Morgan Stanley Research - Aneka Tambang: Positives Mostly Discounted; Downgrade to Equal Weight

We are downgrading Antam to EW as we believe the stock appears fully valued, reflecting most of the positives that we have highlighted. In our view, Antam’s valuation is no longer attractive at 15x 2011E P/E and 2.4x P/B, above closest peer PT Inco’s (INCO.JK, EW, Rp4,100) 12x P/E and 2.1x P/B on our 2011 forecasts.

Our preferred OW non-ferrous stocks, Korea Zinc (010130.KS, W190,500) and Zhongwang (1333.HK, HK$7.57), have more attractive valuations with P/Es below 10x and P/Bs below 2x.

Higher EPS on higher nickel prices forecast: We are raising our Antam 2009-11e EPS by 14-26% as Morgan Stanley’s commodities team has increased its 2009-11 nickel price forecasts by 12-15% (please refer to Global Metals Playbook – 4Q09: A Strengthening Cycle, October 14, 2009, for details).

However, we are maintaining our PT for Antam as we had already incorporated the prior bull-case nickel prices into our model (see our August 15 report, Aneka Tambang: Higher Nickel Prices & Beyond, for more details). Our new base-case nickel prices forecasts are similar to the previous bull-case numbers. Nickel price recovery remains fragile: We do not expect nickel prices to average more than US$8/lb for 2010-11. We estimate that Antam’s share price is discounting nickel prices of ~US$8.50/lb and we see downside to the current share price if prices pull back.

Potential upside from NNT acquisition discounted:
While we have included 65% of our full NNT acquisition value in our model, we think it is too early to assume the deal can be completed and the full value realized in the near term. We need to see more progress before assigning a higher valuation for the deal.