INCO: Strong margin theme - Mandiri Sekuritas

INCO held a conference call last week on FY10 results and FY11 outlook. INCO’s management is still confident that nickel demand growth still strong in coming years especially from Asian market. Strong margin preservation will be the theme for INCO to deliver further value to its shareholders. With operating margin of 47% and expected dividend yield of 4-5%, INCO would be among the highest yielding stocks in the metal industry. The Karebbe project is continuing as planned with 78.1% completion by end of 4Q10. As this development unfolding, running at full hydro capacity, stronger margin is expected as nickel price rises. Thus, with the upgrades of selling price, our Blended-method resulted in higher TP at Rp6,700/share implying 15.1xPER11F and 30 .1% upsi de. Reiterate BUY.

Strong FY10 results. Inco reported FY10 net profit of $437mn, +156.7%yoy, in line with our expectation and consensus estimate. Delivered nickel-in-matte rose by +13.7%yoy to 77,035 tons. FY10 average selling price (ASP) reached $16,568/ton, +47.6%yoy while cost of good sold per ton increased 11.2%yoy to $8,467/ton due to higher fuel costs. The 4Q10’s net profit was flat at $108mn with nickel-in-matte production falling 10% q/q to 17,966 tons due to scheduled furnace repairs but was partially offset by the 14% q/q increase in nickel selling price to $18,011/ton.

Lower output, higher price. We expect another 1-2 week of shut down on the 21-weeks planned shut down of its 2nd electric furnace regarding the earthquake that hit Sorowako last month. This obviously would affect its production level. At the same time, its parent company, Vale SA in Canada also will cut its production this year by 5% to repair its damaged furnace. These could lead to higher nickel price as concerns over rising supply likely will be unfounded.

Thanks to expected higher nickel price. Despite lower volume, we thank expectations of higher nickel price. We increased our FY11-12F nickel-in-matte price assumptions by 10.2% to US$8.5/lb based on consensus’s LME nickel benchmark price of US$11/lb. As the results, we revised up our FY11-12F net profit by 17.9% and 25.8% to US$490mn and US$548mn respectively. Our sensitivity analysis suggests that for every 10% increase in ASP will lead to 22%-26% increase in operating profit.

Retain Buy rating. Based on our new key assumptions and forecasts, our blended valuation derives higher TP at Rp6,700/share implying 15.1xPER11F. INCO is trading attractively at 11.6xPER11F. We reiterate our Buy rating. Our call risks are (a) nickel price volatility and (b) supply and demand in market.