The lucrative nickel business is back!
We have upgraded our TP to Rp3,500 (previously Rp2,825) on account of higher revenues and net profits expectations. This year ANTM will return to its core business, nickel, as nickel demand has returned to normal and the selling price has soared higher to USD21,000/t on a year-to-date average. Revenues from nickel are expected to account for 68% of our FY10 revenues forecast of Rp10,477bn as opposed to 44% last year. Meanwhile, gold sales are estimated to decline due to lower volume as ANTM has decided to put a brake on its gold trading activity to limit the risk resulting from gold price fluctuations. On a positive note, ANTM’s profit margins will improve since the gross margin of gold trading is only 1% and its huge sales in 2009 eroded ANTM’s net margin to 7% from 14% in 2008. By comparison, nickel has a much higher gross margin of 39%. Less gold sales and higher nickel sales will therefore boost the company’s net margin to 26% in 2010.
1Q10 net profits only 7% of FY forecast
Net profits rose 125% yoy to Rp202bn in 1Q10. The net margin improved to 12% from 3% in 1Q09 thanks to a lower volume of gold trading. Nonetheless, the 1Q10 net profit is only 7% of our FY10 forecast. This mainly owes to the lower realization of sales in the quarter which was caused by the slow delivery of 2,514 tons of ferronickel. Consequently, ferronickel sales only reached 1,663 tons in 1Q10. However, the sales should shift to 2Q10; hence we expect a jump in revenues in 2Q10 and a higher net profits figure.
Going back to the big projects
After the lull in the metal business in 2008-2009, ANTM is now ready to kick start some projects. A top priority is the Chemical Grade Alumina (CGA) project in which an alumina plant will be built in Tayan where the company’s current bauxite mine is located. Besides the USD400mn CGA project, other projects which we expect to commence soon are the USD300mn Pomalaa power plant (2010) and the USD1.2bn FeNi IV project in Halmahera (2011). This year alone, ANTM has a USD230mn capex budget, which we think is too much considering that most of these projects are still at a very preliminary stage. We also think that to obtain external financing of the whole USD230mn is unnecessary because ANTM is a cash-rich company. We believe that USD100mn of external financing should be sufficient for ANTM – which it can easily get from banks and financial institutions. As for a possible rights issue, it would be some way off, if it were to take place, and may not be the option favored by investors.
BUY maintained
ANTM’s valuation is attractive as the new TP implies a PE 10F of 12.4x. The shares currently trade at PE 10F/11F of 8.8x/13.4x, or much cheaper than INCO’s shares which trade at a consensus PE 10F/11F of 21.5x/17.5x. BUY recommendation maintained.
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