TBP Group Earnings: Revenue Missed Due to Weak Prices, but Shares Are Still Undervalued

We lower our fair value estimate for narrow-moat Trimegah Bangun Persada NCKL, or TBP Group, to IDR 1,210 from IDR 1,277. The pushbacks are primarily driven by a weaker-than-expected average selling price, or ASP. Although high inventory levels slightly improved for Chinese nickel players in the past two months, we believe the downward pricing pressure will linger throughout the year.

TBP Group’s first-half revenue for fiscal year 2023 is IRD 10.2 trillion, up 88.7% year over year, but tracking below our previous anticipated annual growth rate of 101.1%. The decline in the ASP has been partly offset by the increase in volume sales after ramping up capacities. Hence, we trim our full-year 2023 revenue forecast to IDR 18.1 trillion, representing 89.4% growth year over year. With the revision, the first-half revenue accounts for 56.5% of our full-year estimate, reflecting our view of downward ASP trends in the second half of the year. We think TBP Group’s shares are undervalued and its recent trading price level provides a comfortable entry point.

We now see a better gross margin of 39.7% compared with our previous assumption of 34.4%. TBP Group’s first-half gross margin is 34.2%, in line with our expectations. In the future, we think margins should rise due to lower cash costs as TBP Group further ramps up its capacities for HJF production lines and due to shifts to higher-margin products. ASPs for limonite ores and saprolite ores decreased by 18% and 13% in the first half, respectively, slower than the 25% decline in its processing business RKEF.

While we think the upcoming elections and possible moves made by the new administration remain a near-term risk for TBP Group, we believe that the nickel industry will remain an important contributor to the Indonesian economy and we are optimistic about management and its parent group’s ability to navigate through potential challenges.