Danareksa International Nickel Indonesia (INCO IJ, Rp4,375 BUY) A solid first-half

BUY maintained, TP of Rp5,000
We maintain our BUY call on INCO given the excellent 1H10 performance. In this period, INCO’s net profits surged 61% YoY to USD219mn, representing 51% of our full year forecast. The good profitability came on the back of both higher sales in 2Q10 and higher ASP. Margins also improved, with the net margin widening to 35% in 1H10 from 28% in 1H09 thanks to lower fuel consumption. Looking forward, we remain confident that our full year forecasts for the company will be met, since demand from stainless steel producers for restocking should be strong. INCO’s shares are currently trading at an attractive valuation of PE 10F/11F of 10.5x/12.2x, or less than the mining industry’s 13.6x/13.0x. With our TP of Rp5,000, the shares offer 14% upside potential.

Strong sales and good profit margins in 2Q10
INCO booked strong sales and higher profit margins in 1H10. The higher sales mainly owed to the 11% QoQ increase in sales volume in 2Q10, while the better profit margins resulted from increasing ASP in addition to lower fuel consumption due to a routine maintenance shutdown of a furnace for two weeks in April 2010. As a consequence, the 1H10 net profits were able to grow 61% YoY to USD219mn.

The nickel market has slowed but is still expanding
We are keeping our assumptions and forecasts intact for this year. Although nickel consumption has slowed a little bit, we believe that the slowdown is temporary and that restocking will begin by the end of 3Q10. Our conviction is based on the manufacturing activities of major manufacturing countries which still indicate expansion (see Exhibit 4 for worldwide purchasing manager indices that are still above 50). As such, nickel prices should hold up in the coming months, we believe.