What's New

12 Nov 2020


INCOýs booked solid net profits in 9M20 of US$ 76.6 mn (+47,800% YoY) above our estimates forming 78% of our FY20F. We adjusted our model for FY21F estimates as follows: 1) Higher nickel matte production by 5% to 71,000 tonnes for FY21F, 2) lower our FY21F cash cost estimates by 10.8% on the back lower HSFO prices, 3) Higher Nickel in matte ASP (+7.14% YoY) in FY21F to reflect global nickel price forecast. We roll forward our valuation to FY21F, we maintain BUY with target price of Rp 5.200/share.

Solid Revenue Growth, Boost Earnings
INCOýs posted net profit in 9M20 of US$ 76.6 mn from net profit US$ 0.2 mn in 9M19 on the back of higher revenue amounts US$ 571 mn (+12.7% YoY). The strong top line growth in 9M20 was backed by a higher sales volume for nickel in matte of 56,554 tonnes (+11.3% YoY) and ASP grew by +1.3% YoY to US$ 10.097/tonnes. However, cost of revenue inched up by +1%, mainly due to increase in nickel production to 36.315 mn ton (+18.2% YoY). Margin wise, INCO recorded higher gross margin improved to 15.5% (vs. 9M19: +10.7%). On quarterly basis, INCO booked solid revenue by +13.4% QoQ and a slight decline in net profits by -2.7% QoQ to US$ 23.5 mn, due to normalization of tax rate to 27% in 3Q20 (vs. tax benefits in 2Q20). We expect INCO is likely to sell a volume that similar to 3Q20ýs in 4Q20, and it will increase sales volume in 2021.

Robust Earnings as Recovery for Global Nickel Price in FY21F

We expect the nickel inventory will remain deficit in FY21, driven by: 1) Potential recovery in stainless steel demand (Chinaýs stainless steel demand growth by +5% MoM in Octý due to growing investment on construction projects), 2) EV demand outlook in European market recorded +91% MoM in Sept, 3) Nickel ore band from Indonesia since January 2020, has depressed global supply. Nickel prices are expected to return to level US$ 13,000/tonnes from an average of 1H20 US$ 12,300/tonnes. We forecast our nickel price averaging at US$ 13,000/tonnes (-7.15% YoY) and US$ 14,500/tonnes (+11.5% YoY) in FY20 and FY21 respectively.

FY20-FY22 Forecast
The nickel global demand recovery will be positive for INCO, as we expect higher production output to 71,000, and 74,000 tons in FY21-FY22, with a temporary lower nickel output in 2021, due to planned maintenance on its 4th furnace in 2Q21, before normalizing again in FY22. ASP slightly higher at US$ 10,342/tonnes and US$ 11,214/tonnes for 20F/21F. Moreover, as fuel represents around 30% of INCOýs total COGS, we lowered our cash cost estimates in 2021F by 11,4% to US$ 5,675/tonnes, due to a recent drop in global coal and oil benchmark price. Margin remain positive as long as nickel prices aroud US$ 12,000/tonnes.

Maintain BUY ý TP at Rp 5.200/ share

This solid 9M20 result is certainly a good indicator that the company still booked positive earnings in FY20. We like INCO as a top pick for metal mining sector. We roll forward our valuation to FY21F, maintain BUY with target price of Rp 5.200/share.

Key Risk: 1) the future supply/demand dynamics; 2) lower than expected nickel price; 3) changes in government policies.