Nickel price recovery well reflected, reiterate Sell — PT. Inco’s sound cost
structure, as reflected in the 1Q09 earnings, means the company is a preferred
play on a scenario of nickel price recovery. However, we believe that such a
scenario has been more than reflected in the current valuation, following the
recent rally. Thus, we reiterate our Sell rating with a target price of Rp2,250.
PT. Inco: Structurally sound — Post the shut-down of diesel-fired generators,
1Q09 earnings reflected cash cost of ~US$3.1/lb. We expect to see further cost
reductions as the inventory of higher-priced materials depletes. We also view
the company’s decision to cut its capex plan as a sensible step to support cash.
Nickel price: Forecast maintained — CIRA’s commodities team has maintained
the nickel price forecast of US$4.5, $5.0, $6.0/lb for 2009E-2011E. The team
believes that for nickel prices to see meaningful upside over the next few years
two factors are required: 1) The failure of all leaching projects, and 2) A
recovery in austenitic stainless steel production.
Marking our forecasts — Our 2009E-2011E estimates are increased by 19%-
40%, as we slightly revise our cash cost and 2009 nickel price to reflect the
1Q09 actual numbers. Our DCF-based target price is increased slightly to
Rp2,250/share (from Rp1,975).
Spot earnings, mid-cycle valuation — Using the spot nickel price, the valuation
appears stretched at 19x PE. Mid-cycle valuation (using 2009 production and
mid-cycle EBITDA margin and multiple), implying a Rp3,100/share valuation,
would offer the most attractive valuation angle for bulls.
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