Indorama Ventures

In line with estimate 

IVL reported a 3Q14 net profit of Bt587m, down by 46% YoY and 60% QoQ. Stripping out a one-time corporate restructuring expense of Bt288m and an FX gain of Bt275m, 3Q14 core earnings would be Bt521m, up 209% YoY but down 50% QoQ. The result was in line with our estimate (but 26% below the consensus). 

Results highlights

The bottom-line dive was due to lower net extra gains for the quarter. The drivers of the YoY core profit growth were: 1) greater sales volume (up 11% YoY to 1.6mt) and 2) earnings contributions from assets (PHP and TurkPET) acquired in 2Q14. 

The driver of the QoQ core earnings plunge was a slimmer blended spread—core EBITDA/t is assumed to have slumped 19% QoQ (and 5% YoY) to US$80/t. Note that sales volume rose 3% QoQ (see Figure 2). 

Outlook

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 and blended spread are expected to be flat, the core profit is therefore expected to be flat QoQ. 

Note that the firm is likely to book an insurance payout for business interruption caused by a force majeure at its US PTA supplier in 4Q14. Meanwhile, there is downside risk to IVL’s 4Q14 bottom-line from inventory losses. 

What’s changed?

9M14 net profit represents 76% of our FY14 net profit forecast of Bt3,221m, which we maintain unchanged. We see downside risk to the consensus earnings projection, as our model is now 20% below the street number.

Recommendation

IVL’s recent share price underperformance has somewhat priced in the weak 3Q14 earnings and the likelihood of a 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. The firm currently trades at an FY15 PER of 19.2x, 0.5SD below its long-term average of 29x.