Equity Research

Equity Detail

Wednesday, 06 Nov 2019 02:00

PT TIMAH TBK 

A gruesome outlook

TINS’s 9M19 revenue was great, but its bottom line was below our (and consensus) expectations due to higher operating cost despite strong contribution from tin sales volume. We have more conservative on TINS earnings and cut our FY20-21F EPS by -65.1% and -48.4%, mainly to adjust higher COGS and operating cost.  We downgrade rating to neutral recommendation and TP also lowered to Rp 900/share, from previously Rp 1.700/share. Our TP implies 20.0x P/E and 11.1x EV/EBITDA, based on FY20F forecasts.

Earnings shocks due to higher than expected cost

In 3Q19, TINS booked higher net losses of Rp 381.1 bn (vs 2Q19 net profit of Rp 96 bn) bringing the 9M19 net loss Rp 175bn (vs 9M18: Rp 255bn). The numbers fell short due to higher-than-expected COGS, amounts to Rp 206 bn in 9M19 (+69% QoQ,+%163 YoY). We observed the most significant increase in raw materials of tin ore (+209.2% YoY) and third parties service (+842.1%YoY) as the company used some private smelters to increase production amid regulations in the refined tin industry in Indonesia. Furthermore, the company's performance was depressed from the higher finance cost for bonds and loans   + 163.38% YoY, from Rp 124.7 billion to Rp 328.43 billion, and higher interest expenses (+162% YoY).  At the top line, TINS managed to booked sales revenue of Rp 14.6 Tn or +114%YoY, representing 76% of our estimates.  For quarterly basis lower revenue in 3Q19 was backed by weak ASP (- 13.2%QoQ, to US$ 17,165 ton) as the average LME tin price declined.

Margin squeeze driven by higher cost structure

TINS reported lower profitability margin with GPM and EBIT margin falling by 860bps YoY to 7.3% and 500bps YoY to 0.9% in 9M19, mainly driven by higher raw material costs and third-party service fees. In particular, its inventory as of September 19 remained high at Rp 8.19Tn (vs 9M18: Rp 4.2Tn) that eroded its cash flow and increased its short- term debt. As the result, its interest cost has more than doubled to Rp525bn (vs 9M18: Rp 200bn), which contributed to its net loss in 9M19.

Downgrade to neutral with lower TP Rp 900

Responding to the 9M19 result that was below our expectation, we have to revise down our projection. TINS’s cost structure is more volatile as companies depends on third party to secure raw materials, which represent ~ 60% of production costs.  In this case, TINS must reduce the cost of its material for tin ore and lower costs for third party service as both accounts more than 80% of COGS.  Our new TINS’s fair value of Rp900/ share. This implies a valuation target P/BV 1.0x and EV/EBITDA 10.27x for FY20F. Based on yesterday’s closing price, our TP offers 8.0% upside, NEUTRAL recommendation.

Key Risk: 1) Higher production costs 2)  Lower than expected LME tin price 3) Indonesian authorities fail to suppress illegal mining and

 

 

Financial Summary

 

(Rp billion)

 2017A

 2018F

 2019F

 2020F

 2021F

 

Revenue

9,217

11,050

17,192

18,777

19,470

EBITDA

1,247

1,319

850

1,607

1,721

Net profit

502

532

(140)

261

285

EPS (Rp)

67

71

(19)

35

38

PER (x)

12.31

11.63

(44.07)

23.69

21.68

PBV (x)

1.02

0.95

1.01

0.96

0.93

EV/EBITDA (x)

6.83

8.75

17.72

9.65

8.63

Dividend yield (%)

1.22

2.84

3.01

(0.79)

1.48

RoE (%)

8.57

8.45

(2.22)

4.15

4.35

 

 

 

 

 

 

 

 

 

 

Source: Company data and Lotus Andalan Research