A Cup of Tea 12 Apr'10

Commodity
Macroeconomic backdrop remains supportive of commodity markets. Robust commodity demand in China, Warehouse inventories have started to fall amid signs of restocking activity for base metal, rising steel prices should offset increase in raw materials cost, Iron ore pricing looks set to rise substantially, Oil prices are forming a new range above the USD 80 level, A gradual tightening of the global oil market balance should lead to higher oil prices, Rising Asian demand should bode well for coal prices in the Pacific Basin, rising real interest rates should cap the upside for gold.

ANTM
Nickel Price continues to upward trend. Demand from steel industry triggered higher price movement. We expect a higher nickel price to be sustained and the market to return to deficit for 2010. With these circumstances I will adjust metal prices to reflect the new forecasts, Nickel average 2010 upgrade from 17000 usd/ton to 22500 usd/ton on. Gold average 2010 upgrade from 1200 usd/t.oz to 1300 usd t.oz due higher inflation on 2010. Every 10% increase in average nickel and gold price would be impacted about 21% and 6%. Note: Revenue Breakdown Ferro Nickel 22.3%, Nickel Ore 19%, Gold Mining 12.4%, and Others 46.3%.

For that reason, I will upgrade EPS ANTM at 208 (from EPS 131 PE 18.51xPE’10 comsensus base). I will set Price Objective ANTM at 3328 in line with PE market at 16x F’10. The high P/E suggests an opportunity to buy into this highly cyclical company --- Buy.

INCO
PT Inco is a nickel pure play whose earnings are highly sensitive to nickel prices. Well positioned to leverage on higher prices. The uplift in nickel price should be more than enough to cover the higher costs. With assuming nickel average at 22500 I put EPS will growth to 0.0387 usd. Price objective for INCO at 5632 in line with PE market at 16x --- Buy.

BUMI
I believe that the Xstrata settlement price of US$98/t is a positive and will see upside risks to our thermal companies' 2010 earnings forecast. The reference price usually sets the tone for other contract negotiations in the region. I continue to expect the thermal coal market to be tighter in 2010-2011 driven by potential supply/demand tightness due to the potential for increasing demand from the China market and Indian imports as electrification rates increases. Exports to Japan typically account for about 20-25% of Indonesian company's total sales.

Bumi announced that its subsidiary Kaltim Prima Coal has managed to secure US$104/t pricing (up 44% YoY) for JPY10 with a large Japanese customer. This represents a US$6/t premium to the Xstrata settlement of US$98/t. Bumi’s production volumes rose 19.5% to 63.1Mt, with volume sales of 58.4Mt (vs 2008: 51.5Mt), while its costs 2009 decreased to $28.3/ton from $33.11 in 2008. The Newcastle benchmark prices now at US$98.74/t were above consensus estimate of US$95/t. This is very positive for BUMI because they had 65% volume unpriced in 2010. I assumed that thermal coal average will be at US$100/t. With 65% still open contract I predict that EPS consensus could upgrade to 40-50% at 0.03$.

What Bumi can make in 2010 net income?, that really depends on their plan to below operating line activities such as plan to reduce debt of US$1.1bn through debt to equity swap and the placement of its subsidiary.

Valuation BUMI also looks attractive, trading on 9.16x PER 2010 vs 10.2x PER ASEAN Coal sector and 13x in 2010E PER China Coal Sector. Price Objective BUMI at 3500 with 13x PER 2010 --- Buy.

PGAS
PGAS reported FY09 core net income of Rp5.473 trillion, up 123.5%Y/Y. Excluding forex effect, FY09 core profit grew 59% y-o-y due to higher distribution volume. Distribution volume increased from 577MMScfd to 792MMScfd - a steep increase of 37.3%Y/Y.

Positive Factor:
The industry association and PGAS reached an agreement on the adjustment of gas selling prices. Outside of West Java, the rate will be US$6.36/MMbtu, while the surcharge will be raised from 1.5x the base rate to 2.0x the base rate.
PGAS has planned of LNG receiving terminals in West Java (team up with Pertamina) and North Sumatra (100%) while we also understand that Pertamina may build LNG receiving terminal in East Java.
The growing profitability is also likely to translate into higher dividends.

Negative Factor:
As the 2010 earnings will no longer get a boost from huge forex gains while gains from higher tariff will be mitigated by stronger rupiah and lower volume. On the short term, I do not think the problem with the dwindling gas flow from Co-Phi can be remedied.

At 4325/share (26 March’10), PGAS is trade at 16.5x PER10F, a premium to market PER10F of 14.67x. Now at 3950/share, PGAS is trade at 15.07x PER10F, a discount to market PER of 16.13x (Bloomberg) --- Buy on Weakness.

Bang Juntri