Indorama Ventures

Indorama Ventures Plc (IVL)

Investment thesis: Anticipation of a net loss for 4Q11—the first since IVL listed on the SET in Feb 2010—may create negative sentiment toward the stock in the near-term. But the expected loss was caused by a force majeure (flooding in Thailand) and the bottom-line will turn around in 1Q12. We expect the stock price to bounce back once it becomes clear that the operation is in recovery mode. Over the medium-term, new acquisitions will boost the share price. Looking past the weak 4Q11 numbers, we remain positive about IVL’s long-term growth profile.
Expect a net loss for 4Q11: We expect a net loss of Bt2,302m for 4Q11, brought about by the flooding, which forced plants in Lopburi to shut down (against net profits of Bt3,987m in 4Q10 and Bt3,602m in 3Q11). We expect that IVL will post provisions estimated at Bt2bn for machinery damage, Bt1.1bn in inventory losses and Bt89m in FX losses. We model for a core profit of Bt908m for 4Q11, down by 66% YoY and 57% QoQ. The key factors behind the core earnings contraction were: 1) lower sales volume (due to flooding and lower production at plants in Europe) and 2) slimmer product spreads brought about by inventory destocking.
Rebound in 1Q12: IVL’s bottom-line will rebound in 1Q12, driven by greater sales volume and fatter product spreads, as buyers have started to replenish stocks. In addition, the firm’s latest acquisition is expected to start contributing earnings in 1Q12. Apart from higher utilization rates at existing plants, sales volume should increase QoQ throughout YE12, driven by the commercial start-up of a new PET plant in Nigeria in 1Q12, followed in 2Q12 by the restarts of the Lopburi facilities, the operational launch of a PTA factory in Indonesia, PET expansion in the Netherlands and a full operational year for assets acquired in FY11. Insurance should pay out for the Lopburi facilities this year.
Earnings upside from further expansion and acquisitions: Even though anticipation of weak 4Q11 numbers prompted us to cut our FY11 core and net profit forecasts by 8% and 20%, respectively, we think that there is scope for upside to our long-term earnings projections from investments in greenfield projects and further acquisitions, which are expected to be announced in 2Q-3Q12.  
Outlook
Expect a net loss for 4Q11: We expect a net loss of Bt2,302m for 4Q11, brought about by the flooding, which forced plants in Lopburi to shut down (against net profits of Bt3,987m in 4Q10 and Bt3,602m in 3Q11). We expect that IVL will post provisions estimated at Bt2bn for machinery damage, Bt1.1bn in inventory losses and Bt89m in FX losses. We model for a core profit of Bt908m for 4Q11, down by 66% YoY and 57% QoQ. The key factors behind the core earnings contraction were: 1) lower sales volume (down 9% QoQ but up 37% YoY to 1.1mt), as the facilities at Lopburi were forced to close because of the flooding in Oct and Nov and due to lower production at plants in Europe, and 2) slimmer product spreads brought about by inventory destocking—we estimate that core EBITDA/tonne dropped by 45% YoY and 38% QoQ to $70.
Rebound in 1Q12: IVL’s bottom-line will rebound in 1Q12, driven by greater sales volume and fatter product spreads, as buyers have started to replenish stocks. Furthermore, the firm’s latest acquisition, Fiber Visions Corporation, is expected to start contributing earnings in 1Q12. Apart from higher utilization rates at existing plants, sales volume should increase QoQ throughout YE12, driven by the commercial start-up of a new PET plant in Nigeria (75kta) in 1Q12, followed in 2Q12 by the resumption of operations at the Lopburi facilities, the launch of a PTA plant in Indonesia (465kta, 41% JV), PET expansion in the Netherlands (190kta) and a full operational year for assets acquired in FY11. Insurance should pay out this year (we expect the payment to be higher than the provision, as it will be based on market value).
Earnings upside from further expansion and acquisitions: Even though anticipation of weak 4Q11 numbers prompted us to cut our FY11 core and net profit forecasts by 8% and 20%, respectively, we think that there is scope for upside to our long-term earnings projections, as the firm is working on putting together greenfield projects in the Middle East and India with planned capacities of 1MTA of PTA and 500KTA of PET at both sites. IVL is expected to announce investment plans in 2Q12.  In addition, the firm is in active discussions over potential acquisitions, which may be unveiled in 2Q-3Q12.
Recommendation and valuation
Maintain BUY with a YE12 target price of Bt51.50: We think that diminished expectations for the 4Q11 bottom-line may create negative sentiment toward IVL in the near-term. But the stock will regain momentum once it becomes clear that the firm will post a turnaround for 1Q12. Over the medium-term, further acquisitions would act as share price catalysts. While we are slightly negative about IVL's short-term profit outlook, we remain positive over its long-term growth profile.
The stock price currently implies a forward PEG ratio of just 0.3x, a discount to the consumer staple mean of 1.2x, while its forward PBV/ROE ratio is 0.08x against a peer average of 0.14x. Our BUY rating stands with a YE12 DCF-derived target price of Bt51.50.