New 12-month TP of Rp5,875, BUY maintained
INCO - International Nickel Indonesiaoffers investors a good way to attain exposure to the nickel mining industry, supported by its low-cost operations and a generous dividend payout ratio of 40%, despite the expectation of stable nickel prices in the near future and lower production in FY11F. We incorporate our latest nickel price assumptions, production and cost assumptions into our model for FY11-12F. As a result, our FY10-11F EPS are adjusted upwards by 29.7-20.5%. Our new 12-month TP of Rp5,875 implies P/E 11-12F of 13.0-11.0x, still within the historical valuation range.
Stable expected nickel prices this year
We incorporate our latest nickel price assumptions of $24,500/t for FY11F and US$24,000/t for FY12F, and US$22,500/t for our long-term nickel price (which is lower than the current LME nickel spot price of US$28,700/t). This gives rise to ASP for nickel in matte sales for FY11-12F of US$19,110-18,720/t. Our nickel price estimates reflect: 1) the expectation that nickel prices will normalize due to tighter expected economy policy in China as the country tries to curb inflation and 2) the fact that the current LME nickel inventory of 130,000t is at the highest level for the last 10 years. In the longer term, additional nickel demand requirement will be supplied by additional nickel production capacity at the Goro, Ambatovy and On Puma projects.
Overhaul to curb INCO’s production
INCO - International Nickel Indonesia decision to rebuild furnace #2 (which is used to smelt nickel ore) will push down production this year to 67,000t, as the repairs are expected to take 21 weeks to complete, along with the suspension of production after the recent earthquake that hit Sulawesi Island. Our sensitivity analysis shows that for every 2.5% decline in nickel in matte production there will be a 4.1% drop in FY11F core profits. The total cost of the rebuilding is expected to reach around US$60mn. Nevertheless, we expect that production will return to normal at 75,000t in FY12F. INCO will have no difficulties in marketing their products, regardless of fluctuations in the demand of nickel, due to must-take nickel in matte purchase contracts with Vale and Sumitomo.
Running more efficiently
With persistent heavy rains, INCO- International Nickel Indonesia hydro power generator is running at maximum capacity, which will increase the proportion of the electricity generated from hydro power. Cost savings shall also come from the 90MW Karebbe hydro power generator which shall start operating in August 2011, enabling INCO to save up to US$300/t of cash costs. We expect the decline in production to be offset by energy saving initiatives this year, although cash costs will see some increase due to the higher oil price which affects the HSFO price used for smelting nickel. Thus, with better margins, core profits will still experience modest growth of 7% this year, despite the declining production. The sound profitability of INCOs operations means that it can pay generous dividends with an expected dividend payout ratio of 40% this year - a sweetener for investing in INCO.
analysis by : PT. Ciptadana Securities
INCO - International Nickel Indonesiaoffers investors a good way to attain exposure to the nickel mining industry, supported by its low-cost operations and a generous dividend payout ratio of 40%, despite the expectation of stable nickel prices in the near future and lower production in FY11F. We incorporate our latest nickel price assumptions, production and cost assumptions into our model for FY11-12F. As a result, our FY10-11F EPS are adjusted upwards by 29.7-20.5%. Our new 12-month TP of Rp5,875 implies P/E 11-12F of 13.0-11.0x, still within the historical valuation range.
Stable expected nickel prices this year
We incorporate our latest nickel price assumptions of $24,500/t for FY11F and US$24,000/t for FY12F, and US$22,500/t for our long-term nickel price (which is lower than the current LME nickel spot price of US$28,700/t). This gives rise to ASP for nickel in matte sales for FY11-12F of US$19,110-18,720/t. Our nickel price estimates reflect: 1) the expectation that nickel prices will normalize due to tighter expected economy policy in China as the country tries to curb inflation and 2) the fact that the current LME nickel inventory of 130,000t is at the highest level for the last 10 years. In the longer term, additional nickel demand requirement will be supplied by additional nickel production capacity at the Goro, Ambatovy and On Puma projects.
Overhaul to curb INCO’s production
INCO - International Nickel Indonesia decision to rebuild furnace #2 (which is used to smelt nickel ore) will push down production this year to 67,000t, as the repairs are expected to take 21 weeks to complete, along with the suspension of production after the recent earthquake that hit Sulawesi Island. Our sensitivity analysis shows that for every 2.5% decline in nickel in matte production there will be a 4.1% drop in FY11F core profits. The total cost of the rebuilding is expected to reach around US$60mn. Nevertheless, we expect that production will return to normal at 75,000t in FY12F. INCO will have no difficulties in marketing their products, regardless of fluctuations in the demand of nickel, due to must-take nickel in matte purchase contracts with Vale and Sumitomo.
Running more efficiently
With persistent heavy rains, INCO- International Nickel Indonesia hydro power generator is running at maximum capacity, which will increase the proportion of the electricity generated from hydro power. Cost savings shall also come from the 90MW Karebbe hydro power generator which shall start operating in August 2011, enabling INCO to save up to US$300/t of cash costs. We expect the decline in production to be offset by energy saving initiatives this year, although cash costs will see some increase due to the higher oil price which affects the HSFO price used for smelting nickel. Thus, with better margins, core profits will still experience modest growth of 7% this year, despite the declining production. The sound profitability of INCOs operations means that it can pay generous dividends with an expected dividend payout ratio of 40% this year - a sweetener for investing in INCO.
analysis by : PT. Ciptadana Securities