INCO’s strong 1Q10 results came in-line with our estimates, but we revise our forecasts upward to reflect higher nickel prices, which have reverted to more sustainable levels. Maintaining our BUY stance, we raised our TP to Rp5,250, offering 20% potential upside and implying undemanding valuations of 12.9x/10.4x 2010F/2011F PER.
Strong 1Q10, In-line With Expectations
INCO delivered strong 1Q10 results with net profit jumping 344% YoY and 27% QoQ to USD283mn. Higher nickel in matte sales of 23% YoY (+5% QoQ) to 18,021mt, combined with rising ASP to US$14,182/mt translate into strong revenue growth of 111% YoY (+9% QoQ) to USD256mn. Gross margin improved to 41% in 1Q10 as INCO was able to reduce fixed costs in supplies and contracts and services; even with higher fuel usage in 1Q10, COGS/mt remains relatively unchanged with 4Q09 at USD8,367/mt. INCO’s 1Q10 results came in-line with our previous forecasts, which we have adjusted upwards to reflect higher nickel prices (net profit revised up by 47%/56%/45% for 2010-2012). As INCO starts to maximize the use of hydro power, margins could improve further.
Karebbe Project on Track
INCO is allocating USD257.7mn for capital expenditures in 2010, which consists of USD112.1mn for sustaining capital, USD141.3mn for growth capital, and USD4.3mn for health, safety and environment. The Karebbe hydroelectric power generating plant costing USD410mn is progressing as planned and is expected to commence operations in 2H11. By displacing all oil-based fuel usage to feed the electric furnaces at the Sorowako facility, we project COGS/mt could be reduced from USD8,484/mt in 2010 to USD8,435/mt and USD8,180/mt in 2011F/2012F (assuming oil prices of USD80/bbl). As usage of oil-based fuel is reduced in the future, INCO’s earnings will be less sensitive to oil price fluctuations.
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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