● PT Inco’s 1H10 results are in line with our forecasts at 51% FY10E production and 57% of FY10E net earnings, and 41% of FY10E consensus earnings. 2Q10 revenue increased by 42% QoQ due to higher ASP and deliveries, resulting in an 87% QoQ earnings increase in 2Q10.
● ASP is directly correlated with nickel spots with one month lag – at US$8.3/lb during 2Q10, an increase of 28% QoQ. Higher deliveries in 2Q10 is a result of more shipments in the quarter, up 11% QoQ. INCO’s good cost management led to a 3% QoQ
decrease in unit production costs.
● Despite strong 2Q10 and 1H10 results, we believe they may not be repeated in the following quarters as we forecast weaker nickel prices. Our bearish view on nickel is driven by our expectation of slower growth in 2H10 global production compared to 1H10, leading to slower consumption growth while a supply threat prevails towards the end of the year.
● Our still bearish view on nickel drives our UNDERPERFORM view on INCO. We maintain our target price at Rp3,100 based on 5.5x EV/EBITDA.
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