Indorama Ventures

Indorama Ventures Plc (IVL)
- 2Q13 profit contracts 56%qoq due to MEG plant shutdown and stock loss
IVL reported 2Q13 net profit at B214m, close to our projection, falling 56%qoq and
54%yoy due mainly to 1) an inventory loss of B1.1bn from decreasing raw material
prices, and 2) a maintenance shutdown of an MEG plant in the US with an annual
production capacity of 550,000/ton (7% of total capacity) for 8 weeks. However, in
2Q13 the company had benefited from polyester spreads, both PET and PTA, which
have widened significantly, especially in Asia. Accordingly, core EBITDA in this quarter
stood at B4.3bn, growing 44%qoq. Moreover, there was also an extraordinary income
from the flood compensation of B380m, increasing 29%qoq. Nevertheless, as the
aforementioned negative factors had greater weight, the net profit still weakened in
2Q13. Overall, 1H13 net profit of IVL was B705m, down 54% from the same period
last year and accounting for only 11% of our FY2013 forecast.
- Cut 2013-2014 net profit forecast to reflect delayed spread recovery
We revise down our net profit forecast for 2013-2014 by 37% and 16%, respectively,
in order to reflect the delayed recovery of the polyester business (both PET and PTA)
that made the average product spread of IVL in 2013-2014 lower than projected.
Furthermore, the maintenance shutdown of the MEG plant in the US was longer than
anticipated, so we decrease an assumption for MEG production volume in 2013. After
the forecast revision, IVL’s net profit would decline 13%yoy in 2013 before reversing
to the growth of 43%yoy in 2014. For the net profit in 2H13, it would improve from
1H13 after the MEG plant in the US could resume its operation. At the same time, PET
and PTA spreads would gradually improve after small plants that have high cost had
closed the business. Moreover, IVL’s strategy of increasing net profit with a better
cost control, economies of scales, and increasing proportion of high-margin specialty
products have gradually benefited IVL, allowing the company to survive the
depression and the earnings performance would become vigorous again if the industry
revives.
- Hold. 1H13 dividend is B0.14/share.
After the forecast revision, new 2013’s fair value, using DCF (WACC of 13.6x), is
B19.78. The current share price has only little upside from the fair value, so we
recommend only holding to receive 1H13 dividend of B0.14/share or a half-year
dividend yield of 0.7%. XD date is on 21 August 2013; dividend payment date is on 5
September 2013