Timah - TP Rp1,960 (HOLD)

FY11 in line, but the future is foggy
In-line FY11 result. Timah announced FY11 net profit of Rp897b, down 5% YoY. The result is in line with our expectation of a Rp895b net profit, but well below consensus’ Rp1.15t estimate. Gross and operating profit also came in line with our estimates despite disappointing sales
figures, which was 9% below our estimate, at Rp8.75t (+5% YoY).

Weak 4Q as tin prices plummeted. On a quarterly basis, net profit plunged 78% QoQ to Rp37b as tin prices got hammered in the period. Despite shipping 11% more tin in the quarter, revenue slipped 3% QoQ to Rp1.93t as ASP fell 16% QoQ to US$21.8k/tonne. The margin per
tonne of tin sold fell 34% QoQ to US$2.1k/tonne.

Making too many concessions? Our main worry is the reversal of the trend of growing contributions from offshore (seabed) mining. Over 2007-2010, Timah managed to increase the portion of seabed mining to its tin-in-concentrates production to 54% from 19%. However,
contribution from offshore fell in 2011 to 49%, and we worry that this is a sign that the company has given too many concessions to the illegal miners by increasing purchases from them, which is recorded as production from inland mining.

Inventory destocking a potential profit source. Timah built up its inventory level in 4Q11, adding ~700 tonnes of tin in inventory to 13.9k tonnes, mostly comprising refined tin. As production cost was extremely low during the period at US$15.3k/tonne, the destocking of the inventory might generate handsome profits later on.

Cutting our TP and downgrading to HOLD. We now assume a higher proportion of inland mining from Timah in the future, resulting in a cost structure that is also more closely linked to LME prices, i.e. lower margins for every year in our forecast. We cut our TP to Rp1,960 and downgrade the stock to HOLD. At our TP, Timah would be trading at a 2012F PER of 12.9x.

source: KIMENG dated 3 April 2012