Our analyst Olie revises down our earnings forecasts for both Inco (INCO IJ) and Aneka Tambang (ANTM IJ) by 30-60% mainly to reflect sustained weakness in nickel demand. INCO: downgrade to UNDERperform w/ Rp3,400 TP (from outperform, 2800). ANTM: downgrade to SELL w/ Rp1,650 TP (from outperform, 1300). The new TPs are DCF-based. We continue to like in the medium to long-term prospect of INCO and expect the company to become bigger, adding 30% output, and better, lowering cost by 30%, within two years. However, current valuation does not justify an O-PF.
Upside on nickel price, thus earnings of both Inco Indonesia and Antam, hinges on US dollar direction, re-stocking of nickel inventory, and announcements of production cut and delays. Soaring crude oil price, hence fuel cost, poses downside risk to earnings.
What nickel prices are implied in the current share prices?
Current share prices imply a much higher LT nickel price than current spot, US$8.5/lb for ANTM and US$7/lb for INCO.
How do the nickel shares look relative to their historical trading ranges?
INCO was trading at its through-cycle multiple of 40x back in 1998/Asian crisis and nickel price hit historic lows of US$2.0/lb, with low costs supply under way. INCO and ANTM are currently trading at 68.5x and 91.2x of their 2009 earnings respectively, suggesting a 70% and 120% premium to the previous though cycle multiple, respectively.
Soaring oil prices poses more risk to INCO earnings as fuel cost accounts for 30% of the cash cost. Much less for ANTM due to higher gold contribution: 10% of the cash cost.
How do our numbers look like compared to consensus?
Our numbers are much lower than consensus. For INCO, we are 31% and 24% below consensus for 2009 and 2010, respectively. For ANTM, our numbers are 75% below consensus for 2009 and 81% below consensus for 2010. I suspect this is mainly due to our much lower nickel price assumptions and higher cost structure assumptions.
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