UOB INCO 2Q10: Robust results but expect lower nickel prices in 2H10, TP idr 5200

Results
•Results above expectation. International Nickel Indonesia’s resultswere above our expectation on higher nickel-in-matte deliveries andexpanded margin. Net profit increased 86.9% qoq to US$142.5m in2Q10 from US$76.3m in 1Q10. Higher net profit was mainly attributableto: a) higher revenue (+42.3% qoq) and b) margin improvement. Netprofit yoy increased tremendously to US$218.8m (+533% yoy) in 1H10from only US$34.6m in 1H09.

•Rising nickel-in-matte deliveries and ASP boosted revenue.Quarterly revenue jumped on the back of: a) strong average sellingprice (ASP) up 28% qoq and b) higher nickel-in-matte deliveries up 11%qoq. However, nickel-in-matte production during 2Q10 declined 8.2%qoq mainly due to the planned maintenance shutdown of one furnace inApr 10.

•Margin expanded on lower fuel consumption. Despite COGS rising8% qoq on the back of higher nickel-in-matte sales volume, the grossmargin of INCO expanded from 41.2% in 1Q10 to 55.3% in 2Q10. Thiswas mainly attributable to: a) strong nickel prices in 2Q10 and b) lowerfuel consumption. In 2Q10, INCO’s diesel and HSFO (High Sulphur FuelOil) consumption per tonne declined 24% qoq and 4% qoq respectively

Stock Impact
•Nickel price to stabilise in 2H10. We expect lower nickel prices of aboutUS$17,500-18,500/tonne in 2H10 as demand growth for nickel productscontinues declining compared to 1H10. This will be attributable to thestainless steel producers mostly finished with restocking nickel, and shortterm demand will only come from final consumer demand and thepossible impact from European debt crisis.

•Water level improvement leading to minimising thermal power use.As the water level used for hydro power plants has enhanced to themaximum level thanks to heavy rainfall, the company is maximising theusage of hydro power plants, while lowering usage of thermal power use.As such, we expect lower cost of production in the next few quarters.

•Completion of Karebbe project by 2H11 to reduce energy costs. Thecompletion of a third hydroelectric power generating plant at Karebbeworth US$410m by 2H11 is expected to reduce the company’s energycost, which accounted for about 34% of total costs in 2009. The projectwas about 60% complete at end of 2Q10. When completed, thishydropower plant will replace company’s usage of oil and gas for feedingthe electric furnace at Sorowako facility.

Earnings Revision/Risk
•Revise up earnings forecasts. On the back of robust results in 1H10, weraise our net profit forecast for 2010 by 25% to US$338m and by 18% toUS$370m for 2011 to take into account: a) higher nickel-in-mattedeliveries by about 4-5% and b) raising our margin assumption on lowerunit cash cost of production cost by about 6-7%.

Valuation/Recommendation
•Maintain BUY with higher target price of Rp5,200. To incorporatehigher earnings for 2010 and 2011, we maintain BUY with a higher targetprice of Rp5,200, based on 2011 P/B of 2.9x which is in line with thethree-year average PB of 2.9x. Our target price translates into 16x 2011FP/E.