PT International Nickel Indonesia Tbk Potentially Lower ASP Going Forward - AAA

INCO flat performance in 1H11 was due to higher cost related with repairs in its plants post the earthquake. Furthermore, the potential lower ASP in 2012 will make INCO’s share price to remain under pressure. However, with relatively high dividend yield and ROE, the stock is still worth buying. BUY.

± Weak Growth Due to Higher Cost
INCO 1H11 net profit grew only 9% yoy to US$238 mn, in line and accounted for 50% of our full year estimate. But, this was the weakest growth since 2009 due to several factors, i.e. the significant increased in cash cost by 31% yoy to US$9,155/mt and the operating expense that increased 21% yoy. The higher cost were mainly related to repairing the damage in INCO’s plant in Sorowako, South Sulawesi after being stroke by a 6.1 SR earthquake in end of 1Q11. Meanwhile, 1H11 revenue increased by 16% yoy to US$715 mn due to higher ASP of 23% yoy to US$20,052/mt albeit volume was slightly down by 8% yoy to 35,100 mt. In 4Q11, another furnace will go into maintenance and will not be available for production. As such, we foresee a decline in production of 8% yoy to 69,862 mt.

± Potentially Lower ASP in 2012
The price of nickel has a positive correlation with the price of stainless steel, and the price of the latter is also positively correlated with China inflation (see graph on page 3). As China is curbing inflation, the price of stainless steel will ease and so is the price of nickel (as the raw material for stainless steel). On quarterly basis, the ASP has already sunk by 2%. In the global market, both stainless steel and nickel prices have weakened by an average of 3% and 5% respectively in the last 4 months. On the other hand, Karebbe 90 MW hydro power project is 99% to full completion and ready to be operated in 2H11 and could reduce fuel cost portion from 49% in FY11F to 47% in FY12F. However, in our view, the impact of lower ASP in 2012 will be stronger than the overall cost reduction.

± Valuation: BUY at Rp4,300 on cheap valuation, high dividend yield and ROE
We roll forward our valuation to FY12F, with lower TP of Rp4,300 from Rp5,200 previously. Our lower TP is mainly due to 12% lower ASP assumption. Despite the bearish story, INCO’s share is traded at only 9.2x PE of FY12F versus its historical average of 12.0x. Cheap valuation, combined with high dividend yield of 8% and high ROE of 26% are the main drivers for our recommendation. BUY.