Indorama Ventures

Indorama Ventures Plc (IVL)
Below our estimate
IVL reported a 3Q12 net profit of Bt1,566m, down 62% YoY but up 28% QoQ. Stripping out an FX gain of Bt44m, a gain on the bargain purchase of PT Indorama Polypet Indonesia of Bt121m, an inventory gain of Bt377m and a Bt539m insurance payout for the 4Q11 flooding of its Lopburi complex, 3Q12 core earnings would be Bt485m, down by 87% YoY and 63% QoQ. The result was somewhat below our forecast and the consensus, due to weaker-than-expected product spreads and lower inventory gains than assumed.
Results highlights
The key factor behind the core earnings contraction was weaker product spreads (sales volume expanded). Core EBITDA/tonne dived by 31% YoY and 30% QoQ to US$78, led by lower Asian PET and polyester fiber spreads. However, the PTA (Asia) spread jumped 35% QoQ to $104/t, while MEG (US) spread was flattish QoQ at $470/t. Sales volume posted a rise of 17% YoY and 5% QoQ to 1.4mt, driven by capacity expansion.
Outlook
IVL’s 4Q12 core profit is expected to improve both YoY and QoQ, driven by greater sales volume enabled by capacity expansion and an absence of unplanned shutdowns—there was a two-month unplanned shutdown at Line 2 of the AlphaPet plant and a 10-day unplanned outage at an MEG plant during 3Q12. Moreover, the 187kta PET expansion in the Netherlands will start operating commercially in 4Q12.  But polyester chain spreads are likely to remain flat QoQ, as broad demand has yet to recover.
What’s changed?
We have slashed our forecasts by 32% to Bt5,558m for FY12 net profit and by 45% to Bt2,831m for FY12 core profit (and by 21% to Bt7,358m for FY13 core profit) to factor in diminished product spread assumptions. Our PET spread assumption declines by 10% to US$200/t for FY12-13; our PTA spread assumption declines by 10% to $90/t for FY12 and by 17% to $100/t for FY13. Furthermore, we have revised down our polyester fiber spread assumption by 5% to $360/t for FY12 and by 11% to $330/t. We expect consensus earnings forecast downgrades soon.
Recommendation
Even though IVL’s long-term growth prospects remain good, the likelihood of a street earnings forecast downgrade and the unfavorable product spread outlook brought about by the prevailing global economic uncertainty prompted us to adopt a tactically negative bias toward the stock for the near-term. If there were incipient signs of a sustainable recovery in the global economy—China in particular—we would expect spreads to rally and the share price to re-rate. The current stock price implies a forward PEG ratio of 0.6x, a discount to the regional average of 0.9x.