• 1Q10 net income grew strongly Y/Y but below expectations: ANTM reported 1Q10 net profit of Rp202B, up by a strong 124.7% Y/Y. With 1Q historically contributing to an average of 23.4% of full year net income, 1Q10 net income came in below both our (14.3%) and consensus (15.6%) full year forecasts of Rp1,417B and Rp1,297B respectively. The lower-than-expected profit was driven by lower-than- expected volume and higher SGA costs.
• Contribution from mining activities improved: The gross margin improved from 6.1% in 1Q09 to 28.7% in 1Q10 despite declining Y/Y sales. The reason for this is that ANTM decided to limit its gold trading activities, which carry a minimal margin, and focused on high-margin
mining activities. ANTM’s nickel operation swung from a loss of Rp29B in 1Q09 to a profit of Rp308B in 1Q10.
• Model revisited and earnings adjusted downwards: With the lower volume and higher costs delivered in 1Q10, we revisit our model and incorporate the 1Q10 result into our forecast. In our revised model, we do not adjust the selling price but we adjust volume downwards and
SGA cost upwards. These result in us lowering FY10E net income by 12.2% and long-term earnings (10-year average until FY20E) by an average of 9.4%.
• Maintain OW and lower our PT to Rp2,900: The reduction in earnings forecasts caused us to lower our SOTP-based Dec-10 price target from Rp3,200 to Rp2,900. However, with an ample 18.3% upside still implied by our price target and potential positive momentum on metal prices, we maintain our OW rating on ANTM. Key risks to our price target include:
(1) an unexpected decline in nickel prices; (2) smaller-than-expected cost
decline.
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