Aneka Tambang - Weak Earnings Momentum - Citigroup

 Subdued earnings outlook; maintain Sell — The tepid nickel prices outlook and lack of spare capacity in the next few years suggest limited share price upside for the stock, in our view. While the earnings contribution from gold is rising, we think the increased reliance on higher gold prices to re-rate the stock is not a robust foundation for turning positive. We raise our FY11E/FY12E earnings forecasts by 60%/52% respectively, mainly on higher nickel price assumptions. We consequently raise our target price by 53% to Rp1,780 based on 2012E P/E of 10.6x – the stock’s average since 2004. However, we think valuations at 2012E P/E of 12.2x are demanding against an outlook of declining earnings in 2012-13E. Hence, we maintain our Sell / Medium Risk (3M) rating.

 Nickel prices may have peaked — After nickel prices averaged c.US$25,600/t in 1H11, Citi’s Global Commodities team expects nickel prices to moderate to US$24,500 in the next 6-12 months. Despite the significant ongoing problems with the ramp-up of new HPAL capacity, the ongoing increase in Chinese nickel-pig-iron production is likely to cap significant gains in the price of nickel in 2H11.

 Gold production ramp-up — We expect Antam to increase its gold production by 10% in 2011E as it ramps up production at the Cibaliung gold mine. The ramp-up should mitigate the weaker earnings outlook from nickel and ferronickel. Hence, we expect gold to account for c. 30% of 2011E EBIT vs. 25% in 2010. Citi expects a weaker investment-demand environment for gold in 2012E and thus expects the metal to once more be trading below US$1,400/oz.

 Risks — Upside risks to our call stem mainly from higher-than-expected nickel and/or gold prices and production.