UOBKayhian Timah 1Q10: Refined tin sales volume growth to accelerate in 2Q10

TIN’s net profit surged in 1Q10 due to higher ASP which offset lower volume. We expect sales volume growth to accelerate in 2Q10. Maintain BUY with a target price Rp3,100.

Results
1Q10 net profit surged. Timah’s (TINS) net profit rocketed from Rp14.4b in 1Q09 to Rp141.8b in 1Q10 on the back of higher revenue and margin improvement. On a quarterly basis, however, TINS posted flat growth in net profit due to lower quarterly tin production which offset 23% qoq rise in quarterly margin per tonne. TINS’ net profit during 1Q10 represents about 16% of our 2010 forecast.

Strong revenue owing to improvement in tin price. Revenue jumped 15.6% yoy in 1Q10 owing to a 51% yoy improvement in refined tin price to US$16,970/tonne in 1Q10 from US$11,221/tonne in 1Q09 following an improvement in demand for tin, which offset an 11% yoy fall in lower refined tin sales volume and strengthening of the rupiah against the US dollar by 20% in 1Q10. Despite strong tin-in-concentrated in 1Q10, the company’s refined tin production declined in this period due to the use of tin slag inventory in 1Q09.

Margin improvement on sturdy tin price. On account of sturdy tin price, which resulted in sturdy margin of US$3,262/tonne in 1Q10 (1Q09: US$176/tonne), TINS’ gross and operating margins improved tremendously in 1Q10 to 20.1% and 13.5% respectively.

Stock Impact
Refined tin sales volume growth expected to accelerate in 2Q10. We expect the company to accelerate its refined tin sales volume growth in the next few quarters in order to fulfill the balance of refined tin contracts to its customers. To maintain product quality, TINS expects to cap refined tin production volume at 50,000 tonnes. As TINS is the world’s second-largest refined tin producer, accounting for 15% of global refined tin production, and the largest tin exporter, its sales volume will significantly affect the global refined tin supply.

Focusing on offshore mining activities and downstream business. TINS is focusing on offshore mining activities due to several social problems relating to onshore mining activities. The company expects equal contribution of tin-in-concentrate production from onshore and offshore activity going forward. As of 1Q10, onshore mining activities accounted for 71% of total tinin-concentrate production. To support its offshore activities, the company plans to increase the number of dredges to 15 units by end-10. Meanwhile, it is building its downstream business by developing tin solder and a tin chemical factory. This should help TINS improve its margins.

Earnings Revision
No change to earning forecasts.

Valuation/Recommendation
Maintain BUY. On the expectation of an improvement in the electronics ector, which will have a positive impact on demand for refined tin, we maintain our BUY recommendation with a target price of Rp3,100 based on DCF valuation (WACC: 15.0%, long-term growth: 0%). The target price represents 17.5x 2010F PE. TINS is trading at 15.2x 2010F PE, a discount to closest peers International Nickel Indonesia’s 29.0x and Aneka Tambang’s 22.0x.