Indorama Ventures

Investment thesis

We are positive about this acquisition, but concerns over likely inventory losses tied to falling crude prices may generate negative sentiment toward the stock in the near-term. Regardless, substantial FY15 core profit growth of 46%—to be driven by capacity expansion, full-year contributions by assets acquired in 2Q14 and fatter margins—will boost the share price going forward, we believe. There would be scope for upside to our long-term earnings model from further acquisitions. The firm currently trades at an FY15 PER of 18.5x, 0.5SD below its long-term average of 29x.  

Acquisition of a leading premium polyester tire cord fabric producer

Yesterday, IVL announced that (subject to the approval of regulators) it will buy the Asian manufacturing operations of Performance Fibers Asia (PF Asia) from an affiliate of Sun Capital Partners Inc. PF Asia has a 17% capacity share and is the second largest producer of polyester tire cord fabric in China. PF Asia’s plants are located in Kaiping City, Guangdong Province, China, and have a capacity of 41kta of polyester tire cord fabric and 48kta of polyester tire cord yarn. Its products are both sold in China and exported to other Asian countries. Asia is the largest and fastest-growing market for polyester tire cord fabric, accounting for more than 50% of global demand in 2013 with an 8% CAGR, 2009-13.

Polyester fiber capacity addition plus HVA portfolio enhancement 

The acquisition of PF Asia will both increase IVL’s polyester capacity by 2% to 1.82mta (and expand its total capacity by 0.5% to 8.41mta) and boost its High Value Added (HVA) polyester portfolio by 15% to 322kta. There should be scope for synergy-building with IVL's existing PET plant in China (which could supply feedstock). This acquisition will add to IVL’s presence in HVA automotive applications. Its existing HVA automotive fiber assets are Trevira and PHP Fibers GmbH.  

Value creation expected from the acquisition 

As PF Asia is an operating business, we expect it to start generating earnings for IVL as soon the deal is closed. Note that HVA products normally yield fatter margins (and those margins are usually more stable) than commodity products. We preliminarily estimate that the acquisition will boost our long-term IVL earnings forecast by 4% and add Bt1/share of value to our DCF-derived YE15 target price.

Acquisition cost should be easily financed  

The transaction is expected to be completed in 1Q15 (subject to the approval of regulators). As the deal has not yet been closed, the investment cost has not been revealed. However, using IVL's previous HVA acquisitions as a loose guide, the acquisition cost should be in the US$100-200m range. IVL could easily finance the investment with internal cash flows and debt. Note that the firm recently issued Bt15bn in perpetual debentures. We estimate that its net debt/equity ratio has declined to about 0.7x from 1.1x prior to the issuance of the perpetual debentures.