• Downgrade to REDUCE. Supply and demand situation does not support a recovery any time soon.
• The market is currently pricing in a LT nickel price of USD19,000/tonne, compared to the current USD12,200/tonne.
• Recent rise in price (+70% in a month) has left the stock over-priced. Rating changed to REDUCE, TP IDR2,000.
Over-bought on fundamentals
Liquidity driven out performance
Liquidity inflow into Indonesia has resulted in a 70% rise in INCO’s price over the past month. This is due to the fact that people are now more bullish on commodities, since they believe they are a hedge against the weakening USD (as a result of quantitative easing). INCO provided an attractive opportunity for investors: Its share price had collapsed by 90% from peak to trough, it was strong financially and had excellent corporate governance.
Valuation has run away from fundamentals
At its current share price of IDR3,500, using a DCF based calculation, the long term (from 2012 onwards) implied nickel price would have to be USD21,000/tonne. This seems excessive since the nickel price is quite volatile, while the long-term average (over 10 years) is only USD15,000/tonne. The current nickel price is USD12,200/tonne. The fact that INCO decided not to pay any dividend (vs our already very conservative assumption) this year further reinforces the argument that the stock is overpriced.
LME stock still high, demand unlikely to pick up soon
We do not believe that the nickel price will recover any time soon. The global economy has yet to recover and nickel stocks at the LME remains are at an eight-year high, at 100,000 tonnes (Exhibit 1). Even at the current nickel price, future expansions and projects are being deferred, delayed or cancelled due to lack of demand. This is exacerbated by the absence of lending (of any real scale). As a result, we believe it will take some time for excess inventory to be absorbed.
Downgrade to REDCUE
Speculation that China is planning to stockpile raw material on the cheap may provide some support, with annual consumption of 300,000 tonnes accounting for roughly 20% of total global consumption. However, given the high stocks and a desire not to drive up prices, we believe the impact to nickel price will be muted. Besides, we believe that this potential upside has already been priced in by the market. We therefore recommend investors to take advantage of the strong price to
start taking profits. TP IDR2,000 based on DCF using WACC of 15%.
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