Prospective outlook despite some road bumps

Production volume growth supported by HJF smelter. NCKL reported a production volume surge in 1Q23 (14k tons, +116.6% YoY), mainly driven by additional production from five of the eight production lines in HJF’s RKEF smelter, which helped boost the company’s NPI sales volume to 5k tons (+88.3% YoY). The company expects the remaining production lines to come on stream in 2Q23 and HJF to reach its full production capacity in 3Q23.

Higher production, higher cost. The increase in production by HJF led to surges in raw material and auxiliary costs of +263.5% YoY and +3,443.9% YoY, respectively. Meanwhile, the spike in mining expenses was mainly caused by the signing of several mining contractors in April 2022 to ramp up production at GPS mine. The company expects its costs to decline in 2Q23, supported by the company’s efficiency efforts.

Robust earnings growth on the back of a higher production outlook. We remain optimistic that NCKL will post robust growth this year, supported by 1) additional RKEF and HPAL production capacity of 95k tons and 18k tons, respectively, and 2) the potential for better margins, since the company will convert its MHP products to nickel sulfate (production estimate: 37k tons) and cobalt sulfate (4,500 tons); the projects are planned to be started in April 2023 and June 2023, respectively.

BUY with a lower TP of IDR 1,500/share. We made some adjustments to our forecast: 1) we lowered our FeNi ASP projection by 9.3%, in line with the decline of Indonesia’s NPI FOB prices, and 2) we lowered our MHP price projection by 16.7%. Hence, we lowered our forecast for NCKL’s  2023F and 2024 net profit by 23.9% and 4.6%, respectively. Despite the lower forecast, we still maintain our BUY rating on NCKL, albeit with a lower TP of IDR 1,500 per share (Previously: IDR 2,000/share)