Indorama Ventures

Indorama Ventures Plc (IVL)  

  

Investment thesis

Expectations of substantial core profit growth this year, driven by operational normalization, the start-up of a new polyester fiber plant in Indonesia, contributions from recent acquisitions and fatter margins will push up the share price going forward, we expect. Moreover, further acquisitions would give short-term boosts to the stock. IVL currently trades at an FY14 PER of 25.3x, a discount to its long-term average of 34.1x.

Sales volume growth to drive 3Q14 core earnings

Even though polyester fiber chain product spreads have softened slightly QoQ in 3Q14-to-date, due to a surge in PX feedstock cost and low seasonal demand for PET, we still expect IVL to post YoY and QoQ core profit growth for the quarter, driven by sales volume. A new 318kta polyester fiber plant in Indonesia (started operating in Feb 2014) is expected to achieve an 80% run rate in 3Q14 after encountering technical problems during 2Q14. 

Also, IVL will recognize income from two firms it acquired in 2Q14—PHP (95kta of specialty fibers; 80% stake) and TurkPET (130kta of PET resin; 100% stake)—for a full quarter. And its PET plant in Poland has resumed operating after completing debottlenecking in 2Q14 (its effective capacity has jumped 64% to 230kta). As such, we forecast that sales volume will rise by 13% YoY and 5% QoQ to 1.67mt in 3Q14. 

High demand season for downstream polyester fiber is approaching     

The fourth-quarter of each calendar year is normally a period of high seasonal demand for polyester fiber, due to the Northern Hemisphere winter. Demand for many products along the length of the polyester chain typically rise somewhat. The historical data show that China’s retail sales of clothing and exports of textiles have increased MoM, Sept through Dec, every year (even during the 2008 Wall Street Crash). As the global economy is recovering, we expect this seasonal demand trend to play out in 4Q14. Moreover, PET spread is expected to increase YoY, fueled by broadly improving demand (but may soften QoQ, due to low season). 

Dual drivers of 4Q14 earnings growth outlook

Apart from demand drivers, polyester chain product spreads are expected to expand further in 4Q14. The PTA spread is forecast to rise both YoY and QoQ in 4Q14, led by industry-wide production cuts and a lower PX feedstock cost (due to an influx of new capacity). Moreover, the MEG (US) spread should fatten QoQ, due to tight supply as a result of Sabic’s maintenance shutdown. 

Against this backdrop, IVL’s sales volume will increase both YoY and QoQ in 4Q14, driven by the ramping up of output at recently re-started plants and a contribution from SASA (337kta of specialty PET and polyester fiber; IVL expects to close a deal to take a 51% stake in 4Q14). We, therefore, expect the firm’s earnings growth momentum to be sustained through 4Q14.