Timah - Target price Rp2,650

Export sales to continue

What’s New
􀂃 Timah hosted a public exposé yesterday. It said that it will continue to honor its contracts as well as participate in the moratorium on tin export. In short, the company will continue to ship tin agreed under contracts while refraining from selling in the spot market.
􀂃 Timah expects to sell approximately 8k tonnes of tin in 4Q11 with the price based on the average LME tin price in the previous month. It expects to deliver about 33k tonnes of tin for FY11.
Our View
􀂃 The new sales volume target is much lower than the company’s previous guidance of 36,000‐38,000 tonnes. Nevertheless, we understand the rationale as selling at the current price will yield next to nothing. Timah’s production cost was US$21.6k/tonne in 9M11 and US$20.7k/tonne in 3Q11, while tin was last traded at US$21.7k/tonne.
􀂃 We make several changes to our model, including lowering sales volume and raising both ASP and production cost for FY11F. Our net profit estimate is little changed and we continue to expect Timah to book a loss in 4Q11 unless it can lower its operating expenses.
􀂃 We think Timah has done a great job in preserving its balance sheet amid such volatile environment. Capex until 9M11 amounted to around Rp250b, or only one‐fifth of that earmarked for FY11. With its cash hoard of Rp771b as at end‐September 2011, the company has the financial flexibility to pursue more options, including diversification to other businesses if the weakness in the tin market persists.

Action & Recommendation
􀂃 We lower our TP to Rp2,650 (2012F PER of 11.7x) from Rp2,700 previously, but maintain our BUY call on the stock. We see upside risk to our forecasts in the successful completion of the Indonesia tin bourse, which will ensure more stable pricing free from speculation.

source: KIM ENG dated 15 November 2011