Why I like MSC and it will be my largest exposure of stocks in 2017

First, I normally don't recommend stocks. But this rare gem really worth our studies. I share with all here the studies I have done and it is for references purposes only and it doesn't serve as any recommendation to buy or sell.

Why MSC-Malaysia Smelting Corp get my attentions?  A few reasons:

1. This stock is owned by one of the most famous value investors-Dr.Neoh.

From annual report 2015, he owns around 1.40%, another famous fund managers-ICAP owns around 2.90%

10.NEOH CHOO EE & COMPANY SDN BERHAD- 800,000 units=0.80%
13.DYNA􀀳UEST SDN BERHAD-600,000 units=0.60%

The shares are easy to calculate as it has share outstanding structure of 100mil exact. From the 2015 Annual Report, Top 30 shareholders had owned around 72.54% of the shares, making most circulating outside in market estimated to be only 27%

2. Most of the investors would have stop digging more once they have seen their results past 2 years. Most of the time it was volatile, and also at the same time in loos making.  Well I would say digging deeper we might understand more of this company.

This company is the second largest Tin producer in world after one in China (MSC is producing consistenly 30,000 Tonnes every year). Tin prices have been volatile since and MSC wrote off huge losses during last 3 years after the political risks surface in Indonesia and their venture in Indonesia was forced to a halt and they have no choice but to write them off.

Some write off still happens in recent quarter, but I think the amount left to be write off are really not that much anymore.

Look at Q2 2016 result, a one-off RM30mil write-off on associates occur.  Without this, the company is actually in profit for 1H 2016.

A further reading under notes, it states as such:

6. Share of results of associates and joint ventures

The Group’s share of results of associates and joint ventures recorded a net share of losses of RM30.53 million in 1H 2016 compared with a net share of profit of RM0.35 million in 1H 2015. This was mainly due to higher share of losses from KM Resources, Inc. arising from the provision of additional prior years tax liabilities

Without such one-off items, we can estimate the EPS to be around RM0.88 per year. Which makes its P/E look attractive at around 4 now.

MSC
Cash	208,028.00						EY	ROC
Receivables	40,930.00						35.6%	76.90%
Inventory	146,870.50
							Div
Total Liabilities	(367,539.00)	(2.3)	Mkt price	Graham Ratio	50.09		-	0.00%
	28,289.50	0.28	3.410	pie	7.08
Cash from Operation	158,000.00		-91.7%	NAV	2.53
Share Outstanding	100,000.00	1.58	341,000,000.00		1.70		Top30%
		46.3%					72.54%
							Butterworth, 40,000tonnes capacity
Borrowing	229,956.00	1.46					30209tonnes
EPS	0.880
P/E	3.88

Its strong cashflows generation of around 79mil YTD is even more fastinating. Making its EY, ROC at marvellous status.

Its liability is manageable with its strong cashflows generation, while the cash yielding is one of the craziest I have seen recent years beside the earlier identified KESM!
It is yielding even crazier than KESM when I notice it. KESM was yielding near 30% when I discover it in 2015 end. MSC is now yielding around 46% and can even be MORE due to recent TIN price rally, coupled with weakening currency of MYR.

3. TIN PRICE rally!
The most fundamental reason I am positive about MSC is due to recent rally in Tin Price.
Look at AR 2015, the company keep good track record on Tin prices for few years as below
Tin prices traded around range of  USD 20,000 actually recent years. But a crash on prices happen in 2015.

Tin price has since recover in 2016. As below for 2016
http://www.mtpma.org.my/index.php/statistic/2014-07-07-04-56-57
It has recently recover to near range of USD 20,000 which is why I am positive on their near future earnings.

OCTOBER 2016 TIN PRICES 

DATE	USD	RM	EXCHANGE RATE	TURNOVER
3	CLOSED	CLOSED	CLOSED	CLOSED
4	20,000	82,520	4.1260	28
5	19,850	82,276	4.1449	45
6	19,880	82,273	4.1385	44
7	20,020	83,243	4.1580	41
10	20,020	83,119	4.1518	58
11	20,050	83,324	4.1558	42
12	19,880	83,271	4.1887	38
13	19,880	83,794	4.2150	30
14	19,600	82,549	4.2117	46
17	19,580	82,686	4.2230	30
18	19,500	82,261	4.2185	25
19	19,800	83,051	4.1945	30
20	20,000	83,602	4.1801	38
21	19,900	83,560	4.1990	44
24	20,050	83,949	4.1870	23
25	20,100	84,028	4.1805	40
26	20,300	84,539	4.1645	53
27	20,500	85,885	4.1895	36
28	20,500	86,182	4.2040	34

Source : The Kuala Lumpur Tin Market (KLTM)

