International Nickel Indonesia (INCO) - Benefit From High Nickel Price

International Nickel Indonesia (INCO) – Buy
Price: Rp4,925 – Target Price: Rp5,950

Benefit from high nickel price

  • INCO’s 1Q11 earnings and revenue grew by 47% and 26% YoY respectively.
  • 1Q11 Revenue and net income were above our estimate. Revenue accounts for 29% and net profit accounts for 31% from our estimate.
  • Growth in revenue and net income in 1Q11 were mainly driven by higher ASP and lower input cost even though volume in 1Q11 was lower.
  • Production volume in 4Q11 is expected to drop by 30% due to furnace shutdown.
  • Karebbe project status is 87% completed and will be online in 2H11. With the addition of Karebbe, overall production cost is expected to reduce by around 6%.
  • We revise our forecast factoring rising nickel price and lower production cost despite lower target production volume in FY11 and expected higher volume in FY12.
  • We also change our nickel price assumption from US$7.6/LB to US$11/LB for FY’11F as we are bullish towards nickel price until the end of this year on the back of lower LME nickel inventory, possible global supply deficit for this year, and the expectation that Rupiah will remain strong this year.
  • Our new target price of Rp5,950 (previously Rp4,700), reflecting 10.35x – 11.7x PE’11F–12F.
  • With this new target price, we upgrade our recommendation to BUY as the new TP offers 20.8% upside to the current price. Buy.