Indorama Venture

Indorama Venture Plc (IVL)

Below expectations
IVL reported a 3Q13 net profit of Bt1,090m, down 30% YoY but up 409% QoQ. Stripping out a Bt549m insurance payout tied to 4Q11 flooding, a Bt237m inventory gain, and a Bt120m FX gain, core earnings would be Bt169m, down by 65% YoY and 84% QoQ. The result was somewhat below our estimate and the consensus number, due mainly to a lower-than-expected core EBITDA/tonne and heavier losses among jointly-controlled entities than modeled.
Results highlights
The key factors behind the YoY core earnings contraction were: 1) deeper losses among jointly-controlled entities, 2) higher interest expenses (up 11% YoY) and 3) a higher effective tax rate. However, sales volume rose 4% YoY to 1.5mt and EBITDA/tonne increased 7% YoY to US$84, driven by fatter polyester chain product spreads. The QoQ core profit contraction was due to: 1) weaker EBITDA/tonne (down 16% QoQ), 2) an SG&A/sales ratio rise to 5.4% from 5.2% in 2Q13, 3) deeper losses among jointly-controlled entities and 4) a 63% plunge in other income. Note that sales volume increased 2% QoQ.
Outlook
IVL’s 4Q13 core number will post a turnaround from the core loss posted for 4Q12 and expand QoQ. The drivers of the expected YoY core earnings improvement are: 1) greater sales volume (up 16% YoY to 1.52mt), 2) fatter product spreads and 3) shallower losses at jointly-controlled entities. The key factors behind the assumed QoQ core profit increase are: 1) greater sales volume (up 3% QoQ, driven by the commercial start-up of a new 300kta polyester plant in Indonesia) and 2) an MEG (US) spread rise (in 4Q13-to-date, it fattened 8% QoQ to US$524/t). PET (US & Asia) and PTA (Asia) spreads have been sustained stable QoQ in 4Q13-to-date.
What’s changed?
We have slashed our FY13 net profit forecast 44% to Bt3,497m  to reflect: 1) a 5% decline in our EBITDA/tonne assumption (to US$83) and 2) deeper losses at jointly-controlled entities. As such, our YE14 DCF-derived target price declines slightly to Bt25.90 from Bt26. We expect a consensus earnings forecast downgrade to follow.
Recommendation
In our view, the 3Q13 earnings disappointment may generate short-term negative sentiment toward the stock. However, anticipation of profit growth in 4Q13 with operational normalization and the start-up of a new polyester fiber plant in Indonesia will boost the share price going forward. IVL currently trades at an FY14 PER of 15.7x, a discount to its long-term average of 22.1x, but a premium to the regional mean of 14.7x. Within the Petrochemical sector, we still prefer PTTGC at the moment.