows progress with the new government regulation issuance and the company’s new ship construction program. We maintain our TP at Rp3,000/share (14.7% WACC). The stock is trading at PER10-11F of 8.6-5.5x, the cheapest among our metal counters.
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