Higher production set to enhance MSC’s growth

PETALING JAYA: Following below-expectation earnings in 2023, Malaysia Smelting Corp Bhd (MSC) could see more meaningful growth this year.

Backing this is stronger production, a rebound of tin prices and better margins from the improved utilisation of its new eco-friendly plant at Pulau Indah, Klang.

To account for the lower tin prices and production output, UOB Kay Hian (UOBKH) Research has downgraded 2024-25 earnings by 5% to 13%, but is maintaining a “buy” call on the stock with a lower target price of RM2.39 a share.

“Based on our analysis, every US$2,000 tonne change in our tin price assumptions would affect earnings by about 10% a year,” said the research firm.

The research firm noted tin prices have recovered gradually with a year-to-date gain of 8% after a gestation period in 2023.

Inventory at the London Metal Exchange (LME) warehouses increased significantly to 7,657 tonnes in the fourth quarter of 2023 (4Q23), which was 36% higher than the monthly average in 3Q23.

However, LME inventory has come down to 6,300 tonnes in February 2024, probably due to the suspension of all mining activities in Myanmar’s Wa region.

In 4Q23, MSC booked a net profit of RM9.4mil, which was lower by 63.8% year-on-year due to a foreign-exchange loss, retrenchment compensation cost for its smelting segment and settlement costs for a legal case.

This brought its 2023 core net profit to RM84.8mil, forming 90% of UOBKH Research’s full-year estimate and below its expectation.

The negative variance was mainly due to lower-than-expected average LME tin prices and lower-than-expected production output in both mining and smelting segments, said the research firm.

Mining continued to support growth, while the smelting division dragged earnings down. The weakness in the smelting segment was due to the absence of sale of refined tin from processed tin intermediates and sale of by-products. This was primarily caused by a shortage of tin ore, and the capacity was fully occupied by third-party ore in 4Q23.

“Recall that there was an annual shutdown and maintenance of the TSL furnace at Pulau Indah from June to August.

“As the furnace has resumed operation in August 2023, we expect better utilisation rate and MSC can allocate higher capacity and achieve a good balance between smelting of third-party ore and intermediates to improve margins,” it explained.

With full commission of its Pulau Indah plant, MSC also expects margins to improve in 2024.

“As at end-December 2023, the Pulau Indah plant had reached 100% capacity. It has a 50% higher capacity, yielding an additional 20,000 tonnes per year. The plant boasts production costs that are at least 20% lower than the old ones in Penang as it has better efficiency,” it said.

According to the research firm, higher average tin prices will help to partially offset the elevated production cost (energy, fuel and labour) amid the ongoing inflation.

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