Indorama Ventures

Indorama Ventures Plc (IVL)
In line with estimate: IVL posted a 1Q12 net profit of Bt1,691m, down 85% YoY but a reversal from the net loss of Bt1,554m reported for 4Q11. Stripping out a Bt687m gain on a bargain purchase, a Bt342m inventory gain, the reversal of an impairment loss of Bt78m related to the 4Q11 flooding and a Bt163m FX gain, 1Q12 core earnings would be Bt421m, down by 85% YoY and 52% QoQ. The bottom-line was in line with our model and the consensus, but core earnings were somewhat lower than anticipated, due to lower-than-expected EBITDA/tonne.
Results highlights: The key factors behind the YoY earnings contraction were: 1) slimmer product spreads (though production volume rose) and 2) a smaller gain on bargain purchases. The key drivers of the QoQ profit growth were: 1) greater sales volume (up 13% QoQ) on a demand recovery and the consolidation of Fiber Vision, 2) a fatter PET spread (PTA and polyester spreads were stable) and 3) no extra expenses. Sales volume rose by 24% YoY and 13% QoQ to 1.2mt, while core EBITDA/t dropped by 57% YoY and 5% QoQ to $71.
Outlook: The earnings recovery should sustain momentum through 2Q12, driven by greater sales volume and fatter product spreads, brought about by high seasonal demand and inventory replenishing. Sales volume will increase QoQ through to 4Q12, augmented by the commercial start-up of a new PET plant in Nigeria, the resumption of operations at the Lopburi facilities, the launch of a PTA factory in Indonesia, the consolidation of Old World Industries in 2Q12, followed in 3Q12 by PET expansion in the Netherlands and a full operational year for assets acquired in FY11. We also expect an insurance payout this year for flooding at the Lopburi complex in 4Q11.
What’s changed? Even though 1Q12 earnings represent only 10% of our FY12 net profit forecast of Bt16,916m, we maintain our projection unchanged, as we expect the bottom-line to rise throughout this year.
Recommendation: Core profit bottomed out in 1Q12; we expect sequential core improvements through this year to generate share price upside. Furthermore, IVL’s long-term growth profile is strong—the firm will expand organically and buy existing operations. The stock price currently implies a forward PBV/ROE ratio of 0.09x, a discount to the consumer staple average of 0.15x.