Indorama Ventures

Indorama Ventures Plc (IVL)

Investment thesis

Even though IVL’s long-term growth prospects remain good, the likelihood of earnings forecast downgrade flows and the unfavorable product spread outlook brought about by the prevailing global economic uncertainty prompted us to adopt a tactically negative bias toward the stock for the near-term. If there were incipient signs of a sustainable recovery in the global economy—China in particular—we would expect spreads to rally and the share price to re-rate. The current stock price implies a forward PEG ratio of 1.0x and a forward PBV/ROE ratio of 0.12x, consistent with regional averages.   

Expect YoY profit contraction in 3Q12, but …
3Q12 core and net profits are expected to weaken YoY but rise QoQ. We estimate a net profit of Bt2,821m, down 22% YoY but up 130% QoQ. Stripping out an FX gain of Bt50m, an assumed inventory gain of Bt630m and an insurance reimbursement (for flooding at IVL’s Lopburi plants) of Bt638m, 3Q12 core profit would be Bt1,511m, down 29% YoY but up 14% QoQ. The key factors behind the assumed YoY earnings contraction were: 1) weaker product spreads (note that sales volume rose 7% YoY to 1.3mt) and 2) lower extra gains.

…earnings to rebound QoQ
 
The key drivers of the QoQ profit growth were: 1) a greater PTA (Asia) spread (up 30% QoQ to US$100/t) and 2) a fatter MEG (US) spread (up 11% QoQ to $500/t). While PET spreads in Europe and the US have been sustained stable, Asian PET and polyester fiber spreads dropped by 10-20% QoQ, due to sluggish demand, particularly in China, new capacity additions and the lag effect of one-month forward pricing. As such, core EBITDA/tonne is estimated at $85 for 3Q12, down by 25% YoY and 24% QoQ. Sales volume is expected to post a 7% YoY rise (driven by capacity expansion), but a 3% QoQ dip to 1.3mt (due to a two-month unplanned shutdown of the AlphaPet plant [Line 2] and a 10-day unplanned outage of an MEG plant during 3Q12). However, a full quarter of operation at the Lopburi plant (post-flooding) would have mitigated the production loss.

4Q12 core earnings to sustain an uptrend
IVL’s 4Q12 core profit is expected to grow both YoY and QoQ, driven by greater sales volume enabled by capacity expansion and an absence of unplanned shutdowns. However, polyester chain spreads should remain flat QoQ, as broad demand has yet to recover.

FY12-13 profit forecast downgrades; street to follow suit

We have cut our FY12 net profit forecast by 30% to Bt8,130m and our FY13 number by 23% to Bt9,303m to reflect lower-than-expected sales volume, weaker-than-expected PET and polyester fiber spreads and higher depreciation and interest expense assumptions. We anticipate that the consensus will follow our lead in the near future. We have, therefore, revised down our YE13 DCF-derived target price to Bt33 from Bt36.