TP upped to Rp5,000
We raise our TP to Rp5,000, and place a BUY on the stock to reflect the bullish outlook for nickel prices. We upgrade our 2010 earnings forecast for INCO by 210% to US$406mn, assuming higher nickel prices due to stronger-than-expected recovery of the global economy. Our TP is calculated using a blend of the DCF and PE valuation methods. In the DCF calculation, we use a lower WACC of 15.4% compared to 19.2% previously. In the PE method, we use the 13.4x PE of the mining industry. Our new TP offers 20.5% upside potential. At their current price, INCO’s shares trade at a PE 2009F of 24.5x and 2010F of 9.2x.
Anticipating a recovery in nickel prices
We expect the nickel market to rally next year on the back of strengthening economies and government-funded infrastructure spending. And over the near term, the current curb on production by the major nickel producers is expected to continue. Thus, with stronger demand and limited supply, we are confident of higher nickel prices. In 2010, we expect the nickel price to reach an average of US$24,350/Mton. As a result, we now expect INCO’s revenues to reach US$1,188mn in 2010, or significantly higher than our previous estimate of US$732mn.
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