Vinythai
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2Q14 profit beat estimate on DTA; a weaker quarter ahead
Vinythai Plc (VNT)
Above expectation
VNT reported a 2Q14 net profit of Bt178m, a turnaround from a net loss in 2Q13 and up 84% QoQ. Core earnings were also Bt178m, also a turnaround from a core loss in 2Q13 and up 84% QoQ. The bottom-line was somewhat above our estimate, due to the booking of a corporate tax credit (deferred tax asset); we had modeled for an income tax expense. Stripping out the corporate tax credit, the operation would have posted a loss of Bt69m.
Results highlights
The weak core operation was due to: 1) a slimmer PVC spread (down by 12% YoY and 7% QoQ to US$303/t), 2) a weaker full product spread (PVC spread + caustic soda margin), which is assumed to have weakened by 10% both YoY and QoQ to $517/t, and 3) heavier SG&A expenses—the SG&A/sales ratio rose to 7.7% from 5.9% in 1Q14 (but declined slightly from 7.8% in 2Q13).
Outlook
VNT’s 3Q14 core operation is expected to decline both YoY and QoQ, due to a weaker PVC spread. The average PVC spread in 3Q14-to-date has dropped by 23% YoY and 8% QoQ to US$280/t, due to a rising Ethylene feedstock cost and low seasonal demand for PVC. However, there is scope for upside to the 3Q14 bottom-line from the booking of a corporate tax credit (deferred tax assets).
What’s changed?
While we have cut our FY14 (and long-term) PVC spread assumption by 9% to US$300/t, we have fine-tuned for the corporate tax credit booked in 1H14, so have revised up out full-year bottom-line forecast 9% to Bt414m. However, we have reduced our long-term earnings model by 10%. Our new DCF-derived YE14 target price is Bt10.75 (down from Bt11.80).
Recommendation
As the PVC spread is expected to slim back in 2H14, we don’t see any obvious share price catalysts going forward. Our HOLD rating stands. However, we think the market has already priced in the weak product spread outlook for this year. VNT currently trades at a YE14 PBV of 0.8x—equal to its long-term average, but a significant discount to the regional mean of 1.6x. As such, downside risk to the share price appears limited from here.
