Indorama Ventures

Indorama Ventures Plc  

Investment thesis

Expectations of weak 1Q13 earnings may dampen IVL’s share price performance in the near future, but it will later regain momentum, particularly in 2H13, once its operations are back on-track. The current stock price implies a forward PEG ratio of 0.5x, a discount to the regional average of 0.8x, which has somewhat priced in the weak earnings outlook, we believe.   
Expect a weaker 1Q13 operational performance …
We anticipate that IVL will post a net loss of Bt456m for 1Q13, a reversal from net profits of Bt1,691m in 1Q12 and Bt128m in 4Q12. Stripping out extra gains, the 1Q13 core loss is expected at Bt1,055m, deeper in QoQ terms and a reversal from a core profit of Bt421m in 1Q12. The key factors behind the weaker expected numbers are: 1) slimmer PET (Asia) and MEG (US) spreads and 2) lower MEG sales volume.
…squeezed by narrower spreads and lower MEG volume
Although they declined in YoY terms, most polyester chain spreads posted QoQ improvements in 1Q13, driven by a demand recovery—PTA (Asia), polyester (Asia), and PET (Europe & US) spreads increased QoQ. The PTA (Asia) spread rose 11% QoQ to US$100/t, while the polyester (Asia) spread jumped 23% QoQ to $220/t. The PET (Europe) spread increased 8% QoQ to $195/t and the PET (US) inched up 2% QoQ to $280/t. On the flipside, the PET (Asia) and MEG (US) spreads both dipped 5% QoQ to $170/t and $560/t, respectively.
We expect that MEG sales volume (MEG yields the fattest spread of IVL’s commodity products) fell 15% QoQ to 102kt in 1Q13, as output of the chemical would have fallen in preparation for a maintenance shutdown in April 2013. As such, IVL’s 8% QoQ rise in total sales volume to 1.4mt for the quarter probably wouldn’t have been sufficient to offset the bottom-line squeeze caused by reduced MEG sales.   
Better QoQ numbers expected in Q2 2013
In 2Q13-to-date, sales volume and some spreads—PTA (Asia), PET (US) and MEG (US)—have risen, while PET (Asia & Europe) and polyester (Asia) spreads have been sustained stable QoQ. The QTD PTA (Asia) spread has increased 10% QoQ to US$110/t, the PET (US) spread has inched up 2% QoQ to $285/t, while the MEG (US) spread has risen 7% QoQ to $600/t. So, we expect a stronger QoQ bottom-line.
Weaker expectations for spreads prompted profit forecast cut
Although IVL’s income statement is expected to improve significantly in 2H13, driven by greater sales volume (boosted by the MEG plant restart and the start-up of a new polyester plant in Indonesia by Sept), we have slashed our FY13 net profit forecast by 21% to Bt6,198m to factor in lower spread assumptions (see Figure 2)—an influx of new supply has put greater downward pressure on spreads than we previously envisaged.