Indorama Ventures

Indorama Ventures Plc (IVL)

Above expectations
IVL reported a 2Q13 net profit of Bt214m, down by 83% YoY and 56% QoQ. Stripping out extra losses, core earnings for the quarter would be Bt1,061m, down 20% YoY but a turnaround from a core loss in 1Q13. The result was 24% above our estimate and much higher than the consensus number, due mainly to a higher-than-expected core EBITDA per tonne and a smaller aggregate loss posted by jointly-controlled entities.
Results highlights
The key factor behind the YoY earnings contraction was weaker EBITDA/tonne—down 11% YoY to US$100, squeezed by slimmer MEG (US) and polyester fiber (Asia) spreads; note that sales volume rose 7% YoY to 1.44mt. The drivers of the QoQ earnings improvement were: 1) fatter EBITDA/tonne (up 54% QoQ, brought about by greater PET [Asia and Europe] and PTA [Asia] spreads), 2) increased sales volume (up 2% QoQ) and 2) smaller losses at jointly-controlled entities.
Outlook
IVL’s 3Q13 core earnings are expected to increase both YoY and QoQ, driven by sales volumes and spreads. We forecast that sales volume will rise by 9% YoY and 6% QoQ to 1.5mt, driven by capacity expansion and the re-start of the MEG facility in the US after a turnaround. In 3Q13-to-date, the PTA (Asia) spread has increased 11% QoQ to $121/t. In addition, the MEG (US) spread is expected to gradually improve throughout 3Q13 on high season. However, QTD PET (Asia, Europe & US) spreads have softened 5-7% QoQ, due to low seasonal demand.
What’s changed?
We have cut our FY13 core profit forecast by 14% to Bt4,518m to reflect: 1) a 5% decline in our PET spread assumption (to US$210/t) and 2) deep losses at jointly-controlled entities. But we have upgraded our polyester fiber spread assumption by 12% to $280/t to factor in better-than-expected margins for high value-added products. We have also raised our FY13 net profit forecast slightly to Bt6,226m to factor in an expanded expectation for insurance payouts this year.
Recommendation
The street-beating 2Q13 results and anticipation of further QoQ (and YoY) earnings growth in 3Q13 will catalyze the share price in the near-term, we believe. The bottom-line should also rise in YoY terms in 4Q13 (flattish QoQ) with operational normalization and the start-up of a new polyester fiber plant in Indonesia. The current stock price implies an FY13 PER of 13.9x, a discount to the regional mean of 15.6x. IVL announced an interim DPS of Bt0.14 for 1H13 operations—a 93% payout and an annualized dividend yield of 1.5% (XD on August 21; payment on September 5).