Indorama Ventures

Indorama Ventures Plc (IVL)

China’s polyester demand rises, boosting polyester price
We hold more positive prospect toward IVL’s polyester business in 2013 due to PET
and PTA prices that have improved after hitting the record low in 3Q12. This is in line
with the overall outlook of global economy that has recovered from the record low,
especially China who is the main petrochemical product consumer of Asia.
Accordingly, the demand for polyester products is projected to increase and help ease
excessive production capacity. Moreover, the cotton price in the US’s future market ha
risen continuously to 77.78 cent/pound, hitting the record high in the past 12 weeks
which is a result of cotton that tends to be imported more from China. For the US’s
cotton production (world’s 3rd major cotton producer), it has declined from our
previous prospect because of uncompromising weather. Furthermore, some
entrepreneurs have turned to cultivate other kinds of agricultural plants with more
promising yield instead; for example, soybean meal. Accordingly, the cotton supply in
the US has fallen, benefiting prices of polyester products which are substitute
products (IVL aims for 15% of revenue from polyester fiber business). Overall, the
spread of PET-PTA and PTA-PX products in 2013 is projected to increase to US$231
and US$129 respectively which is a normal level, growing by 11.59% YoY and 15.1%
YoY respectively. In addition, the company’s new production capacities would be
recognized gradually in 2013 (as illustrated on the following page), driving the total
production capacity in 2013 by 18% YoY. We’re convinced that IVL’s 2013 net profit
would return to grow outstandingly once again, rising significantly by 46% YoY.

Q4 2012 profit under pressure from low spread, as already projected
IVL’s 4Q12 operating result tends to still stabilize at a low level from the prior quarter,
as mentioned earlier. The profit from main operation (EBITDA) is projected to stand at
B3.55bn, stabilizing at a low level from previous quarter due mainly to the following
reasons. 1) The total production in 4Q12 is projected at 1.37 million tons or 3% QoQ
decrease. 2) IVL’s spread of polyester prices (both PET and polyester fiber, together
with PTA’s midstream raw material) still hasn’t recovered, especially the spread of PET
in Asia that has weakened continuously due to oversupply problem. Nevertheless, the
spread of MEG in the US that has slightly increased (benefiting IVL’s MEG in the US,
considered 10% of the company’s total production capacity) would partially help offset
the weakness of polyester products. Overall, the company’s 4Q12 net profit is
projected to stand at B1bn, stabilizing close to one of the preceding quarter. However,
our forecast still hasn’t included the possibility that IVL might recognize US$40m of
insurance compensation from the flood. This is because this item is still unclear
whether it would arrive in 4Q12 or in 1Q13, considered upside that’s not included.

Revise up recommendation to “BUY”… share price tends to turnaround
aggressively
We revise up our recommendation to “BUY”. After revising up IVL’s terminal growth to
6% (from 5% p.a.), the new fair value, using DCF, at end-2013 stands at B31 (from
B26.50). We believe that the share price would return to outperform the market in 3
months ahead due to the support from the company’s operating result that is likely to
turnaround once again. For the current issue about Baht appreciation, IVL would be
affected very limitedly. Although most of revenue is in a form of international
currencies (mainly USD), most cost of production and debt are also in the same form,
which is considered natural hedging from risks of Baht appreciation.