SEPTEMBER 2016 TIN PRICES 

DATE	USD	RM	EXCHANGE RATE	TURNOVER
1	18,900	77,103	4.0795	30
2	19,180	78,379	4.0865	31
5	19,330	78,741	4.0735	35
6	19,300	78,715	4.0785	43
7	19,450	78,996	4.0615	51
8	19,600	79,600	4.0612	25
9	19,600	79,684	4.0655	41
12	CLOSED	CLOSED	CLOSED	CLOSED
13	19,200	78,826	4.1055	28
14	19,150	79,128	4.1320	27
15	19,200	79,286	4.1295	47
16	CLOSED	CLOSED	CLOSED	CLOSED
19	19,200	79,344	4.1325	38
20	19,400	80,316	4.1400	42
21	19,480	80.676	4.1415	55
22	19,400	79,831	4.1150	66
23	19,450	80,163	4.1215	49
26	19,600	81,164	4.1410	68
27	19,600	81,036	4.1345	55
28	19,800	82,051	4.1440	36
29	19,980	82,288	4.1185	30
30	20,080	83,292	4.1480	52

 Source : The Kuala Lumpur Tin Market (KLTM)

AUGUST 2016 TIN PRICES 

DATE	USD	RM	EXCHANGE RATE	TURNOVER
1	17,900	72,146	4.0305	45
2	17,940	72,729	4.0540	43
3	18,000	73,125	4.0625	30
4	17,970	72,752	4.0485	27
5	18,080	73,070	4.0415	32
8	18,350	74,270	4.0474	42
9	18,200	73,444	4.0354	15
10	18,425	73,811	4.0060	31
11	18,550	74,360	4.0086	48
12	18,400	73,744	4.0078	34
15	18,250	73,553	4.0303	50
16	18,250	72,927	3.9960	31
17	18,300	73,182	3.9990	43
18	18,350	73,354	3.9975	26
19	18,430	74,089	4.0200	30
22	18,430	74,319	4.0325	45
23	18,480	74,484	4.0305	38
24	18,600	74,986	4.0315	40
25	18,600	75,032	4.0340	36
26	18,700	75,286	4.0260	26
29	18,700	75,501	4.0375	65
30	18,850	76,390	4.0525	47
31	CLOSED	CLOSED	CLOSED	CLOSED

JULY 2016 TIN PRICES 

DATE	USD	RM	EXCHANGE RATE	TURNOVER
1	17,080	68,115	3.9880	57
4	17,500	69,939	3.9965	45
5	17,930	71,792	4.0040	26
6	CLOSED	CLOSED	CLOSED	CLOSED
7	CLOSED	CLOSED	CLOSED	CLOSED
8	17,550	70,986	4.0448	28
11	17,901	71,362	3.9865	78
12	17,800	71,191	3.9995	41
13	17,990	71,717	3.9865	31
14	17,900	70,825	3.9567	31
15	17,990	71,186	3.9570	56
18	17,940	71,444	3.9824	31
19	17,850	71,195	3.9885	33
20	17,700	71,101	4.0170	45
21	17,900	72,432	4.0465	32
22	17,870	72,695	4.0680	23
25	17,800	72,677	4.0830	36
26	17,800	72,576	4.0773	31
27	17,900	73,082	4.0828	54
28	17,900	72,737	4.0635	28
29	17,900	72,656	4.0590	52

Source : The Kuala Lumpur Tin Market (KLTM)

4. Selling of lands in Penang factory to unlock value??

I read a recent news from the edge daily. There was rumors where MSC might reallocate their smelting factory from Penang state to Klang as the land in Penang could be redeveloped into properties to unlock their values. If this happen, I am not sure if it might impact their temporary functions? But CEO resigning from company is a big warning sign to me. Could it be tussle of wars among Malaysian and Singaporean? Or is there other things? I wouldn't want to do any estimation. But if reallocate did happen will be extra bonus to us.

5. Price recover back past 2-year record at RM4 range?

Look at its price during 2012 when it was trading at RM4.50 high. I believe with no much write off can be further done on associates, its near future result can be very fascinating.

Its investment in associates as noticed in latest quarter result report is RM49.78mil, compared with Dec15 RM84.47mil. MSC, come and write off the balance. So the price can go further down and next year it will boom like mad.

Assuming next yr no more write off, EPS of 0.80 at P/E 10 can easily give it RM8 TP.

Its cash yielding is around RM1.58 per share per year. By that, it should be easily traded at range of RM15-RM18.

In near term using recent latest results, I think it can challenge EPS of RM1, giving P/E 10=TP RM10

EPS RM1 derived from below

30,000 tonnes capacity per year x Avg price per tonnes USD19,000 x MYR 4 x profit margin around 4.5%=RM102.6mil net profit.

S/O=100mil, so easily EPS=RM1 per year. P/E can be even lower near 3 next yr.

EVEN, we are so pessimistic that It will by Maximum goes back only to 2-3 years high of RM4.50 range, it will still give us around 32% return.