Indorama Ventures

Indorama Ventures Plc (IVL)

Investment thesis
Expectations of an improved 2Q13 core operational performance should support IVL’s share price in the near-term. We anticipate that earnings will regain momentum through 2H13, as operations are back on-track. The current stock price implies an FY13 PER of 15.2x, a discount to the regional mean of 15.5x, which has somewhat priced in the weak bottom-line outlook for 2Q13, we believe.   
Inventory loss to hit 2Q13 bottom-line, but core profit to rise QoQ …
IVL will post a 2Q13 net loss of Bt263m, we expect, a reversal from net profits in 2Q12 and 1Q13. Stripping out extra losses, the 2Q13 core profit would be Bt858m, down 35% YoY but a turnaround from a core loss in 1Q13. The key factors behind the expected YoY earnings contraction were: 1) slimmer MEG (US) spread and 2) lower polyester fiber (Asia) spread (despite greater sales volume). The key drivers for the QoQ earnings improvement were: 1) greater PET (Asia and Europe) spreads and 2) a fatter PTA (Asia) spread.
…on fatter PET and PTA spreads
As the second-quarter is normally a period of high seasonal demand for PET resin, PET spreads mostly increased QoQ—PET (Asia) spread up 16% QoQ to US$223/t and PET (Europe) up 41% QoQ to $292/t. In addition, PTA (Asia) spread increased by 3% QoQ to $108/t, driven by a lower PX feedstock cost. Meanwhile, the PET (US) spread was stable QoQ at $281/t. On the flipside, the MEG (US) spread dropped by 15% QoQ to $466/t, due to slow demand in China, where inventories are high. Also, polyester fiber (Asia) spread declined by 7% QoQ to $210/t.
We expect MEG sales volume to post a drop of 67% QoQ to 30kt, due to a two-month maintenance turnaround. However, greater PET production will have offset the effect of lower MEG production. As such, IVL’s 2Q13 sales volume should be sustained stable QoQ (and up 7% YoY) at 1.4mt. 
QoQ core earnings to sustain momentum in 3Q13 
In 3Q13, greater sales volume growth should offset the effect of expected spread slippage. We forecast that IVL’s sales volume will rise by 9% YoY and 6% QoQ to 1.5mt, driven by capacity expansion and the restart of the MEG facility in the US after a turnaround. In 3Q13-to-date, the PTA (Asia) spread has increased 11% QoQ to $120/t. However, QTD PET (Asia, Europe & US) spreads have softened 5-7% QoQ, due to low seasonal demand. In addition, the MEG (US) spread has fallen 8% QoQ to $430/t. We, therefore, expect IVL’s 3Q13 core earnings to be flattish QoQ.
There would be some downside risk to our FY13 earnings forecast if polyester fiber and MEG spreads and/or MEG sales volume were to miss our expectations.