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29% upside, Buy
11 July, 2024
Price Rp 3980
Target price Rp5100
Investment Consideration
Expecting higher revenue in 2Q2024
- INCO focused on improving productivity in 1Q2024, recording a +9% YoY growth in nickel in matte production, although there was a -4.6% QoQ decline to 18,199 T due to lower nickel grades. Nickel matte deliveries increased by +8% YoY but declined by -12.9% QoQ to 18,175 T.
- With an average realized price decrease of -42% YoY to USD 12,651 per ton in 1Q2024, INCO’s revenue decreased by -37% YoY and -22% QoQ to USD 229.9 million.
- However, we expect stronger 2Q2024 revenue as LME nickel prices rebounded, reaching USD 21,300 per ton in May, which should reflect higher average realized prices for INCO in 2Q2024.
- We are targeting total nickel in matte production of 70,800 MT for 2024, aligning with INCO’s annual production target.
Margin remain positive, Cost efficiency maintained
- INCO improved productivity and maintained cost efficiency in 1Q2024. The cost of revenues decreased by -8.7% YoY and -10.4% QoQ, aided by lower fuel consumption (-12% YoY) and royalty expenses (-58% YoY).
- The cash cost per ton was USD 9,231, lower by -17% YoY compared to USD 11,122 per ton in 1Q2023. Lower coal prices also contributed to reduced cash costs. Management aims to keep cash costs below USD 10,000 per ton in 2024 through continued lower energy costs and production efficiency.
- INCO booked gains of USD 24.7 million from recognizing the fair value of derivative assets from its investment in PT Kolaka Nickel Indonesia (KNI) in 1Q2024 but recorded a USD 12.88 million decline in the fair value of this derivative asset compared to 2023, primarily due to decreased nickel prices.
- This resulted in a lower net profit of -93.8% YoY or -88.5% QoQ to USD 6 million. Despite lower nickel prices, INCO’s margins remained positive with a net profit margin of 2.7% in 1Q2024.
- We expect improved margins in 2024 in line with cost efficiency amid nickel price volatility.
Valuation: 29% upside
- For 2024, we adjust our target price within a year to IDR 5,100. This target price is based on a 2024 target EV/EBITDA of 7.5x. With 29% potential upside, our recommendation is BUY.