Timah (TINS IJ) Equity Research Company Update BUY. Better outlook on supply risks. Thursday,05 October 2017

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1 Equity Research Company Update Thursday,5 October 217 BUY Maintain Timah (TINS IJ) Better outlook on supply risks Last price (IDR) 845 Target Price (IDR) 1,1 Upside/Downside +3.2% Previous Target Price (IDR) 1,5 Stock Statistics Sector Bloomberg Ticker Metal Mining TINS IJ No of Shrs (mn) 7,448 Mkt. Cap (IDR bn/usdmn) 6,293/467 Avg. daily T/O (IDR bn/usdmn) 18.9/1.4 Major shareholders Government of Indonesia 65.% Estimated free float (%) 35. EPS Consensus(IDR) 217F 218F 219F Danareksa Consensus Danareksa/Cons (21.6) (3.7) (4.3) TINS relative to JCI Index Source : Bloomberg Stefanus Darmagiri (62-21) stefanus.darmagiri@danareksa.com The supply risks in the global tin industry are expected to outweigh the muted refined tin demand. This will create a global market deficit. Coupled with the implementation of new technologies to improve productivity and efficiencies in the medium term, we continue to like Timah (TINS). As we have rolled over our valuation to 218, we raise our target price to Rp1,1 (Based on DCF valuation with WACC of 11.3%). Maintain BUY. Stable tin prices to sustain earnings in 3Q17. With a stable average refined tin price of USD2,59/tonne in 3Q17 (+2.9% qoq) and given the assumption that tin sales volume can be maintained, we believe that the company can sustain its quarterly net profits in 3Q17. Looking at the company s performance in 2Q17, TINS recorded net profits of IDR84bn (+26.5% qoq, but - 2.7% yoy). The stronger quarterly net profits owed mainly to rising refined tin production (+14.1% qoq). However, net profits were lower yoy. This was due to the absence of gains from revaluations of investment properties which were booked in 2Q16 amid 12.2% yoy higher ASP. Implementing new technologies to process tin slag and low-grade tin-ore. The company plans to implement two new technologies as it had around 9,73 of tin slag inventory in 1H17. The new technologies are: a) a fuming plant to reprocess tin slag with a recovery rate of 96.5%. With capex of around IDR61bn and daily capacity of 85, this plant is expected to operate in 2Q18. And b) Ausmelt to process low-grade tin-ore with a recovery rate of 98%. At annual capacity of 45,, it requires capex of USD56mn and is expected to operate by 22. We believe the new technologies will support the company s productivity and efficiencies over the medium term. The source of funds comes from bonds and sukuk issuance. Tin market outlook 218: supply risks to outweigh muted tin demand. We expect muted refined tin demand due to the continued miniaturization of electronic equipment (meaning lower solder usage). For 217, ITRI expects global refined tin consumption growth of only 2% yoy. However, we expect supply risks to persist as peak production from Myanmar will limit supply growth. Almost all the tin-ore imported by China comes from Myanmar. We assume an average refined tin price of USD2,/tonne in 217 and USD21,/tonne in 218. Maintain BUY recommendation. We have fine-tuned our financial model to incorporate: a) the change in our assumption of the refined tin price and b) given Rp1.5tn of bond and sukuk issuances. This results on lower our net profit forecast by % for However, as we roll over our valuation to 218, we increase our target price to Rp1,1 (based on DCF valuation with WACC of 11.3%). Our target price implies 25.5x 218F PE. Key Financials Year to 31 Dec 215A 216A 217F 218F 219F Revenue, (IDRbn) 6,874 6,968 7,864 8,713 8,987 EBITDA, (IDRbn) ,19 1,214 1,283 EBITDA Growth, (%) (54.3) Net profit (IDRbn) EPS (IDR) EPS growth (%) (84.9) BVPS, (IDR) DPS, (IDR) PER (x) PBV (x) Dividend yield (%) EV/EBITDA (x) Source : TINS, Danareksa Estimates See important disclosure at the back of this report 1

2 Exhibit 1. REVENUE AND GROWTH Exhibit 2. NET PROFIT AND GROWTH Exhibit 3. MARGIN Exhibit 4. GEARING LEVEL Issuing bonds and sukuk to finance its capex. The company recently issued Rp1.2tn of bonds and Rp3bn of sukuk. About 7% of the bond proceeds will be used for capex (this year, TINS plans to spend IDR1.5tn on capex) to improve production capacity and implement new technologies with the remaining 3% to repay bank loans. Meanwhile, the proceeds from the sukuk issuance will be used for the reconditioning of production equipment. Expanding into the American market through cooperation with Yunnan Tin. The company has signed a strategic partnership with China s state-owned and the world s largest tin mining company, Yunnan Tin Group Company Limited to sell its tin chemical products to the American market. In 216, the company produced 1,998 tons of tin chemical. Tin chemical accounted for about 2.2% of the company s total revenues in 216. Declining imports from Myanmar to impact refined tin production in China. Going forward, the refined tin production in China is expected to be impacted by the limitation of tin-ore from Myanmar since almost all of China s tin-ore imports come from Myanmar. In 8M17, China s imports of tin-ore and concentrate declined by 43.8% yoy. See important disclosure at the back of this report 2

