INCO’s performance of 2Q19 began to slightly narrow the financial deficit of 1Q19 despite net losses it posted. Its performance begins to crawl and rise due to the hiking global nickel prices, increasing ASP, and growing sales volume. The future endeavours it must complete are efficiency and more profit-making sales performance. Adding to its must-to-do efforts is to consider the electric car business opportunity, potentially providing positive synergies.


Wobbly Performance

In 2Q19, INCO posted revenues of USD166 billion (-18% YoY, + 31% QoQ) and net losses decreasing to USD6 billion (vs. the 1Q19 net losses of USD20 billion). Its financial deficit was attributable to drastic declines in the 1Q19 revenues, followed by rising COGS for fuel and lubricants. However, the maintenance processes for a number of production equipment that was completed in 2Q19 narrowed the deficit.

Impacts of Hiking Global Nickel Prices

Global nickel prices hiking in 2Q19 with the average price of USD12,291 enabled INCO to record ASP of USD9,774 per ton (-10% YoY, 7% QoQ) with sales of USD165 million (-18% YoY, +23 % QoQ) followed by nickel matte sales volume of 16,965 mt (-9% YoY, + 22% QoQ). We project that for 2019F, INCO is capable of recording sales of USD736 million, with nickel matte sales volume of 70,021 and ASP falling shortly at USD10,506 per ton. The 2019F performance is likely to generate total revenues of USD54 million. The average global nickel price of 2019F is likely to fall short at the range of USD15,549, our estimate.

Efficiency and Business Opportunities

INCO continues to boost efficiency at the 2Q19 production process since energy costs have been one of the biggest expenses by far. Diesel consumption was reduced to 19,978 kiloliters (+ 5% YoY, -29% QoQ), with average diesel prices at USD0.58 (-6% YoY, -1% QoQ). The sharp decrease was attributable to the properly re-function of Larona Hydropower plant, minimizing the use of thermal power generators. Apart from the efficiency it successfully carried out, it paves the way for supplying batteries for electric cars. Electric car manufacturing is a fast-moving industry as China powering up the sales of 500,000 units in 2018 (Chinese market share +76% YoY) makes the industry more lucrative. The industry moving into the fast lane brings positive long-term prospect for the nickel industry as nickel is a raw material for electric car batteries. INCO inevitably reaps benefits from the rapid rise of the electric car industry, for it provides long–term business synergies.

BUY Rating at the Price Target of IDR3,960

We take account the 2Q19 efficiency having yet to reach maximum. The 2Q19 overall performance slightly improved even though it had yet to post positive results. Thus, we maintain BUY recommendation with the price target of IDR3,960 or a 15.1% upside potential based on the estimate of a forward EV/EBITDA at 10.9x. INCO is currently traded at a 2019F EV/EBITDA of 12.2x.


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