Indorama Ventures

Investment thesis

IVL’s recent share price underperformance has somewhat priced in expectations of weak 3Q14 earnings and a potential street forecast downgrade. We think that any share price weakness would open an opportunity to accumulate the stock ahead of substantial FY15 core profit growth of 46%, to be driven by a full operational year for a new polyester fiber plant in Indonesia, full-year contributions by assets acquired in 2Q14 and fatter margins. Moreover, further acquisitions would boost the stock price. We have rolled over our investment horizon to YE15 with a new DCF-derived YE15 target price of Bt32. The firm currently trades at an FY15 PER of 20x, 0.5SD below its long-term average of 29x.

Extra expenses to squeeze 3Q14 bottom-line

We expect IVL to post a 3Q14 net profit of Bt614m, down by 44% YoY and 59% QoQ. The absence of extra gains in the face of recognition of extra expenses for the quarter are behind the assumed bottom-line dive. Stripping out a one-time organizational restructuring expense of Bt242m, 3Q14 core earnings would be Bt856m, up 408% YoY but down 17% QoQ. The drivers of the assumed YoY core profit growth were: 1) greater sales volume (up 11% YoY to 1.6mt), 2) a fatter blended spread—core EBITDA/ tonne is assumed to have risen 13% YoY to US$95/t and 3) earnings contributions from assets (PHP and TurkPET) acquired in 2Q14. 

The driver of the modeled QoQ core earnings slide was a slimmer blended spread—core EBITDA/t is expected to have dipped 4% QoQ. Note that sales volume should have increased 3% QoQ (see Figure 2). 

Earnings improvement expected for 4Q14    

IVL’s core earnings should expand YoY in 4Q14, led by greater sales volume at the new Indonesian plant, contributions from recent acquisitions and a fatter blended spread (up for PET, PTA and polyester fiber). In QoQ terms, sales volume is also expected to rise, while the blended spread is likely to be flat. However, we expect core profit to decline QoQ, due to higher interest expenses tied to the issuance of hybrid debentures in late October 2014. As such, IVL’s core earnings look set to soften QoQ in 4Q14. But its bottom-line for the quarter is forecast to improve both YoY and QoQ, buoyed by the absence of extra expenses.  

Slow spread recovery prompts earnings forecast downgrades 

Polyester chain product spreads in 2014-to-date have recovered at a slower rate than we previously envisaged and this trend is likely to persist into next year, as global economic growth is weak. Hence, we have cut our spread assumptions for FY14 and FY15 (see Figure 3). We have also factored in a higher interest expense assumption (tied to the hybrid debentures). As a result, our earnings forecasts have been slashed by 37% to Bt3,221m for FY14 and by 31% to Bt5,652m for FY15. Our projection is now 20% below the consensus.