Indorama Ventures

Indorama Ventures (IVL)

Q1 2013’s profit to recover qoq from flooding insurance claim. Main business remains dull

Business overview of IVL has remained dull in 1Q13. We estimate the net profit in the
quarter at B537m, growing significantly threefold from a very low profit base in 4Q12
but falling 68%yoy. The growth would come mainly from the flooding insurance claim
of US$10m (around B3,00m). However, the norm profit would stay at a low level in
this quarter at B1.4bn. In spite of positive factors from 1) total production volume in
1Q13 that is projected at 1.4 million tons or an increase of 7%qoq and 2) spread of
PTA and PET in Asia that has begun to rebounded slightly, in 1Q13 the company has
been effected by a cut in the utilization rate of the MEG plant in the US (a high margin
business that comprise 7% of total capacity of IVL) to 60% from 90% in 4Q12
because of an annual turnaround in April 2013. Moreover, IVL has started to comply
with the update Thai Accounting Standards or TAS 12 regarding income tax, which
resulted in the company having to book deferred tax in the income statement and
would make effective tax rate in 1Q13 increase to 20% from 10% on average in 2012.
This is another factor to offset the positive factors mentioned above. Accordingly,
1Q13’s net profit would comprise only 7% of FY2013’s net profit forecast.

- Cut 2013-2014’s forecast to reflect lower-than-expected polyester spread
Net profit in 2Q13 is projected to remain low because of MEG sales volume that is still
anticipated to decrease from a maintenance shutdown of IVL’s plant in the US and
polyester prices, both PTA and PET, that are projected to weaken following global
crude oil price, which might lead to a inventory loss. Moreover, the outlook of the
polyester business in the rest of the year is still dull due to a delay in the world
economic recovery that has slowed down polyester demands. Accordingly, polyester
stock in China has increased significantly in 1Q13 as a result of decreasing export
volume. Consequently, we revise down our net profit forecast for IVL in 2013-2014
respectively by 23% and 29% as follows. 1) Average spread of IVL in 2013-2014 is
cut by 4%. 2) Effective tax rate is revised up to 20% from 10% (but this will not
affect the business cash flow and IVL’s fair value because it resulted from a change in
the TAS. 3) Utilization rate of MEG plant is cut to 80% from 90% in order to reflect
the maintenance shutdown in April-May 2013. However, we include an assumption for
the insurance claim of US$40m (around B1.2bn) in 2013 in our forecast, which helps
prevent the net profit in this quarter from a drastic fall. Overall, new 2013’s net profit
forecast is B6.3bn, increasing 38%yoy.

- Downgrade to HOLD. New fair value is B25
After the forecast revision, new 2013’s fair value, using DCF, is B25 (from B30).
Although the share price has already been declining, the dull earnings performance of
IVL in 1Q13-2Q13 will make the share price continue underperforming the market. We
therefore downgrade our recommendation from BUY to HOLD.