PT International Nickel Indonesia Tbk Efficiency and Higher ASP is On The Way - AAA Securities

INCO ended 2010 with strong figure but inline with market expectation. In 2011, catalysts will be coming from higher ASP and manageable fuel cost as Karebbe project is about 78% toward finalization and will be finished in late 1H11. Compare to peers, INCO’s share price is traded at good bargain. BUY.

± 157% yoy Bottom Line Growth, Best Performance Ever
After two consecutive negative bottom line growth in 2008-2009, INCO marked 2010 with its best performance with net profit soared 157% yoy at US$437 mn. The result, however, was inline with market and our expectation. Unlike ANTM which had flat growth on their upper line item, INCO’s revenue was up 68% yoy to US$1,276 mn, or about 103% of our estimate, which then sending gross profit higher by 155% as cost only inched up 26% yoy. Gross profit margin was expanded by more than 170 bps to 49%. Operating profit margin ascended from 30% to 47% and net profit margin advanced to 34% compare to previous year, at only 22%.

± Revenue Up 68% on Higher ASP and Volume
The brisk performance during 2010 was contributed by higher volume and higher ASP as well. Nickel production grew 13% yoy to 75,989 tons; with nickel sales rose 14% yoy to 77,036 tons while at the same time, ASP for nickel improved by 48% yoy to US$16,568/ton, equivalent with US$7.5/lbs. But looking at qoq performance, in 4Q10, production fell 10% to 17,996 tons which was caused by roof repairs to furnace #4 and a partial relining of kiln #3 and #4. However, the 14% higher ASP, could still maintain revenue at 0% quarterly growth.

± Higher ASP Should Persist in 2011
Two important buyers i.e. Vale Inco and Sumitomo purchase company’s product at 78% discount from spot price, hence higher nickel price should be positive to INCO’s performance. In January 2011, nickel price rose 10.5% to US$28,772/ton, as world inventory declined by 1,632 tons to 134,040 tons. The decline in inventory was due to China ’s lower export of refined nickel which was down 6.5% while import rose 2.5% in the same period. Meanwhile, there may be concern over China ’s recent tightening monetary policy that could result in lower economic growth which then hurt nickel demand. But, we believe it is not going to happen as long as China pegged their currency. Therefore, we still hold our optimistic view that global nickel price will stay at an average of US$23,000/ton.

± Valuation, at Good Bargain
Following the positive outlook on global nickel price, we increase our ASP assumption from US$7.9/lbs to US$8.4/lbs (+6%) in 2011F-2012F. As INCO has only low financial leverage, small increase in ASP, will result in higher bottom line. On that basis, we increase our TP from Rp5,200 to Rp6,000 with BUY recommendation. Compare to ANTM, TINS, INCO is traded at bargain valuation.