Indorama Ventures
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Polyester business still not recovers in 2H12. Likely to cut forecast BUY
Current price (B) 27.50
Fair Value (B) 37.00
Market cap (B bn) 132.39
- 3Q12’s net profit to shift 85%qoq mainly from
extraordinary items
- Likely to cut forecast…PTA/PET spread to stay low in
4Q12
- Gradually buy on price weakness. Share price to
underperform continuously
- 3Q12’s net profit to shift 85%qoq mainly from CGR
extraordinary items
We project IVL to post net profit in 3Q12 at B2.26bn, surging 85%qoq (but
falling 37%yoy) due to a support from following extraordinary items. 1)
Inventory gain is expected at B939m in this quarter, compared with the loss
of B1.4bn in 2Q12, thanking to a rise in selling price of all IVL products
following increasing global crude oil price. 2) There would be recognition of
insurance compensation claims for the flooded plant in Lopburi province at
B626m (compared with B1.29bn in 2Q12). However, excluding these
extraordinary items, core EBITDA is projected to decline by 13%qoq to stand
at B3.9bn because of the following reasons. 1) Total sale volume is projected
at 1.37 million tons, increasing only 2%qoq (lower than we have estimated)
because IVL has not operated at a full capacity while there was an unplanned
shutdown of MEG plant (Old World Industries) for 10 days. 2) Spread of PET
and polyester has contracted by 10%qoq (60% of total income) as a result of
significant additional supply from PTE plants in Asia while global demand is
still weak from the world economic downturn, which will place pressure on
operation of IVL in this quarter. Overall, net profit in 9M12 of IVL is estimated
at B5.2bn, falling 70% from the same period last year and comprising only
43% of our FY2012’s net profit forecast.
- Likely to cut forecast…PTA/PET spread to stay low in
4Q12
We are likely to cut our net profit forecast for FY2012-2013 by 30-40% after
IVL reports its 3Q12’s net profit. This is because total sale volume in 3Q12-
4Q12 might be lower than we have projected. Furthermore, spreads of
polyester products (both PTA and PET) are believed to stay low in 4Q12
because new supply in Asian market has grown whereas international
demand has still not increased, resulting in a continued oversupply in 4Q12.
However, we believe that the PTA and PTE industries in global market would
normalize in 2013 from capacity cut of small plants that have high production
cost so that they will not have to bear loss from operation. The industries
would finally reach a balance of demand and supply within the next 3-6
months.
- Gradually buy on price weakness. Share price to
underperform continuously
After the forecast revision, new 2013’s fair value is B32 (from B40.85),
implying around 17% upside from the current share price. Therefore, we
reiterate our recommendation to buy for long-term investment. IVL’s
strategy of aggressive growth from M&A, an increase of portion of specialty
products with value added, and an expansion to intermediate and upstream
businesses to reduce risk from raw material seeking will benefit the
company’s net profit in the long run. Nevertheless, dull earnings in 2H12
might influence IVL’s share price to underperform in the next 3 months, so
we recommend only buying when the price weakens in the short term.
