Indorama Ventures

Indorama Ventures Plc (IVL)
 

Investment thesis: We think that anticipation of an earnings rebound in 1Q12 followed by a spread recovery in late 2Q12 together with expectations of improving profitability throughout this year will catalyze the share price going forward. In addition, we remain positive about IVL’s long-term growth profile, led by further expansion and/or acquisitions. The stock price currently implies a forward PBV/ROE ratio of 0.09x, a discount to the consumer staple average of 0.15x.
Expect YoY profit contraction in 1Q12, but … We anticipate that IVL will post a 1Q12 net profit of Bt1,848m, down 83% YoY but a reversal from the net loss of Bt1,458m reported for 4Q11. Stripping out an expected Bt467m gain on a bargain purchase, a Bt450m inventory gain, the reversal of a Bt40m impairment provision and a Bt19m FX loss, the 1Q12 core profit should be Bt910m, down 67% YoY but up 4% QoQ. The key factors behind the YoY earnings contraction were: 1) slimmer product spreads (despite higher sales volume) and 2) a smaller gain on bargain purchases.
…to turnaround QoQ: The key drivers of the QoQ earnings growth were: 1) greater sales volume on a demand recovery and the consolidation of Fiber Vision, 2) a fatter PET spread (PTA and polyester spreads were stable) and 3) no extra expenses. Sales volume is expected to post a rise of 26% YoY and 14% QoQ to 1.2mt, while we estimate that core EBITDA/t dropped 39% YoY but increased 39% QoQ to $100.
Earnings growth through to year-end: Profit growth should sustain momentum through 2Q12, driven by greater sales volume and fatter product spreads, brought about by high seasonal demand and inventory replenishing. Sales volume will increase QoQ through to 4Q12, augmented by the commercial start-up of a new PET plant in Nigeria, the resumption of operations at the Lopburi facilities, the launch of a PTA factory in Indonesia, the consolidation of Old World Industries in 2Q12, followed in 3Q12 by PET expansion in the Netherlands and a full operational year for assets acquired in FY11. We also expect an insurance payout this year for flooding at the Lopburi complex in 4Q11.