On worries of shaky economic recovery, nickel prices fell back to more sustainable levels which reflect market fundamentals more closely, in our view. Potentially higher margins and strong earnings growth lead us to upgrade ANTM to a BUY on higher TP of Rp2,600, which offers 19.5% potential upside and implies 20.3x/15.4x 2010F/2011F PER.
Under delivery in 1Q10
ANTM’s production of ferronickel and nickel in 1Q10 increased 14% and 30% QoQ respectively and on track to meet 2010 production targets. 1Q10 ferronickel sales fell 63% QoQ to 1,663tons, reaching only 9% of our 2010E due to product in transition, which will carry forward to 2Q10. Revenues fell 30% QoQ to Rp8,573bn but gross profit still rose 20% QoQ as the reduction in gold trading activities raised gross margin to 29%. ANTM’s net profit was up 125% YoY but fell 19% QoQ on higher non-operating expenses.
Ongoing developments
Among the several projects that ANTM is developing, the Cibaliung gold mine is starting operation in 2H10, potentially producing 500kg this year. The mine has total reserves of 12,800kg and annual production capacity of 2,000kg pa, for a mine life of 6 years. This should help raise margins by reducing gold sales associated with low yielding trading activities.
Debt Preferred for External Funding
ANTM is looking for external financing of Rp1.64tn to fund 70% of the Rp2.35tn capex it has allocated for 2010. Higher debt is beneficial to its capital structure and should raise its financial leverage to benefit from higher earnings sensitivity to rising operating income. While debt is preferred, ANTM also considers rights issue as an alternative, which could also serve to reduce the proportion of government’s stake in the company, making it eligible for a 5% tax reduction.
Back to More Sustainable Levels
Recovery in world steel demand, which is estimated to increase 10.7% YoY to 1,241 mmt in 2010, has lifted nickel demand and prices in 1Q10. Despite more polished fundamentals, nickel market is still far from being concretely strong as inventory levels remain high. Nickel prices had overran itself when it peaked at US$27,227/mt and quickly fell to US$21,985/mt as market optimism faded in view of China’s tightening of its monetary policy and concerns over the contagion of European sovereign debt crisis began to undermine global economic recovery. Nevertheless, surging automotive steel demand in China and India provide strong support to nickel prices, which at around US$22,000/mt currently, reflects nickel’s fundamentals more closely and seems more sustainable in our view.
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