Indorama Ventures

Indorama Ventures Plc (IVL)
- 3Q13 profit recovers qoq. MEG business starts producing, inventory gain recognized
IVL’s 3Q13 net profit was B1bn, growing significantly fourfold from a very low
profit base in 2Q13 but still declining 24.4%yoy. Major contributions were 1) an
inventory gain of B252m (US$8m), versus an inventory loss of B1.14bn (US$38)
in 2Q13 and 2) an extraordinary income from additional flood compensation
booked at B549m, increasing 44%qoq. Core EBITDA in 3Q13 stood at B4.1bn,
down 3.5%qoq because the PET business (64% of total income) has been affected
by contracting spreads of PET and PTA in Europe and the US after a high season
of polyester industry (summer) passed. However, a benefit from the MEG
business in the US (550,000 tons a year capacity or 7% of total production) that
has resumed its production after a two-month maintenance shutdown helped
prevent the core EBITDA from substantially decreasing. Overall, 9M13 net profit
was B1.8bn, falling 40% from the same period last year and making up only 45%
of our FY2013 net profit forecast.
- 2014 profit to rebound remarkably, thanks to PTA and MEG businesses
We revise down our net profit forecast for FY2013-2014 by 33% and 26%,
respectively, to reflect a delay in a recovery of the polyester industry (PET and
PTA) that would make average product spread of IVL in 2013-2014 lower than
projected. After the down revision, the net profit would decrease 42%yoy in 2013
and then reverse to show the growth of 58%yoy in 2014. 4Q13 net profit would
drop from 3Q13 because the company would face an inventory loss after
polyester price has declined following global crude oil price. Moreover, spreads of
most polyester products in 4Q13 would stay close to that of 3Q13, except for PTAPX
spread in Asia that would continue shrinking. Despite a first commercial run of
a polyester fiber plant in Indonesia, the plant has a low capacity of only 300,000
tons a year, which is only 4% of total capacity of IVL, so it would not be able to
mitigate the above-mentioned negative factors. However, a brighter business
outlook is foreseen in 2014, as spread of PTA in Asia would gradually revive after
small plants could not bear high cost and had to close their businesses, while Px
excess supply would make IVL’s raw material cost decrease from 2013. Moreover,
IVL’s change in its strategy to focusing on boosting net profit margin via a cost
control, economies of scale, and increasing proportion of income from specialty
products will gradually benefit IVL, helping strengthen the company against the
industry’s recession and allowing the earnings to rebound notably if the industry
revives again.
- Reiterate SELL. Already fully value, with 2014 PER above 27x
After the forecast revision, new 2014 fair value, using DCF (WACC at 13.6%) is
B21.50 (from B25.00). The current share price has already reflected the new fair
value, with 2014 PER of above 27x, the highest in the petrochemical sector. SELL.