Indorama Ventures

Indorama Ventures Plc (IVL) 

 

Investment thesis

Expectations for strong core earnings growth momentum throughout 2016 to be realized by spread expansion and volume growth, in our view, should continue to be share-price catalysts for IVL. Moreover, there is scope for upside to the firm’s long-term earnings forecast from the potential M&As through which the firm will be invigorated. Furthermore, its valuation is still undemanding—the current share price implies a YE16 PBV of 1.1x, 1.1SD below its long-term average and a deep discount to the regional mean of 1.5x. However, as crude prices are expected to be skewed to the downside in the short term, we would recommend that investors wait until crude stabilizes further before taking positions in the stock.

Strong YoY core earnings growth expected for 4Q15

We expect IVL to report 4Q15 net profit of Bt137m, a reversal from net loss posted for 4Q14 but down 71% QoQ. The YoY bottom-line turnaround was due to smaller inventory loss and expected FX gain against FX loss in 4Q14. Meanwhile, the QoQ net profit contraction was due to weaker core earnings QoQ in 4Q15. Stripping out an expected inventory loss of Bt1.1bn and FX gain of Bt8m, 4Q15 core profit would be Bt1,245m, up 56% YoY but down 38% QoQ (see Figures 1 and 2). 

The key drivers of the assumed YoY core earnings growth were: 1) greater sales volume (up 20% YoY to 1.83mt) and 2) earnings contribution from assets acquired in 2015—Polyplex (PET, Turkey), Performance Fibers (HVA, China), Cepsa (PTA, Canada), Bangkok Polyester (PET, Thailand), and Micropet (PET, India). However, the key factors behind the QoQ core profit contraction were: 1) weaker blended spread—core EBITDA per tonne is assumed to have decreased 6% QoQ to US$90, due to low seasonal demand for PET resin and slimmer MEG (US) spread following a sharp drop in Asian MEG margin. 

1Q16 core profit to expand QoQ     

IVL’s QoQ core earnings growth is expected to regain momentum in 1Q16, driven by greater sales volume and wider blended spread (on high seasonal demand for PET resin). IVL’s sales volume is expected to increase 2% QoQ to 1.87mt in 1Q16, boosted by full-quarter recognition of the sales volume from Micropet, of which acquisition was completed in Dec 2015. However, the higher PET resin sales volume to be brought about by high season should be offset by lower MEG sales volume on the back of a 25-day planned shutdown (to change catalysts). Meanwhile, the blended spread is also expected to rise QoQ, fueled by a wider PET spread on high seasonality. 

Nevertheless, we expect IVL’s 1Q16 core profit to soften YoY, due to weaker contribution from MEG (US) business on the back of maintenance shutdown mention earlier. Despite that, the contribution from assets acquired in 2015 will provide considerable support for 1Q16 core earnings. In addition, the expectation of smaller inventory loss in 1Q16 should also boost the 1Q16 bottom line.