Indorama Ventures

Indorama Ventures Plc (IVL)

Investment thesis
The key messages at the analyst meeting reaffirmed our views regarding IVL’s short-term earnings improvement and long-term growth prospects. Anticipation of profit expansion in 4Q13 with operational normalization and the start-up of a new polyester fiber plant in Indonesia will boost the share price going forward. The stock currently trades at an FY14 PER of 15.5x, a discount to its long-term average of 21.9x, but a premium to the regional mean of 14.7x. Within the Petrochemical sector, we still prefer PTTGC at the moment.   
Earnings improvement expected for 4Q13
IVL’s 4Q13 core number is expected to turn around from the core loss posted for 4Q12 and expand QoQ. The key drivers are: 1) greater sales volume (up by 18% YoY and 5% QoQ to 1.55mt with a production ramp-up at an MEG facility and the commercial start-up of a new 300kta polyester plant in Indonesia), 2) fatter product spreads and 3) shallower YoY losses at jointly-controlled entities. PET spreads have increased by 4% QoQ to US$288/t (US) and by 7% QoQ to $190/t (Asia) in 4Q13-to-date. Also, the MEG (US) spread fattened 8% QoQ to $521/t QTD. European PET and Asian PTA spreads have been sustained stable QoQ in 4Q13-to-date. 
PTA spread to recover next year, PET spread still under pressure
The Asian PTA margin should rise YoY (from US$100/t this year to $120-130/t next year), driven by supply rationalization and a lower PX feedstock cost. Moreover, US MEG margin is expected to increase YoY from $500/t in 2013, fueled by a better demand-supply balance. In contrast, Asian and European PET spreads are forecast to remain low, close to the 2013 levels ($195/t for Asia and $240/t for Europe), due to supply surpluses.
The spread recovery outlook may be only modest, but we expect IVL to post core earnings growth for FY14, driven by sales volume (with a full operational year for an MEG plant and the start-up of a new polyester plant) and cost savings from the rationalization of PET assets. The firm is likely to announce that it will close a high-cost 168kta PET facility in the UK. Management expects the closure to boost EBITDA by about US$17m per year through logistics and conversion cost savings and from higher run rates at IVL’s remaining factories in Europe (the Netherlands and Poland).  
Long-term growth story …more to come 
The company will continue to pursue growth through both organic and inorganic means. The acquisition of a high value-added asset is expected to be announced soon. Further ahead, IVL should make a final investment decision over a proposed PX project in the Middle East by March 2014. Furthermore, the company is working on feasibility studies for other potential projects, including a joint-venture Ethylene cracker in North America.