Indorama Ventures

Indorama Ventures Plc (IVL)

Investment thesis: The key messages from the analyst meeting yesterday reaffirmed our view of IVL’s earnings outlook and sustainable long-term growth profile. We think anticipation of profit expansion in 2H12, fueled by a recovery in demand and product spreads (driven by stable oil prices and stronger Chinese GDP), should catalyze the share price going forward. Further expansion and cost optimization would boost long-term growth.
Volume growth and margin expansion to drive HoH core earnings growth in 2H12: IVL should sustain QoQ core earnings growth momentum through 2H12, driven by greater sales volumes and fatter product spreads, enabled by supply rationalization among high-cost producers as well as lower gas feedstock costs in the US. The six-month profit contribution of the MEG business, the start-up of a new PET plant in Nigeria and expanded PET capacity in the Netherlands in Sept and the ramping up of run rates at the Lopburi plants will drive sales volume growth; we expect 2H12 sales volume to rise 20% HoH. 
Furthermore, product spreads in 3Q12 QTD—particularly PTA (Asia) and MEG (US)—have improved QoQ, while PET and polyester fiber spreads have been sustained stable QoQ. The PTA (Asia) spread has bounced to above US$100/t from $77/t in 2Q12, while the MEG (US) spread has increased to $500/t from $450/t in 2Q12.
Cost optimization to boost earnings: Apart from the ongoing investments in committed expansion projects, IVL is undertaking cost optimization projects, which it says will boost earnings over the mid-term. The total investment cost will be US$99.6m; the estimated cost saving is $50m/year. The full benefits of the cost saving projects are expected to be realized in FY14 (they would mean 10% upside to our FY14 profit forecast).
The cost optimization projects would also help IVL achieve its FY14 EBITDA target of US$1bn with required capacity of only 8mt (versus 10mt planned previously), as they would contribute an additional $10 EBITDA/tonne. As such, the firm has revised up its long-term mean EBITDA/tonne target to $126 from $116 previously.
Strategic moves to earn greater returns: IVL plans to increase its capacity in both Europe and North America—mean core return on capital employed ROCE during FY09-11 was 22% in Europe, 14% in North America against 13% in Asia. Moreover, ROCE in the US is expected to rise significantly going forward, driven by capacity expansion and cheaper feedstock costs. In 2014, IVL’s European capacity will comprise 28% of its total, up from 27% currently, while its North American capacity will increase to 32% from 31%. In contrast, the Asian capacity will slip to 40% from 42% currently.