Maintain SELL with a lower PT
The share price has underperformed the market by over 50% in the past one year, but we still see downside risk to earnings due to nickel-price volatility. As such, we maintain our SELL rating and slash our PT to IDR1,200 (based on 0.5x PBV or 75% discount to its long-term mean of 1.9x). The stock trades at 0.6x PBV. Downside pressure on nickel prices and earnings should be the main catalyst for the stock.
Tough outlook on nickel
Nickel prices were the worst performer among base metals in 2015. At the current level of USD8,500/tonne, more than 50% of global producers already make losses. However, we believe it would take some time for supply cuts, if any, to make a significant impact on nickel prices. On top of that, LME inventory remains high, and there are still uncertainties in the global and China economies. That said, we cut our 2016-17 nickelprice assumptions by 25.0% and 8.3% to USD8,910-11,942/tonne.
Downgrade 2016-17 earnings
Following our nickel-price downgrades, we cut our 2016-17 earnings forecasts to –USD25m and USD41m from USD88m and USD41m. Our new earnings forecasts are lower than consensus. In order for INCO to start booking profit in 2016, average nickel prices would have to be USD10,400/tonne (22% higher than current nickel prices).
4Q15 earnings preview: negative
We forecast INCO will record a loss of USD5m in 4Q15 mainly due to low nickel prices. Despite the loss in 4Q15, we forecast INCO’s 2015 earnings to remain positive at USD47m, in line with our full-year forecast of USD48m. We forecast sales volume in the quarter at 18.9k tonnes, down 4.5% QoQ. The only positive thing coming out of the quarter would be total costs, which we forecast to be down 3.9% QoQ driven by lower oil prices