Merrill Lynch: Upgrade INCO & ANTM to Buy
After factoring in our new higher nickel px forecast, US$23mn insurance receipt, and 50% lower costs from efficiency program, INCO's earnings got quite a boost by 542% for 2009, 137% for 2010 and 87% for 2011. Hence, Daisy upgraded INCO to Buy with PO Rp 6,500, based on 47% premium to NPV which Daisy thinks is justifiable as cyclical stocks did trade at a premium to NPV in past cycles in anticipation of rising prices (up to 2x for gold stocks). As the saying goes "don't dance cha-cha when everybody is dancing disco", so just ride along because INCO will continue to rerate with nickel px recovery given close correlation (R²=0.9) b/w INCO’s shr px and nickel px. Aside from being one of the lowest cost producer, INCO's other catalysts include solid 2Q and higher dividend as it remains cash flow positive even at the current low nickel px environment. Our commodity team raised nickel px to US$5.7/lb for '09, $6.4 for '10, $5.6 for '11 and $5.3 for LT…these are higher by 27%, 26%, 15% and 9% respectively.
ANTM also got upgraded to Buy with PO Rp 2800. Daisy raised earnings by 227%, 203%, and 83% for 2009-11. Our new PO is based on 26% premium to NPV of Rp2,215. Nickel contributes ~60% to ANTM’s revenue. We see turnaround in ANTM on the back of its nickel bizz returning to profit in 2Q with nickel px now above ANTM's breakeven level of US$5.5/lb (vs loss of Rp29.4bn in 1Q). Further, with the re-commissioning of its FeNi3’s copper cooling system in Sept, we see limited downside risk to its ferronickel output.
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