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IVL

To turnaround in 2014, but valuation is expensive HOLD

IVL Plc

PTA business and stock loss to depress 4Q13 profit

We estimate 4Q13 net profit at B499m, falling 54.2%qoq due to the

following reasons. 1) Total product sales would decrease 3.5%qoq to

1.42 million tons on seasonal effect (winter in Europe and the US). At

the same time, PET demand usually decreases during a year-end long

holiday. Moreover, there was a one-month unplanned shutdown of a PTA

factory in Europe due to a technical problem. 2) PTA spread has

contracted 36.3%qoq to US$72/ton because a commercial production of

new Px supply (raw material) has been postponed from 4Q13, while PET

and MEG spreads have stayed quite flat from the prior quarter. 3) There

would be an inventory loss of around B400m, versus an inventory gain

of B252m in 3Q13, thus EBITDA would decrease 6.3%qoq to US$75/ton

in 4Q13. However, there would be an extraordinary income of around

B250m net to sustain the overall profit (insurance claims of B470m, Fx

gain of B95m, and debt restructuring expense of around B315m).

Overall, FY2013 net profit is projected at B2.3bn, dropping 50.3%yoy,

14.1% worse than previously forecast.

-Sales volume and spread to rebound in 2014 along with global economy

We project 1Q14 profit to increase from 4Q13 from contributions as

follows. 1) PTA spread since the beginning of 2014 until present has

widened by US$10/ton on average, from US$85/ton in December 2013,

consistent with a gradual commercial production of new Px supply, while

PET and MEG spreads would remain near that of the previous quarter. 2)

PTA sales volume would improve after the PTA factory in Europe can

resume its operation. 3) PET sales volume would increase after a

polyester fiber factory in Indonesia has started a commercial run in

January 2014. For FY2014, the business tends to prosper from PTA

spread in Asia that is anticipated to revive gradually after many small

factories have closed due to a problem of high production cost.

Additionally, increasing Px supply would help decrease IVL's raw

material cost from 2013. Furthermore, sales volume is anticipated to

grow 12.2%yoy to 6.4 million tons since a MEG factory could resume its

full operation after a two-month shutdown in 2013. There would also be

additional capacity from the polyester fiber factory in Indonesia that

produces 200,000 tons of PET a year and 100,000 tons from extensions

of factories in Poland and China. Consequently, FY2014 net profit would

leap significantly by 112%yoy.

- Hold. 2014 PER is very high. Switch to PTTGC

2014 fair value (DCF; WACC of 13.6%) is B25. We reiterate to hold IVL.

Although the share price has absorbed a negative factor from the weak

earnings in 2013, its 2014 PER is as high as 20.7x, which is above the

regional average of 12-13x. We recommend switching to

PTTGC(FV@B91.78).


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