Indorama Ventures

Indorama Ventures Plc (IVL)
 

Investment thesis: We think that diminished expectations for the 2Q12 bottom-line together with the likelihood of earnings downgrade flows may create negative sentiment toward IVL in the near-term. However, anticipation of a demand and product spread recovery (fueled by stable oil prices and a Chinese economic recovery) prompted us to adopt a more positive bias toward the stock on a three-month time horizon. Further expansion and/or acquisitions would boost long-term growth. We, therefore, think that any share price correction would present a good opportunity to accumulate the stock ahead of the spread recovery.
PTA spread soon to recover, driven by production cuts and … During the past 18 months, the PTA spread in Asia has declined, due to an influx of new supply in the face of subdued demand across the region. However, the exceptionally low PTA spread has prompted many operators to cut production or delay commercial start-ups. We think market rationalization will mitigate the oversupply pressure and eventually push the PTA spread back up.
… a demand recovery: High season for clothing sales in China is approaching (late 3Q12). Moreover, Chinese exports of textile yarns and fabrics have continued to grow. Based on Morgan Stanley’s view that the Chinese economy will recover in 2H12, we think demand for polyester chain products (including PTA, a key feedstock) and spreads will improve in 3Q12 onward.
Expect downstream PTA spread to rebound ahead of upstream PX spread: Historically, the downstream PTA spread has normally rebounded 3-4 weeks ahead of the upstream PX spread. If this pattern holds true, the PTA spread should recover ahead of the PX spread.
FY12-13 earnings forecast cuts, street downgrade expected: We have revised down our product spread assumptions to reflect the slower-than-expected demand recovery, so have downgraded our FY12 earnings forecast by 30% to Bt11,572m and our FY13 number by 28% to Bt13,360m. Our FY12 net profit forecast is now 17% below the street. Even though the consensus IVL’s FY12 projection has fallen by 10% YTD, we expect it to drop further in the near future
Outlook
PTA spread to recover soon, driven by the production cuts and … the Asian PTA spread has weakened from US$383/tonne in 1Q11 to $122/tonne currently, due to an influx of new supply in the face of subdued demand across the region, brought about by global economic uncertainty and oil price volatility; which has made buyers hesitant to purchase. But the PTA spread won’t stay this low for very long—the conversion cost of about half the global makers of the chemical exceeds $150/tonne. The exceptionally low PTA spread has prompted many operators to cut production or delay commercial start-ups (see Figure 2). We think market rationalization will mitigate the oversupply pressure and eventually push the spread back up.