Indorama Ventures

Indorama Ventures Plc (IVL)
 

Investment thesis: Last week, we accompanied IVL executives on a non-deal roadshow to Hong Kong and Singapore. We sensed that while foreign institutional investors are broadly positive about the firm's long-term growth prospects, they are concerned about weakening product spreads, particularly the PTA spread in Asia. Core 4Q11 earnings are likely to be weaker than the market previously envisaged, which may generate negative sentiment toward IVL in the near-term. However, we expect the stock to regain momentum as earnings improve in 1Q12 onward. Further acquisitions would act as share price catalysts. While we are slightly negative about IVL's short-term profitability outlook, we remain positive about its long-term growth profile.
Good long-term polyester chain outlook: Management is optimistic about the long-term outlook for the polyester chain industry, led by strong demand expansion, itself buoyed by global population growth—polyester chain products are used to make low-cost consumer staples. The PTA market was oversupplied in 2H11, a situation that is expected to persist through much of next year. Integrated polyester polymer spreads in 2012 are forecast to soften YoY, as spreads in 2011 were exceptionally high, driven by a 1H11 PTA shortage in tandem with a skyrocketing cotton price.
Weak 4Q11 earnings, but a rebound expected in 1Q12: Management cited that 4Q11 profit will weaken QoQ, due to slimmer product spreads and lower sales volume. IVL said the cause of the current spread squeeze is inventory destocking. But management expects sales volume and product spreads to rebound in 1Q12, as buyers will need to replenish stocks by then.
Long-term growth story intact: The executives reiterated a strong commitment to growth. IVL is confident that its FY14 capacity target of 10mta is achievable.
Strong financial position—capacity for investment: Management said that the firm’s healthy balance sheet and cash flows will enable further investments as opportunities arise. IVL remains confident that it can continue to expand without running into any financial difficulties.