Vale Indonesia (INCO) – HOLD (Downgrade)
Price: Rp2,510 – Target Price: Rp2,400
Fairly valued with nickel price weakness
Slowing growth in China has caused nickel demand to weaken with LME nickel inventory levels remaining stubbornly high despite the Indonesian nickel ore ban. As a result, nickel price has collapsed and in 3Q15 fell to its lowest levels since 1Q09 and is down by 30% YTD. This has caused significant reductions to nickel price estimates as high LME inventory levels are expected to persist with weakening nickel demand expectations. We have cut our nickel price estimates by 20% in FY15 and by 33% in FY16 in-line with current market expectations. We rollover INCO’s DCF based valuation to 2016 and downgrade recommendation to HOLD with target price reduced from Rp3,400/sh to Rp2,400/sh (16E’EV/EBITDA 9.1x and 16E’PBV 1.0x).