MSC (SMELT MK, Initiate with BUY, FV RM5.60, Last Price: RM4.21)

Stock Name: MSC
Company Name: MALAYSIA SMELTING CORPORATION

Research House: OSK

Price Call: BUY

Target Price: 5.60

Malaysia Smelting Corporation (MSC), one of  the world's leading integrated producers oftin metal products, is set to derive steady income from its custom tin smelting and mining operations inMalaysia and Indonesia.  That said, thegroup's long-term value will be enhanced by efforts to acquire new tin assetsand divest its remaining non-tin assets. Assuming the worst-case scenario forits foreign mining concessions, as well as an aggressive WACC for its tinsmelting and mining DCF and a moderate BV on its non-tin business, we arrive ata SOP-based FV of RM5.60. We initiate coverage on MSC with a BUY rating.

Century-oldintegrated tin player. With a history dating back to 1887, MSC is theworld's second largest tin metal producer with a combined installed capacity of60,000 tonnes per year (tpy) at its facilities in Penang, Malaysia and BangkaIsland, Indonesia. The  Penang plant, thegroup's cash cow, is expected to grow  ata moderate pace in tandem with  the additionof refined capacity and increasing tin concentrate supply from Central Africa.

Leveraging onfavourable tin market cycles via mining. In 2002, MSC moved upstream afteracquiring a 75% stake in PT Koba Tin, which has a Contract of Work (CoW) tomine tin in a concession area of 41,700ha in Bangka Island. MSC's wholly ownedRahman Hydraulic Tin SB (RHT), which it acquired at end-2004, has a tin mininglease for a 601ha concession area in Perak, Malaysia. This local mine hasconfirmed resources that can last almost until the end of the lease period in2030, which will enable RHT to benefit from any upcoming upcycles in tinprices. Although our valuation assumes that the PT Koba Tin CoW will expire in March2013, MSC has brought in a new Indonesian partner  which will eventually turn the unit into alocally controlled entity, a move that will augur well for a potentialextension of the mining lease for 10 more years, plus other benefits.

Value accretion  set to materialise. MSC  is still pursuing opportunities to expand its tin resources in Malaysia andIndonesia, and has identified several prospective tin mineralized areas forexploration and development. Discussions are also ongoing in relation topossible acquisitions of suitable tin assets. The group is also evaluatingseveral tin prospects in the Democratic Republic of Congo (DRC), which  has been a significant source of tin concentratesfor the group. As  potential new minesare not incorporated into our earnings model, any new concession awarded to MSCwill definitely boost its valuation. This aside, the divestment of non-tinassets that kicked off in 2009 has come to its tail end, with only a few assetsremaining to be hived off. After a few rounds of impairment for some of itslossmaking entities (which resulted in only their nominal values being recordedin MSC's books), its other businesses still offer decent returns. Thisreinforces our view that the group will see upside surprises moving forward.

Source: OSK188