Wednesday, May 25, 2011

Benefit from high nickel price - International Nickel Indonesia. Tbk

by Samuel Securities

 INCO recorded 26% revenue growth and 47% earnings growth YoY in 1Q11. Revenue was recorded at US$322 million while net income for the period was US$112 million.

 1Q11 result was in-line with the market and above our projections. 1Q11 revenue accounts for 29% from our estimates and net profit accounts for 31% from our FY’11F estimate.


 INCO’s growth in revenue and net income in 1Q11 was mainly supported by high ASP of nickel and lower input cost because production during 1Q11 was lower by 17% compared to 1Q10. Furthermore, the company announced further cutback on production volume this year as electric furnace #2 will be shutdown temporarily and will be rebuild for a period of 21 weeks in 4Q11 strecthing into parts of 1Q12.

 Thus, production in 4Q11 is expected to reduce by 30% and the company’s target production volume in 2011 is 71k tons (vs. Our new assumption of 68K tons).

 Lower production volume in 1Q11, -8.3% QoQ, was caused by the temporary production shutdown in Sorowako due to earthquake and lightning storm. However, lower input cost and expenses has compensated the lower production volume such that overall margins of the company improved.

 Currently, Karebbe project status is 87% completed. Although the facility will start in 2H11, INCO will only be able to put Karebbe up to the test in 2012 because we believe INCO will not be able to switch from thermal power to hydroelectric power immediately, especially when EF#2 will undergo overhaul in 4Q11. Nonetheless, with the addition of Karrebbe, overall production cost is expected to reduce by around 6%.

Actions & Recommendations:

 We revise our forecast factoring rising nickel price and lower production cost despite lower target production volume in FY11 and expected higher volume in FY12.

 Although nickel price is quite volatile, we change our nickel price assumption from US$7.6/LB to US$11/LB for FY’11F as we are bullish towards nickel price until the end of this year on the back of lower LME nickel inventory, possible global supply deficit for this year, and the expectation that Rupiah will remain strong this year.

 Based on our DCF model, we derive a new target price of Rp5,950 (previously Rp4,700), reflecting 10.35x – 11.7x PE’11F – 12F. With this new target price, we upgrade our recommendation to BUY as the new TP offers 20.8% upside to the current price. BUY

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