DBS INCO 3Q09 profit surprise on upside

At a Glance
• 3Q09 earnings were better than expected; surge in nickel price boosted revenue
• But all the positives have been priced in
• Maintain HOLD rating and Rp3,979 TP. Comment on Result

International Nickel (INCO) reported 3Q09 net profit of US$76m, surging 336% q-o-q to exceed our estimate. The strong growth was driven by 61% revenue growth q-o-q underpinned largely by higher average selling price (+51% q-o-q) and to a lesser extent, sales volume (+7% q-o-q). Production cost only rose 6% q-o-q, and as such gross profit managed to improve by 311% q-o-q Note that LME nickel price rose 35% q-o-q.

On y-o-y basis, net profit fell 70% to US$110m as a result of lower average selling price (-48% y-o-y) and sales volume (-11% y-o-y). Both revenue and gross profit fell, by 54% and 69%, respectively.

The realised price for FY09 is higher than our estimate, which prompted us to raise our nickel price assumption to US$14,000/ton, which in turn raised our FY09F revenue by 12%. We also lowered our production cost by 5%, thus adjusting net profit for FY09 by 85%. Note that the huge percentage change in earnings is due to the relatively small base.

Recommendation
Going forward, INCO’s earnings will continue to edge up along with rising nickel prices. However, the market has already priced-in the positives and upside is limited from current levels. Hence, we retain our target price of Rp3,979 based on 12.7x targeted FY10 PE, and our HOLD recommendation.