Macquarie PT Inco, risks of earnings and dividend dissapointments

Kenneth Yap (analyst) starts coverage on PT Inco with Underperform rating and DCF based PxT of Rp1,300, or 38% downside. His 2009 EPS estimate is currently 78% below consensus, mainly due to Macquarie commodities team’s new assumption of US$4.50/lb nickel price for 2009. The team only sees a marginal nickel price rise in 2010 to an average of US$5/lb, due to a much-worse stainless steel production outlook coupled with large unused nickel capacity that hangs over the market. Nickel inventories are at the highest they have been since mid-1995, despite significant product cuts already made in 2008. Negative catalyst could come in the form of a dividend shortfall on 17 April EGM. Consensus is looking at a 12-month dividend yield of between 6-12% from INCO shares; Ken thinks the dividend yield could be zero as the company’s free cash flow turns negative in 2009/10. Finally, the stock is looking pricey on PER of 64.9x 2009E and 49.8x 2010E.