Indorama Ventures

Indorama Ventures Plc (IVL)

Above expectations: IVL posted a 2Q12 net profit of 1,226m, down by 48% YoY and 28% QoQ. Stripping out an FX gain of Bt53m, an inventory loss of Bt1,440m and an insurance reimbursement (for flooding at its Lopburi plants) of Bt1,290m, core earnings would be Bt1,323m, down 60% YoY but up 214% QoQ. The numbers were somewhat above our estimates and the consensus, due to higher core EBITDA/tonne and insurance payouts than modeled.
Results highlights: The key factor behind the YoY core profit fall was weaker product spreads (volume rose). The drivers of the QoQ core earnings growth were: 1) greater sales volume with the restarts of the Lopburi facilities and the consolidation of Old World Industries LLC (MEG business) and 2) fatter product spreads (PET, polyester fiber and MEG). Sales volume increased by 18% YoY and 13% QoQ to 1.3mt, while core EBITDA/tonne fell 29% YoY but jumped 58% QoQ to US$112.
The QoQ rise in core EBITDA/tonne was driven by the consolidation of the MEG business in 2Q12. Excluding the effect of the MEG business, core EBITDA/tonne would have dropped 45% YoY but increased 23% QoQ to $87. Note that 2Q12 core EBITDA/tonne was weighed down by a weak Asian PTA spread.
Outlook: IVL should sustain QoQ core earnings growth momentum through 3Q12, driven by greater sales volumes and fatter product spreads. A full operational quarter for a new PET plant in Nigeria, the start-up of expanded PET capacity in the Netherlands and the ramping up of run rates at the Lopburi plants will drive sales volume growth. Furthermore, polyester chain spreads should improve in 3Q12 onward, driven by high seasonal demand for polyester products and supply rationalization among high-cost producers.
What’s changed? Even though 1H12 earnings represent only 25% of our FY12 net profit of Bt11,572m, we maintain our projection unchanged, as we expect the bottom-line to rise throughout 2H12.
Recommendation: We think anticipation of profit growth in 2H12, fueled by a recovery in demand and product spreads (driven by stable oil prices and a Chinese economic recovery), should catalyze the share price going forward. Further expansion and/or acquisitions would boost long-term growth. The stock price currently implies a forward PEG ratio of just 0.6x, a discount to the consumer staple mean of 1.6x, while IVL’s forward PBV/ROE ratio is 0.13x against a peer average of 0.16x.