Indorama Ventures

Indorama Ventures Plc (IVL)       

Investment thesis
Last week, we accompanied IVL executives, Mr Vikash Jalan, Head of Corporate Finance, and Mr Richard Jones, Head of Investor Relations and Corporate Communications, on a non-deal roadshow to Hong Kong. We sensed that the foreign institutional investors we met broadly hold the view that Asian polyester chain product spreads have troughed already (though concerns were expressed about downside risk to the European PET spread). The fund managers appeared to be considering entering or adding to positions in IVL, as they expressed interest in its long-term growth prospects.   
Limited downside to polyester chain margins; upside in 2014
Management believes that the market for polyester chain products will improve next year, driven by a better demand-supply balance. The Asian PTA margin should rise YoY, driven by supply rationalization and a lower PX feedstock cost. Moreover, US MEG margin is expected to increase YoY, fueled by cheaper feedstock costs and supply tightness. Asian and US PET spreads are forecast to be sustained stable YoY in 2014. In contrast, the European PET spread is likely to weaken YoY, due to oversupply brought about by substantial new industry capacity additions.
FY14 earnings expansion to be driven by volume growth
The spread recovery outlook may be only modest, but we expect IVL to post good core earnings growth for FY14, driven by sales volume and cost savings enabled through the rationalization of PET assets. The firm’s production volume is set to increase 8% YoY next year to 6.4mta. Note that IVL’s installed capacity will increase to 8mta in FY15 from 7.1mta in FY13 as a result of several capacity expansion projects currently being implemented.
Expect new M&As to be announced soon
Management has resumed actively considering potential acquisitions with a focus on high value-added specialties (HVA). The first deal is expected to be announced by year-end or early next year. IVL aims to double its HVA market share in the US from 16% currently. The company will also continue to pursue growth through organic means.
Strong financial capacity for future investment
IVL should be able to finance upcoming investment projects without any difficulty, given expected strong operational cash flows coupled with capacity to take on new debt. Management guides for cumulative free cash flows of around US$1bn for the period FY13-15. The firm’s current net debt/equity ratio of 1.3:1x, means it could raise a further $500m in in extra debt before it reached its self-imposed net debt/equity ratio policy ceiling of 1.5x (its creditor covenant is 2.1x).