MSC- is this peak earning or better days ahead?

Results Update

MSC's net profit increased by 28% q-o-q or 355% y-o-y to RM36 million while turnover increased by 8% q-o-q or 37% y-o-y to RM853 million. The increase in the top-line increased was attributable to high tin prices while the bottom-line improved due to higher operating profit from tin mining & smelting operation in Malaysia & higher contribution from its investment in KM Resources Inc.


Table: MSC's last 16 quarterly results



Chart 1: MSC's last 22 quarterly results

Tin price movement

Over the past 3 years, tin prices have risen from a low of USD10,000 per ton in early 2009 to a high of USD33,000 per ton in May 2011. This rise coincided with the rally in commodities. However, as commodity prices retreated over the past few weeks, tin prices have also dropped back substantially. It broke the strong horizontal support of USD24,000-25,000. The next support is at the psychological level of USD20,000. Currently, tin is trading at about USD23,000.


Chart 2: Tin Price movement (Source: LME)

Valuation

MSC (closed at RM4.36 yesterday) is now trading at a PE of 3.3 times (based on annualized earning for FY2011 of 133.8 sen). I don't think it is prudent to use the annualized earning basing on the results for the first half since tin prices appeared to have peaked. The last time tin peaked in the middle of 2008, MSC dropped for the next two quarters (i.e. QE30/6/2008 & QE30/9/2008) as well as incurred losses for the two quarters (i.e. QE31/12/2008 & QE31/3/2009). However, one may argue that that period was exceptional as the global economy came to a standstill. We are not likely to see that kind of collapse in the price as well as the demand for tin. If we were to assume that the earning for the next two quarters to zilch, MSC's full year earning for FY2011 would still be 66.9 sen and MSC's PE would be 6.5 times. At that PE multiple, MSC looks attractive. If tin prices & demand hold up better than market expectation, I think MSC may surprise on the upside.

Technical Outlook

From the weekly chart (plotted on log scale), MSC is still in a long-term uptrend line, with support at RM4.30.


Chart 3: MSC's weekly chart as at August 8, 2011 (Source: Tradesignum)

Conclusion

Based on the above, I would rate MSC a HOLD.