Morgan Stanley - ANEKA TAMBANG (ANTM.JK): NICKEL LAGGARD TO OUTPERFORM: UPGRADE TO OW

What's Changed
Price Target: Rp2,300 to Rp2,700
Rating: Equal-weight to Overweight
2010-11e EPS : Up by 26-29%

Upgrade to OW & raise PT: Morgan Stanley's commodity team has published the latest version of its quarterly Playbook, in which the team raises its nickel price forecast by 14-27% over 2010-15e. Please see Morgan Stanley "Global Metal Playbook - 2Q10: Navigating Liquidity Withdrawal, Policy Tightening and a Stronger US Dollar", for more detail. On these higher nickel price forecasts and some cost adjustments, we raise Antam's 2010e and 2011e EPS by 24% and 34%, respectively, and upgrade the stock to OW with a new PT of Rp2,700.

More positive on nickel: We expect a higher nickel price to be sustained and the market to return to deficit for 2010. We believe that the recovery is well-supported by improving fundamentals from: 1) recovering stainless production; 2) continued strikes in Vale's Sudbury mines; and 3) delay in Vale's major Goro nickel project.

Higher nickel price and volume to drive earnings: We forecast strong earnings recovery from the nickel business on higher nickel prices and volumes. We estimate that each US$1/lb increase in nickel prices could add Rp30 or 16% to our revised 2010e EPS forecast. If we apply the spot nickel price of US$10/lb, we could see our 2010e EPS increase by 28% to Rp212.

Buy ahead of earnings recovery: Our new 2011 EPS forecast is 10% ahead of consensus and we forecast Antam's ROE to recover to mid-cycle levels of ~25% by 2011-12 from the cycle trough of 11%. Despite this recovery, Antam's valuation is below the MSCI Indonesia Index average at around 10x P/E on 2011e and a dividend yield of ~4%; implying 50% earnings growth p.a. over 2009-11. Investors should buy ahead of the earnings recovery before consensus earnings are upgraded.