Indorama Ventures

Indorama Ventures Plc (IVL)

We reiterate our Outperform rating on IVL with a target price of Bt33.4 based on its core earnings CAGR of 36% in 2016-18E. Core earnings have passed bottom and should improve gradually over the next few years on the back of expanding volumes of high-margin products, including IPA, NDC and upstream olefins products. The short-term catalysts are easing concerns on the impact of Brexit and expectations of a very strong 2Q16 earnings announcement on Aug.10, 2016. The stock is currently trading at 1.49x PBV, which is in line with the average of its 3-year trading range. Though its key product spreads remain in a cyclical trough, higher sales volumes and a higher-margin product mix should lead to a valuation re-rating for the stock. Therefore, our TP is set at 1.7x PBV, or 1.0x S.D of its 3-year historical mean.

Investment highlights

- No immediate negative impact from Brexit: Management is highly confident that Brexit will not have a major impact on IVL. The potentially weaker euro will help to save costs at its European operations, while product selling prices, which are quoted in USD, should be higher in euro terms and margins are expected to be protected from lower import cargoes from other regions. Meanwhile, the potential strengthening of the USD is favorable for IVL as all revenues will be higher in THB terms.

- PTA improvement under way; PET margin to stabilize: The PTA industry should gradually improve over the next three years, while the PET market should become more stable over the same period. New PTA supply is estimated at 3.64mn tons during 2016-18, while incremental demand should be as high as 8.0mn tons during the period. The operating rates and margins of PTA producers are expected to improve accordingly. New PET supply in 2016-18 is estimated at 2.9mn tons/year, almost the same level as estimated PET demand growth (2.64mn tons). Therefore, management expects the PET margin to stabilize at the current level. This outlook is in line with our expectations.

- Confirms first operating date for U.S. gas cracker in 4Q17: Currently, IVL is in the early stages of procuring key equipment needed for refurbishment and modification of its gas cracker, which is expected to take about 6-8 months. Therefore, the plant should be up and running by 4Q17 as planned. Upon the start-up of this gas cracker, IVL’s overall margin level will improve as ethylene and propylene margins are more than triple the current PET and PTA spreads.

- Very strong 2Q16 earnings outlook; solid core earnings expected in 2H16: We estimate IVL’s 2Q16 net profit at Bt4.7bn (EPS: Bt1.01), up 15% QoQ but down 15% YoY. We estimate IVL’s core EBITDA/ton at USD90/ton (up 15% QoQ but down 6% YoY), while its sales volume should be as high as 2.2mn tons (up 24% QoQ and 21% YoY). Additionally, we expect IVL to recognize an inventory gain of Bt422mn and negative goodwill of about Bt2.0bn. Looking toward 2H16, we expect the PET margin to maintain its current level due to higher polyester demand in winter and the rising cotton price. Meanwhile, the PTA spread will benefit from higher PX supply from the new Reliance plant in India. This all suggests IVL’s core earnings will remain solid in 2H16.

Valuation

- IVL is trading at 1.49x PBV, which is in line with the average of its 3-year trading range.

- Our TP is set at 1.7x PBV, or 1.0 S.D. of its 3-year historical mean, reflecting the fact that its key product spreads remain in a cyclical trough. However, higher sales volume and a higher-margin product mix should lead to a valuation re-rating for the stock.