Indorama Ventures

Indorama Ventures Plc (IVL)

Investment thesis: We think that the market has already priced in diminished expectations for the 2Q12 bottom-line and the likelihood of earnings downgrade flows. Moreover, 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 going forward. Further expansion and/or acquisitions would boost long-term growth. Valuation-wise, the stock price currently implies a forward PEG ratio of just 0.6x, a discount to the consumer staple mean of 1.6x, while IVL’s forward PBV/ROE ratio is 0.11x against a peer average of 0.16x.
Expect YoY earnings dive in 2Q12, but … Core profit bottomed out in 1Q12 and is expected to gradually improve from 2Q12 onward. However, an expected inventory loss will squeeze IVL’s 2Q12 bottom-line. We anticipate that the firm will post a 2Q12 net profit of 122m, down by 95% YoY and 93% QoQ. Stripping out an FX loss of Bt125m, an expected inventory loss of Bt1,443m and an insurance reimbursement (for flooding at its Lopburi plants) of Bt941m, 2Q12 core earnings would be Bt749m, down 77% YoY but up 78% QoQ. The key factor behind the assumed YoY core profit contraction was weaker product spreads (note that sales volume rose YoY and the insurance payout [for AlphaPET] in 2Q11 was lower than for Lopburi). 
…core profit to rise QoQ: The key drivers of the QoQ core profit growth were: 1) greater sales volume with the restarts of Lopburi facilities and the consolidation of Old World Industries LLC (MEG business) and 2) a fatter MEG spread (polyester chain spreads declined). Sales volume is expected to post a rise of 23% YoY and 17% QoQ to 1.4mt, while core EBITDA/tonne is assumed at US$90, down 43% YoY but up 27% QoQ.
Expect further QOQ core earnings rise in 3Q12: IVL should sustain QoQ core earnings growth momentum through 3Q12, driven by greater sales volumes and fatter product spreads. A full operational quarter for a new PET plant in Nigeria, the start-up of expanded PET capacity in the Netherlands and the ramping up of run rates at the Lopburi plants will drive sales volume growth in 3Q12. In addition, polyester chain spreads are expected to improve in 3Q12 onward, driven by high seasonal demand for polyester products and supply rationalization among high-cost producers.