Indorama Ventures

Indorama Ventures Plc (IVL)

Investment thesis: Early this week we arranged a non-deal local roadshow for institutional investors. The information we got from the management prompted us to tactically adopt a near-term negative bias toward the stock—product spreads have yet to rebound. But we think that a spread recovery in late 2Q12 together with expectations of improved profitability later this year will push up its share price during the medium-term.
Volume growth a key FY12 earnings driver, despite … Management guided that core earnings growth should sustain momentum through FY12, driven by greater sales volume, brought about by: 1) the first full operating year for assets acquired in FY11, 2) the AlphaPet plant’s first full operational year, 3) the restart of the Lopburi facility (closed in 4Q11 because of flooding) and 4) the commercial starts-up of PET expansion projects. As such, total production volume is expected to increase by 25% YoY to 5.5mt this year.
…softer product spreads: Polyester value chain product spreads, PTA in particular, are expected to normalize this year, retreating from exceptionally high 2011 levels. Huge new PTA capacity additions present another factor squeezing the PTA spread this year. As such, IVL’s EBITDA/tonne is expected to soften 10-15% YoY to $110-115 in FY12.
QoQ earnings improvements, going forward: Core profit in 1Q12 is expected to rise slightly QoQ, driven by higher sales volume (despite weaker QoQ product spreads). Earnings growth should continue into 2Q12, led by increased sales volume and fatter product spreads (due to seasonality and inventory restocking). IVL’s profitability is set to rise further in 2H12 on capacity expansion and a rebound in product spreads in tandem with a global economic recovery.
Organic growth will be a key medium-term driver: Management reiterated its organic expansion strategy as a key medium-term growth driver. Further capacity additions would mean scope for upside to our long-term earnings projections. If IVL were to invest in any of its tabled greenfield projects, the firm’s 10mt capacity target would be achieved two years ahead of plan. Moreover, the firm said it would seize any good acquisition opportunities that might arise.