China’s infrastructure-driven US$550bn stimulus package has revived construction and real estate activities recently. Prices of nickel, tin and copper have risen sharply as demand slowly improved. As risk perception falls, we have tapped a risk- free rate assumption of 9.5% and 6.2% equivalent to our 10-year Rupiah and US dollar bonds interest rate forecasts, respectively. Without any other changes, our upgraded TP for our metal counters are as follows: Antam (ANTM, Rp2,200, Neutral TP: Rp2,200), Inco (INCO, Rp4,400, Neutral, TP:Rp4,100) and Timah (TINS, Rp2,175, Sell, TP:Rp1,900), which are still below their current prices. With the limited downside, we upgrade the sector to Neutral from Sell.
De-stocking measures ……Due to the current de-stocking measures brought about by the fiscal stimulus, metal prices have gone up recently entwined with the resumption of higher contruction and manufacturing activities.
…….driving up LME prices. LME price has shot up sharply not necessarily due to demand in intermediate base metals but more so because of the supply de-congestion as a number of plants and mills have stopped or reduced production prior to the allocation of fiscal stimulus funds. Over the last three months LME nickel and tin prices have gone up by 65% and 51% respectively while inventories have not shown any significant decline, even rising by more than 50% over the same period.
Steel market remain directionless. Global data on stainless steel, which takes about 70% nickel content remains unassuring. Based on China’s stainless steel index in the month of May09, industrial stainless steel production rose only by 7%mom. Thus the short-term rebound driven by the US$585mn domestic stimulus which should help boost some fluctuative recovery in construction activities! , remains to be seen.
Higher TPs but still below current prices. With the rupiah strengthening and lower interest rate environment, we have adjusted our WACC assumption that landed a revised TPs for Antam Rp2,200/shr, Inco Rp4,100/shr and TINS Rp1,900/shr, still at watershed levels below their current prices. Valuations remain high at average PER09-10F of 60.6x and 21.7x, r! espective ly while regional peers points to a lower median discount of 60.2% versus domestic metals in 2009. Key share price boosters are (a) price and demand improvement (b) steel demand growth and (c) shutdown of inefficient plants to help constrict supply curve.
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