Indorama Ventures

Indorama Ventures Plc 

Investment thesis

Even though IVL’s share price has rallied recently in tandem with the crude price rebound, we think that it still has further upside. The QoQ core earnings growth through 1H15, to be brought about by spread expansion and volume growth, would be the share price catalyst. Moreover, the valuation is undemanding—the current share price implies a YE15 PBV of 1.3x, 1SD below its long-term average of 2.3x. We have therefore upgraded our rating from HOLD to BUY with a revised YE15 target price of Bt28, pegged to PBV of 1.7x (the multiple that the stock traded at toward the peak season).

4Q14 core profit to expand; inventory loss to squeeze bottom line

We expect IVL to post a 4Q14 net loss of Bt246m, shallower YoY but a reversal from the net profit reported for 3Q14. The inventory loss for the quarter is behind the assumed bottom-line loss. Stripping out an expected inventory loss of Bt1,314m and an insurance payout of Bt329m, 4Q14 core profit would be Bt740m, up 453% YoY and 42% QoQ. The drivers of the assumed core earnings growth were: 1) greater sales volume (up 6% YoY to 1.5mt), 2) a fatter blended spread—core EBITDA/tonne is assumed to have risen 3% YoY and 12% QoQ to US$90/tonne and on earnings contributions from assets (PHP and TurkPET) acquired in 2Q14 (see Figure 2). 

High season to drive core earnings growth through 1H15    

Unlike olefins and aromatics products, which enter their low season in the second quarter of each calendar year, high seasonal demand for PET resin (IVL’s main product) normally runs from the first quarter through the second quarter (peak season) and will enter the low season in the second half of the year. Historical data indicated that the PET spread continued to rise QoQ through 1H15 (see Figure 3). 

IVL’s sales volume is also expected to rise QoQ through YE15, driven by fewer planned shutdowns, capacity expansion, and contribution from recently acquired assets. As such, IVL’s core earnings look set to increase QoQ through 2Q15. Also, its 1Q15 bottom line is expected to turnaround, buoyed by smaller inventory loss (inventory gain is also possible depending on the crude price movement).      

Further share price re-rating expected  

Our study suggested that the IVL share price generally moved in line with the PET spread movement and its valuation was re-rated accordingly (see Figure 4). As the PET spread is expected to continue its uptrend through 1H15, we therefore expect IVL’s share price to be re-rated further. In 2014, the stock price rallied from PBV of 1.2x (-1.1SD below its long-term mean) in Jan to 1.7x (-0.5SD below its long-term mean) in Jun. We expect the share price movement to repeat itself this time around.