Indopremier Nickel Industry Update Lack of Support from Fundamental Basis

The price of metal commodities jumped on speculative uncertainty, which the first rebound began in early year 2009 and continued recently following China stocks financing support from Government and rally in crude oil price. Bullish momentum in the crude oil has brought nickel price surging up to US$ 13,000/Mt to capture the momentum despite of lower demand and surplus supplies. Ferrous metal industry was severely hit due to delayed and halted project globally. However, some industrial production indices output has been declining at a slower pace indicating that the recession might be halted. We find that heavy industries related to construction and automotive might take more times to back to its origin level which might occur in second semester 2010. The market has overreacted to crude oil market momentum despite of bleak industry in nickel, in our opinion. ANTM and INCO have traded at their highest historical valuation, in our view.

2009: Recap and Changes

In term of Return: INCO still the best performer
Despite of falling nickel price, INCO was the stock pick compare to ANTM since INCO offers cost efficiency. INCO stock price has offered 201% return from its lowest price in 28 October 2008, while ANTM offered 122.4% return. Year-to-date return for INCO was higher at 54.3% relative to ANTM at 53.7%. Nevertheless, both stocks underperformed the mining index that has increased by 75.5%. Meanwhile JCI has surged up by 69.7% from its lowest level in October 2008 and 31.2% Ytd.

Q109 Operational Highlight
Q109 operational result was bleak for ANTM since its ferronickel sales volume only reached 1,161 tons or 9.9% of our FY09 estimates. While its ferronickel production volume reached 3,296 tons or 27.5% of our FY09F estimates. However, it is a common pattern for ANTM that has volatile pattern (see exhibit 15).

Meanwhile, INCO showed its competitive advantage by having stable production and sales volume supported with mature operational efficiency and effectiveness relative to ANTM that has fluctuated production and sales volume levels (see exhibit 14 and 15). In Q109 ANTM’s ferronickel price was hit by 74% drop QoQ compare to INCO that relative stable by only -8%.

ANTM’s Cash Dividen is Rp 57.37 per share equal to 40% Payout of FY’08 Earning, While INCO is nil

ANTM’s General Meeting Shareholders have approved dividend payout ratio of 40% from FY08 earning, which above previous government proposal of 30%, whereas It also above our assumption of 30% payout ratio. Therefore we maintain 40% DPR assumption in 2009 and 2010. Meanwhile, we expect INCO not to pay cash dividend until 2010.

Assumptions Changes
Following the current market circumstances and Q109 performance result, we adjust some of our key basic assumptions toward our DCF valuation model. Here are some of our new risk factors and macroeconomics assumptions:

Risk Free = 11.8% (previous was 12.5%)
Risk Premium = 5.45% (previous was 6.5%)
Beta market = 1.1x (previous was 1.3 – 1.4x)
Tax rate = 28% (in 2009) and 25% (in 2010 towards)

Therefore WACC used into our DCF model for INCO and ANTM are 15.9% and 16.5% respectively. We also make some revision toward ANTM operational variables. We increase gold sales volume regarding to its intensive trading activities from Logam Mulia up to 16,000 (+146.2%) in 2009 and 18,000 (+172.7%) in 2010. We also increase ASP for gold price in 2009 and 2010 up to US$ 950/tr.oz and US$ 1,000/tr.oz respectively.

Both Stock Price Valued at historical highest valuation, It’s not Cheap!!
With WACC of 16.5% our DCF model arrive new TP for ANTM is at Rp 2,098 implying PER09F and PER10F at 27.8x and 17.1x respectively. Currently ANTM share price traded at 25.3x PER09F. While for INCO, our DCF model with WACC 15.9% arrive new TP at US$ 0.34 or equivalent to Rp 3,722 per share (assuming Rp 11,000/US$) implying PER09F and PER10F at 23.9x and 14.9x respectively. ANTM share price at Rp 1,960 offers 7% potential upside return. While INCO price at Rp 3,500 offers 6.3% potential upside return. However, we still find lack of fundamental core strength from the industry to boost. Thus we maintain our HOLD recommendation for ANTM and INCO.