Hurt by Commodity Downfall

We expect rather weak numbers from NCKL in 2Q23, mainly due to the drop in nickel (-14.1% QoQ) and cobalt prices (-14.0% QoQ). Even though we anticipate higher production in 2Q23, driven by higher utilization rates at its HJF RKEF (which just began operations at the end of 2022) and HPAL smelters, it might not be enough to offset the decline in ASP. In this report, we revised our nickel price forecast to USD 22,500 per ton (prev: USD 23,500 per ton) and lowered our forecasts for NCKL's net profit in 2023F and 2024 by 32.1% and 26.7%, respectively. Despite all these, we still maintain our BUY rating on NCKL, albeit with a lower TP of IDR 1,100 per share (prev: IDR 1,500/share).

Massive pressure from commodity downfall. Prices of metal mining commodities fell under pressure in 2Q23; LME nickel prices, NPI prices, and Shanghai cobalt prices all went down by 14.1%, 18.0%, and 14.1% QoQ, respectively. We believe this was caused by a combination of China's slower-than-anticipated economic recovery, which led to a drop in stainless steel demand, and robust nickel supply following the smooth development of nickel smelters in Indonesia. On this basis, we anticipate NCKL's 2Q23 earnings to be subdued despite higher production (thanks to higher utilization rates at its RKEF and HPAL smelters).

Expect higher earnings in 2H23F. We expect 2H23 to be better than 1H23 for NCKL despite flat nickel and cobalt prices, supported by these catalysts: 1.) Three new production lines in its RKEF projects (which was completed in 2Q23) are expected to run at full capacity in 2H23, as it typically takes the company 2-4 months to ramp up production (for information, the company installed three new production lines in the same project in 1Q23, and the three lines have been operating with respective utilization rates of 80%, 50%, and 30%. 2). In April 2023, NCKL began converting MHP into nickel sulfate, and in June 2023, it has begun producing cobalt sulfate. We anticipate that this conversion process will contribute an additional USD 1,000 per ton to the company's cash margin, resulting in a margin expansion in 2H23.

BUY with a lower TP of IDR 1,100/share. We revised our nickel price forecast to USD 22,500 per ton (prev: USD 23,500 per ton). As a consequence, we reduced our NPI and MHP price forecasts by 11.3% and 17.0%, respectively. Therefore, we decided to lower our projections for NCKL's net profit in 2023F and 2024 by 32.1% and 26.7%, Even so, we still maintain our BUY rating on NCKL, albeit with a lower TP of IDR 1,100 per share (prev: IDR 1,500/share).