3 Exhibit 5. TIN PRICE AND INVENTORY LEVEL USD/tonne 25, 15, 12, 2, 9, 15, 1, Jan 15 May 15 Sep 15 Jan 16 May 16 Sep 16 Jan 17 May 17 Sep 17 Inventory (RHS) Market Price (LHS) 6, 3, Source: Bloomberg Exhibit 6. CHINA S IMPORTS OF TIN-ORE AND CONCENTRATES 8, 7, 6, 5, 4, 3, 2, 1, Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Source: WBMS, Bloomberg Exhibit 7. INDONESIA S REFINED TIN EXPORTS USDmn 16, 35 14, 3 12, 25 1, 2 8, 6, 15 4, 1 2, 5 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Volume (LHS) Value (RHS) Source: Ministry of Trade, Bloomberg Exhibit 8. CHANGES IN OUR FORECAST New Previous Change (%) 217F 218F 219F 217F 218F 219F 217F 218F 219F Refined Tin Sales Volume (tons) 28, 3, 3, 28, 28, 28, Refined Tin ASP (US$/ton) 2, 21, 22, 2, 2,5 21, Revenue (Rp bn) 7,864 8,713 8,987 7,864 7,938 8, EBITDA (Rp bn) 1,19 1,214 1,283 1,99 1,123 1, Net Profit (Rp bn) (3.8) (4.2) (4.2) See important disclosure at the back of this report 3

4 Exhibit 9. Income Statement Year to 31 Dec (IDRbn) 215A 216A 217F 218F 219F Revenue 6,874 6,968 7,864 8,713 8,987 COGS (6,188) (5,873) (6,63) (7,346) (7,552) Gross profit 686 1,95 1,234 1,367 1,435 EBITDA ,19 1,214 1,283 Oper. profit Interest income Interest expense (129) (118) (139) (242) (257) Forex Gain/(Loss) (33) (16) (63) (28) (14) Income From Assoc. Co s 7 3 Other Income (Expenses) Pre-tax profit Income tax (67) (132) (1) (17) (113) Minority interest Net profit Core Net Profit (49) Exhibit 1. Balance Sheet Year to 31 Dec (IDRbn) 215A 216A 217F 218F 219F Cash & cash equivalent , Receivables ,17 1,226 1,264 Inventory 3,12 2,39 2,725 3,19 3,13 Other Curr. Asset 1,359 1,669 1,298 1,452 1,438 Fixed assets - Net 2,224 2,221 2,714 2,828 2,912 Other non-curr.asset 1,611 1,897 1,642 1,767 1,732 Total asset 9,28 9,549 1,83 11,57 11,353 ST Debt 2,115 1,733 1,64 1,5 1,5 Payables Other Curr. Liabilities Long Term Debt 1,5 1,5 1,5 Other LT. Liabilities Total Liabilities 3,99 3,895 4,863 4,947 5,64 Shareholder'sFunds 5,371 5,653 5,939 6,19 6,288 Minority interests Total Equity & Liabilities 9,28 9,549 1,83 11,57 11,353 See important disclosure at the back of this report 4

5 Exhibit 11.Cash Flow Year to 31 Dec (IDRbn) 215A 216A 217F 218F 219F Net income Depreciation and Amort Change in Working Capital (212) (415) (12) OtherOper. Cash Flow 1, Operating Cash Flow 2,62 1, ,167 Capex (649) (535) (1,) (65) (65) Others Inv. Cash Flow (1,28) (27) Investing Cash Flow (1,929) (742) (994) (627) (613) Net change in debt (22) (381) 1,47 (14) New Capital Dividend payment (191) (3) (126) (15) (16) Other Fin. Cash Flow (13) (118) (139) (242) (257) Financing Cash Flow (541) (53) 1,141 (533) (417) Net Change in Cash (553) 138 Cash - begin of the year , Cash - end of the year , Exhibit 12. Key Ratios Year to 31 Dec 215A 216A 217F 218F 219F Growth (%) Sales (8.6) EBITDA (54.3) Operating profit (91.5) Net profit (84.9) Profitability (%) Gross margin EBITDA margin Operating margin Net margin ROAA ROAE Leverage Net Gearing (x) Interest Coverage (x) Source : TINS, Danareksa Estimates See important disclosure at the back of this report 5