PT Vale Indonesia Tbk (INCO) - ASP and earnings upgrade
Bareksa • 24 Apr 2014
A worker monitors the nickel melting process at a nickel smelter of PT Vale Tbk, near Sorowako (REUTERS/Yusuf Ahmad)
Buana Capital reiterate Buy on INCO with a TP upgrade to Rp 4,300
Bareksa.com - We reiterate Buy on INCO with a TP upgrade to Rp 4,300 (+34% than previous) due to: 1) Benefiting from nickel price surges of +31.8% YtD 2) Strong earnings growth at 397% and 9% for 2014-2015F.
Nickel price shoots through the roof. LME nickel price surges by ~31.8% YtD to ~US$ 18,200/t, the highest level since February 2013. The two main catalysts are namely 1) Russia and Ukraine tension posses a threat to the LME nickel inventory and 2) Indonesia’s nickel ore export ban presents a real hazard to China’s Nickel Pig Iron (NPI) production.
Inventory level vs. short term price anomaly. Looking at LME nickel in-ventory level, it shows an upward trend as it is near all-time high at 284 kt currently. The two catalysts above have driven this short term anomaly in our view which should normalize later. Even if the two European counterparts comes to peace, Indonesia’s ban on the export of nickel ore posses a problem to China’s NPI production. As soon as China’s nickel ore stockpile decreases, they will most likely look into LME inven-tory leading to the decrease of LME’s inventory. Going forward we believe LME nickel price is likely to continue the uptrend.
Upgrading ASP and 2014-2015F earnings. We have increased our nickel price forecast by 13% and 10% to US$ 17,800/t and US$ 18,500/t for 2014- 15F. We have upgraded INCO earnings estimates by 94% and 55%.
Valuation. Our TP Rp 4,300 (+34% than previous) derives from DCF-based (WACC 13.7%, LTG 5%) which implies 18.8x 2014F P/E. The stock currently trades at 16.2x 2014F P/E and 8.1x 2014F EV/EBITDA.
*Franky Kumendong and Andre Maningkas are equity analyst of PT Buana Capital. This article is part of the Equity Research of PT Buana Capital