Promising Outlook Supported by Higher ASP
Deliver Solid 1Q22 Results
• INCO booked a revenue of USD235.09 mn in 1Q22 or grew by +13.81% YoY (vs USD206.56 mn in 1Q21). The increase in revenue was driven by an increase in ASP by +25.30% YoY to USD17,432/mt. Although sales volume decreased by -9.17% YoY in 1Q21.
• GPM increased to a level of 39.44% followed by OPM which increased to a level of 37.05%, thanks to efficiency strategy in COGS and other expenses alight -8.04% YoY and -64.63% YoY, respectively. Net profit increased by +100.77% YoY or USD67.65 mn in 1Q22 (vs USD33.69 mn in 1Q21), followed by NPM at 28.78%.
• Seeing the solid 1Q22 run rate, we believe INCO to achieve 66% net profit growth in FY22E, largely driven by higher ASP and its ability to manage cost.
Nickel Price to Remain High at USD20,000/mt
• As of June 16, 2022, nickel prices closed up +2.37% to USD25,857/mt. Moreover, on an annual basis, nickel price has increased significantly by +45.76% YoY and +24.57% YTD due to the rising geopolitical tension between Russia and Ukraine, which disrupted supply chains.
• Global demand for nickel used in lithium-ion batteries is expected to rise 20% this year on solid demand for electric vehicles (EV) to nearly 410,000 tons in FY22E (vs 330,000 tons in FY21). In addition, According to Bloomberg NEF, demand for battery-grade nickel is likely to be around 1.5 million tons by 2030.
• Indonesia recorded total nickel exports in FY21 reaching 166,300 tons or up +78.85% YoY (vs 93,100 tons in FY20) with the largest export destination to Japan with 83,160 tons, followed by China with 82.400 tons.
• We believe nickel prices will remain high in FY22E, due to geopolitical tensions between Russia and Ukraine, followed by the increasing demand and limited nickel reserves following the planned policy to ban exports of raw materials from Indonesia. We estimate nickel price to remain high at USD20,000/mt in FY22E.
Promising Long term Project Ahead
• The nickel smelter project in Bahodopi, Central Sulawesi is shifted to Apr-22, according to the Final Investment Decision (FID), due to technical issues regarding licensing, commercial, ESG aspects, and Financing. Previously, the for Dec-21 until Jan-22. In collaboration with two partners, TISCO and Xinhai, who are members oplan, this smelter project was scheduled for a joint venture company (JV Co). The new smelter is targeted to operate in FY26F with a production target of 73,000 tons/year.
• The smelter construction plan will increase production targets, in accordance with developments in EV battery demand. According to Bloomberg NEF, 51% of the materials needed to manufacture EV batteries are lithium and other battery metals, including nickel.
• INCO has signed a cooperation agreement with Zhejiang Huayou Cobalt Company Ltd to develop the HPAL project in Pomalaa. INCO will have a 30% stake in this project, with adopt and apply Huayou's proven HPAL process, with a potential production capacity of up to 120,000 metric tonnes of nickel per annum in FY25F. Pomalaa FID smelter is expected to be carried out in early 2023.
• We estimates production volume at level 62,000 - 64,000 tons in FY22E, considering the delay in the completion of furnance 4 rebuilding project to May-22 (prev: Nov-21).
Valuation and Recommendation: BUY (TP: IDR7,800)
We maintain our recommendation BUY, with a higher TP: IDR7,800 implying 11.19x EV/EBITDA FY22E. We believe INCO will deliver a solid performance throughout the year mainly supported by higher nickel prices amid higher exposure demand for EV batteries. Down risk to our call: 1) lower-than-expected commodity prices; 2) any delay in the ongoing smelter project; 3) unfavorable government policies.
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