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Monday, January 9, 2012

PT INTERNATIONAL NICKEL INDONESIA - TP 3,700/sh - Cost efficient company on a gloomy nickel price outlook

by Ciptadana Securities

We like International Nickel Indonesia (INCO) for its cost efficiency program through newly commenced hydro power plant and its growth expansion plan; nevertheless, we think the unexciting outlook of nickel price would hold back INCO’s performance.

In addition, due to the overhaul and rebuild program in late FY11 and continue in early this year, we expect INCO’s production will slow down during FY11-12F period but will recover in FY13F. We re-initiate our coverage on INCO with HOLD recommendation and target price of Rp3,700/share (rounded up).

New low cost power from Karebbe to ramp up production

On October 4, 2011, INCO inaugurated its third hydroelectric power facility called Karebbe plant which has 90MW of average capacity and consumed a total capital US$410mn. This will bring a total average capacity of 370MW from its hydro generating
facilities consists of Karebbe (90MW), Balambano (110MW), and Larona (170MW).
Previously, INCO would have to operate its fuel-based thermal power facility (about 70MW of total capacity) to support its production. With the commencement of Karebbe plant, INCO now has the capacity to ramp up its production using all hydro power which will strengthen its position as a low cost nickel producer.

Stalled short-term production but expect to surge in the following years INCO’s production faced challenges during FY11 which we expect to reach 66.5k metric tons (mt), down 12.5% yoy and in line with the Company’s revised target of 66.7k mt due to temporary shutdown as a result of earthquake in 1Q11 combined with its overhaul and rebuild program for two of its furnaces that started in late 4Q11 and is expected to complete in 1Q12. We estimate FY12F’s production to grow by 5.5% reaching 70.2k
mt and further by 10.3% into 77.4k mt for FY13F after the completion of its rebuild program.

Gloomy nickel price

We put LME benchmark nickel price at US$23,000/mt as our assumption for FY12F onwards, a decline by 6% as compared to our FY11F LME benchmark price at US$24,500/mt, as we expect nickel price will still be unfavorable this year given the prolonged concerns over European debt crisis coupled with a relatively high level of nickel inventory. On top of that, we expect nickel demand to reach moderate levels this year amid global economy uncertainties that would put pressure on nickel price.

Re-initiate with HOLD

We re-initiate our coverage on INCO with a HOLD recommendation and a target price of Rp3,700/share, implying 11.2X and 9.8X FY12 and 13F PE, respectively. We derived our
target price using a DCF valuation method assuming 12.3% of WACC and 3% of terminal growth. We identify several downside risks to our view, namely 1) significant correction in nickel price, 2) soaring oil price, 3) low rainfall, and 4) regulatory risk.

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