What's Changed
Price Target: Rp4,500 to Rp5,500
2010e/11e EPS : +24%/34%
Higher PT: Morgan Stanley's commodities team have published their latest quarterly playbook, in which they have raised their nickel price forecasts by 14-27% over 2010-15. Please see Morgan Stanley's "Global Metals Playbook -2Q10:Navigating liquidity withdrawal, policy tightening and a stronger US dollar", for more details. On the back of these higher nickel price forecasts and some cost adjustments, we raise our 2010-11e EPS for PT Inco by 24%/34% and the PT to Rp5,500.
More positive on nickel: We expect the higher nickel prices to sustain and the market to be in deficit for 2010 from the surplus that we previously forecast.We believe 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 Goro major nickel project.
Well positioned to leverage on higher prices: PT Inco is a nickel pure play whose earnings are highly sensitive to nickel prices - we estimate every US$1/lb increase in nickel prices could add US$0.55 or 15% to our revised 2010e EPS. If we apply the spot nickel price of US$10/lb, we could see our 2010e EPS increase by 24% to US$0.04. Although we have raised our cost assumptions, we believe the uplift in nickel price should be more than enough to cover the higher costs.
Attractive valuation: Our new 2011e EPS is 35% above consensus and we forecast PT Inco's ROE to recover to mid-cycle levels of ~25% on higher nickel prices and volume by 2011-12 from the cycle trough of 11% in 2009. Despite this recovery, valuation is below MSCI Indonesia at less than 12x P/E and a dividend yield of ~5%, implying 30% earnings growth p.a. in 2009-11.
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