Indorama Ventures

Indorama Ventures Plc 

Investment thesis

Core profit in line with our model

IVL reported a 2Q14 net profit of Bt1,483m, up by 592% YoY and 302% QoQ. Stripping out Bt1,670m in gains on the bargain acquisitions of PHP Fibers and Artenius Turkpet, Bt1,267m in impairments for the Ottana and Workington plants, a Bt174m FX gain and Bt127m in inventory losses, the 2Q14 core profit would be Bt1,033m, down by 3% YoY and 15% QoQ. The bottom-line beat our estimate and the consensus, due to higher-than-expected extra gains. But the core profit was in line with our number (but 21% below the consensus). 

Results highlights

The key factors behind the core earnings contraction were: 1) a slimmer blended spread—core EBITDA/tonne dipped by 1% YoY and 3% QoQ to US$99/t (Figure 2)—and 2) the SG&A/sales ratio rose to 6.6% from 4.3% in 2Q13 and 5.1% in 1Q14. 

However, greater sales volume (up by 10% YoY and 5% QoQ to 1.6mt) and a shallower QoQ loss at an affiliate (Polyprima) mitigated the impact of a slimmer blended spread. 

Outlook

IVL’s core earnings should rise YoY and QoQ in 3Q14, driven by fatter product spreads and greater sales volume at the new Indonesian plant and contributions by recently acquired firms. We forecast that sales volume will rise by 13% YoY and 11% QoQ to 1.7mt. PET and polyester fiber spreads are expected to be stable QoQ (and rise YoY) in 3Q14—the MEG (US) spread is set to fatten QoQ, due to tight supplies as a result of Sabic’s maintenance shutdown (which will temporarily remove 500kt of capacity from the market, equal to 2% of global MEG capacity). Also, the PTA (Asia) spread should expand QoQ, led by a lower PX feedstock cost and industry-wide output cuts. 

What’s changed?

Even though 1H14 core profit represents only 44% of our FY14 core projection of Bt5,138m, we maintain our forecast unchanged, as we expect the numbers to rise HoH in 2H14. There may be scope for upside to our FY14 model from new acquisitions. 

Recommendation

Expectations of substantial core profit growth this year, driven by operational normalization, the start-up of a new polyester fiber plant in Indonesia, contributions from recent acquisitions and fatter margins will push up the share price going forward, we believe. Any further acquisitions would give short-term boosts to the stock. IVL trades at an FY14 PER of 25x, a discount to its long-term mean of 34.4x.