Indorama Ventures

Indorama Ventures Plc (IVL)

Above expectation
IVL reported a 1Q13 net profit of Bt491m, down by 54% YoY and 35% QoQ. Stripping out an FX gain of Bt159m, an insurance payout of Bt295 and an inventory gain of Bt337m, the core loss would be Bt300m, a reversal from core earnings of Bt161m in 1Q12, but a shallower QoQ core loss. The result was somewhat better than our estimate, due mainly to a fatter PET spread than expected and fewer losses among jointly-controlled entities.
Results highlights
The key factor behind the weaker YoY core operation was slimmer product spreads, led by PET (Asia & Europe), and PTA (Asia)—note that sales volume jumped 20% YoY. Core EBITDA/tonne dropped 17% YoY to US$65. The QoQ improvement in core numbers was driven by: 1) 9% greater sales volumes, 2) fewer loss contributions from jointly-controlled entities and 3) lower interest expenses. But core EBITDA/tonne fell 16% QoQ, due mainly to slimmer MEG (US) spread (down 7% QoQ to $547/t). Note that most polyester chain spreads posted QoQ rises in 1Q13, driven by a demand recovery—PTA (Asia), polyester (Asia), and PET (Asia, Europe, & US) spreads increased QoQ.
Outlook
Despite the YoY contraction, PET (Asia, Europe, & US) spreads in 2Q13-to-date have risen by about 10% QoQ on average. However, PTA (Asia) and MEG (US) spreads remain under downward pressure, due to oversupply and huge inventories among buyers. The supply surpluses are expected to ease in 2H13, driven by supply rationalization and a demand recovery. Note that we expect IVL’s sales volume to increase by 7% YoY and 2% QoQ to 1.45mt in 2Q13, driven by capacity expansion (despite a 32-day maintenance shutdown at the MEG plant in the US). The better PET spread should lead a QoQ core operational improvement for the quarter (though the core operation will still weaken in YoY terms). 
What’s changed?
Even though 1Q13 net profit represents only 8% of our FY13 earnings forecast of Bt6,198m, we maintain our model unchanged, as IVL’s income statement is expected to improve significantly in 2H13, driven by greater sales volumes (boosted by the MEG plant restart and the start-up of a new polyester facility in Indonesia by Sept).
Recommendation
Expectations of a 2Q13 earnings improvement together with a better outlook for product spreads (the nadir is now behind us) should support the share price in the near-term. The stock should rebuild momentum in 2H13, once its operations are back on the rails. IVL’s current price implies a forward PEG ratio of 0.5x, a discount to the regional average of 0.8x, which has somewhat priced in the weak 1Q13 earnings, we believe.