AAA PT Timah Tbk Too many “x” factors...

± 1H10 net income below expectations
Timah reported 1H10 net profit of Rp 322.2 (+653% yoy, +27% qoq), which is below our expectations and consensus. It only accounts for 35% our FY10 estimates and 30% consensus. Revenue was up to Rp 3,749 bn (+6% yoy, +4% qoq) mainly come from higher ASP of US$ 17,529/ton, which surged 45% yoy. 1H10 refined tin production only slightly increased by 0.6% to 19,502 tons, which off shore production up 28% yoy in 1H10 to 9,085 tons Sn. But sales volumes of 19,760 tons which only account 40% our full year target of 48-49k tons. Historically, 1H sales volumes contributed 45%-50% FY target.

± Unexpectedly weak 2Q10 results
On QoQ basis, we find peculiarly results. Amid stronger ASP of US$ 17,959/ton, up 6% qoq, and higher off shore production of 6,959 tons vs 3,262 tons in land production, Timah reported lower margin due to higher cost production. Management states that inland production cost increased unexpectedly above 70% of LME price vs internal expectation of 60% when LME tin price above US$ 15,000/ton (probably relates to anticipation of new mining law) and maintenance cost for old BLDs also surged significantly. As a result, 2Q10 margin plummeted to only US$ 1,465/ton, down 55% qoq.

± Revisit model, revise down earnings forecasts
Historically, Timah’s earnings oftenly below expectations and downward revision to consensus earnings oftenly to occur. We revisit our cost structure conservatively since there are many “x” factors that oftenly unexpected and unjustified. Tin solder is still on market penetration and unlikely to be commercially sold this year. Timah finds is difficult to enter the market because there are already established tin solder factories that vertically integrated with electronic producers. Positive catalyst comes from LME price, supported by lower LME stocks that have fallen 47%ytd. Based on our new revised key assumptions (see figure 2), we cut FY10 and FY11 earnings forecast by 28% and 25% to Rp 663 bn and Rp 875 bn, respectively.

± Pricing In – Lower TP - Downgrade to HOLD
Based on our revisited model and lower WACC of 13.9% (from 14.3% previously due to lower Rf of 9%), we derive new TP of Rp 2,300 per share. Our TP implies at 17.5x-13.2 P/EFY10F-11F and 8.1x-6.5x EV/EBITDA FY11F, with potential downside of 5.2%. Timah is not cheap anymore based on our new forecasts. We downgrade our BUY rating to HOLD. Key downside risks are: 1.) tin price volatility, 2.)higher mining cost, and 3.)lower sales volume.