Mandiri Sekuritas INCO: Pushing growth with higher selling prices

Price driven growth

Nevermind the absence of a final dividend for FY09, there are other positive elements to look forward in Inco to such as (a) YTD rate of growth of global nickel prices continues to outpace the rise in selling prices of cost components and (b) Margin and earnings enchancements as a result thereof. Thus, we adjusted our FY10F ASP to US$16,400/t. 12.% higher than previous, which resulted in FY10F earning enhancem! ent of 33 % to US$330mn (+94%yoy). At our new TP of Rp5,900/share, the implied PER10F is 20x.

Raising earnings with higher ASP and higher margins. YTD LME nickel prices is now at the US$27,000/t level , a 42% rise since the start of the year. Meanwhile, main cost components such as high speed fuel oil, needed to run its thermal gensets (HSFO) has only gone up by 2.9% YTD based on Bloomberg’s HSFO index. By raising Inco’s nickel in matte price to US$16,400/tn , our revised FY10F net income turns out to be US$330mn, a 33% upgrade from previous. Additionally, gross and operating margins expanded to 44% and 42% from 37% and 35%.

Alternative product now viable. At the current nickel global prices, low margin nickel pig iron is now a viable alternative to temporary fulfill supply global supply issues. China’s iron ore output 1Q10 was up by 7.6%qoq to 150Mt while price accelerated by 18% to US$3,260/t. Notwithstanding the competition from nickel pig iron , we think nickel prices can still improve, though not as far as the US$50k/t in the heydays of 2007.

Retain buy with upgraded TP. As a pure nickel player, Inco will benefit immensely from any further uptick in nickel prices. Our sensivity shows that for every 3% incease in price, EPS would improve by 9%. Under our blue sky scenario for 2010 (FY10F ASP=current market price of about US$26,000/t). earnings would shoot up by 112% with an implied PER10F of 10.4x. However, our assumptions point to a more conservative ASP of U! S$21,000/t which equates to a DCF-derived target price of Rp5,900/share. We also maintain our forecast on the company’s production level at 71.8k tons (6.7%yoy). Our long-term nickel in matte assumption is placed at US$18k/t. (equiv. LME of US$23k/t)