Timah (TINS) posted a 25% yoy decline in net profits to Rp95b in 1Q14, below our expectation at only 15% of our full year forecast of Rp649b. The lower-than-expected net profits owed mainly to weak tin sales volume and a higher tax rate and higher financial expenses in 1Q14. However, with the expectation of stronger refined tin sales volume in the coming quarters, we maintain our BUY call with a Target Price of
Rp1,575, based on our DCF valuation (WACC: 12.5% and long-term growth of 0%). OurTarget Price implies 18x 2014F PE and 15x 2015F PE.
Lower sales volume, higher tax rate and higher interest expenses drag down the net profits
The decline in net profits was mainly attributable to :a) 26% yoy lower refined tin sales volume - which resulted in a 14% yoy decline in revenues. This was mainly attributable to the weak tin price of US$21,500/ton in January 2014, which prompted the company to restrict sales until the tin price improves, b) a higher tax rate of 35% in 1Q14 vs. 24% in 1Q13, c) rising financial expenses of Rp20b in 1Q14 (1Q13: Rp3b), and d) forex losses of Rp31b in 1Q14 vs. gains of Rp12b in 1Q13. However, this was partly offset from other income of Rp37b in 1Q14 vs. expenses of Rp10b in 1Q13. On a quarterly basis, net profits sank 75% qoq as the company posted a sharp decline in refined tin sales volume to 4,319 tons in 1Q14 from 8,010 tons in 4Q13.
Gross and operating margins improvement
While the refined tin ASP posted a slight decline of 3% yoy to US$23,302/ton, the company managed to improve its gross and operating margins to 26.3% and 14.3%, respectively, in 1Q14 from 23.5% and 13.4% in the same period last year. We believe the better margins owed mainly to the weakening in the Rupiah/US Dollar exchange rate as the company sells its refined tin products in US Dollars, while its financial statements and some of the cost components are in Rupiah, in addition to the company’s efforts to withhold its refined tin sales volume in 1Q14 amidst the unfavorable tin prices in January 2014. Due to the high corporate tax rate and higher interest expenses, however, the company posted a lower net margin of 7.7% in 1Q14, or down from 8.8% in 1Q13.
Expecting higher refined tin sales volume in the coming quarters
While the company managed to increase its refined tin production by 8% yoy to 5,148 tons in 1Q14, the total refined tin sales volume dropped 26%. This, in turn, resulted in higher refined tin inventory of 4,371 tons in 1Q14 vs. 1,192 tons in 1Q13. Hence, with expectations of stronger tin pricesgoing forward and given that the 1Q14 production only reached about 20% of the company’s full year target of about 25,000 tons, we expect the company to boost its refined tin sales volume in the coming quarters.
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