INCO - Riding the wave of EV boom

• INCO’s 1H22 net profit surged 155.9% YoY to USD150.5mn (+22.4% QoQ in 2Q22) 

• We expect net revenue growth of 26% YoY, EBITDA margin of 45.0% in 2022 

• We reiterate our “BUY” call with 11% upside potential on a 12-month view on strong ASP 

Exceeding estimate INCO recorded a net profit of USD150.5mn in 1H22 (+22.4% QoQ in 2Q22), growing 155.9% YoY or accounting for 50.6% of our FY estimate. Meanwhile, the company's revenue grew 36.1% YoY to USD564.5mn (40.1% QoQ in 2Q22). Gross margin also expanded from 20.7% in 1H21 to 36.9% in 1H22 thanks to controllable cost of revenue growth of 8.3% YoY (+50.3% QoQ). Furthermore, operating expenses grew 326.5% YoY in 1H22 on the back of higher employee costs. Nevertheless, INCO's operating margin still increased to 35.3% in 1H22 from 20.2% in 1H21. This also was followed by higher EBITDA margin of 49.5% in 1H22 (49.6% in 2Q22) compared to 38.9% in 1H21. INCO also managed to maintain net cash position in x1H22. Enjoying strong ASP INCO's revenue was mainly boosted by higher ASP by 50.2% YoY in 1H22 (+39.7% QoQ) to USD20,899/MT, in the midst of lower sales volume by 12.0% YoY (+0.30% QoQ) to 27,013 MT. This figure was in line with lower production in 1H22 that fell 12.7% YoY (-9.1% QoQ) to 26,394 MT due to Furnace 4 rebuild project. This figure only represents 41.2% of FY production target of 64,000 MT. On the cost front, INCO has managed to maintain its cost efficiency in 1H22 amid high HSFO prices by 52.1% YoY (20.6% QoQ in 2Q22), diesel price by 64.4% YoY (+22.4% QoQ in 2Q22) and coal by 164.7% YoY thanks to lower fuel consumption volume on the back of the rebuild project. Expecting price to stay at high level We expect INCO's revenue and net profit of USD1.20bn and USD296.8mn in 2022, respectively, as we assume its ASP to stay at USD20,000 level despite estimated mild surplus in global market in line with supply additions from Chinese producers. Furthermore, we see that supportive policies in the US and EU to support EV infrastructure will continue to prop up the price over the long run. On the other side, we see that geopolitical tension along with aggressive interest rate hikes will negatively impact commodity market across the board. In terms of sales, we anticipate INCO's volume to reach 60,000 MT this year, or 10% YoY lower than previous year as a result from lower production impacted from Furnace 4 rebuild project in 1H22. The company has kicked started pre-construction phase of nickel processing facilities in Bahodopi, Central Sulawesi, that is slated to commence commercial operation in 2025. The annual production capacity is expected to reach 73,000 MT. Reiterate BUY on the back of positive demand outlook We maintain our BUY call with a DCF-based price target of Rp7,715/share. The stock is currently traded at a 2022F PER of 17.3x and EV/EBITDA of 7.8x. We highlight several paramount catalysts including 1) high level of ASP amid strong demand in line with global economic recovery; 2) management's efforts to maintain efficiency; 3) expansion of smelting facilities; 4) government policies on nickel export ban and 5) strong B/S. Nevertheless, we also note several downside risks to our recommendation, namely 1) downward pressure on prices as a result from supply surplus and rising geopolitical tension; 2) possible change on policies and 3) interest rate hikes.