Indorama Ventures

Indorama Ventures Plc (IVL)  

Investment thesis
We believe that a warrant issue reassures investors of the firm’s financial ability to pursue substantial growth opportunities should they arise without worrying about shareholders’ price dilution or too much risk control. We think that any notable share price correction on concerns of an earnings dilution (which we view as unlikely) offers a good opportunity to accumulate IVL. We see continued upside potential from meaningful core profit growth this year driven by operational normalization; the start-up of a new polyester fiber plant in Indonesia; and generally fatter margins. Moreover, any news of further acquisitions should provide a short-term boost for the stock. IVL currently trades at an FY14 PER of 26.5x, a discount to its long-term average of 34.4x.
Warrants to fund new growth opportunities especially in the US
IVL's Board of Directors, on July 3, 2014, approved the issuance and allocation of two series of warrants to purchase newly issued ordinary shares of the company subject to approval of the EGM (see Figure 1). The plan is that proceeds from warrant converting (which will raise around Bt33bn at maximum) will be used for: 1) investing in a 1.5mta shale gas ethylene cracker (JV with 50% equity stake) and a 750kta MEG plant (100% equity stake) in the US (where the gas feedstock cost is almost 80% cheaper than the Naphtha which is mostly used worldwide); and 2) acquiring High Value Added (HVA) assets.
If IVL does decide to invest in these projects production capacity, revenue, and EBITDA will more than double in 2018 compared to 2013, while its balance sheet will remain strong with an expected net debt/equity of less than 1x (assuming that all the warrants are exercised). It’s worth noting that approved and ongoing projects already have funding in place, so these will not absorb proceeds from these warrants.
Expect earnings accretion not EPS dilution over the long-term
Should the cracker and MEG projects go ahead then they’re expected to start commercial operations in 2018. Based on the following assumptions of: 1) a project IRR of 15%; 2) an investment cost of US$2.4bn; 3) cost of ethane at US$200/t; and 4) the US MEG spread of US$420/t (5-year average), we preliminary estimate that these projects will generate EBITDA at around Bt14bn per year which implies a payback period of 5.5 years and contributes earnings at around Bt10bn per year (almost 40% incremental profit compared to no investment in these projects). If so, then there’s no EPS dilution over the long-term given greater incremental earnings than new ordinary shares. 
Under the worst case scenario—assuming all IVL-W1 & IVL-W2 warrants are fully exercised and no earnings accretion from future investments—which we think it is unlikely, EPS dilution will be 15.03%.         
What if no warrant conversion? 
If no warrants are converted during the expected period and IVL would like to still invest in the above projects then the alternative fund raising avenues include a right offering, private placement, and perpetual bond.