Indorama Ventures

Q4 2011 core profit met estimate; better quarter ahead BUY (maintained) Target Price: Bt51.50 Price (22/02/12): Bt38.75

Indorama Ventures Plc (IVL)

Core profit in line: IVL posted a 4Q11 net loss of Bt1,458m, a reversal from net profits of Bt3,840m for 4Q10 and Bt3,602m for 3Q11. Stripping out an impairment loss (due to flooding) of Bt1,645m, an inventory loss of Bt1,122m, a gain on a bargain asset purchase of Bt230m and an FX gain of Bt201m, IVL would report a 4Q11 core profit of Bt878m, down by 65% YoY and 58% QoQ. Core earnings were in line with our estimate, while the bottom-line was better than we expected, as the impairment loss was less severe than assumed. However, the result was somewhat below the consensus. IVL also reported an FY11 net profit of Bt15,568m, up 49% YoY.

Results highlights: The key factors behind the core earnings contraction were: 1) lower sales volume (down 13% QoQ but up 28% YoY to 1.05mt), due to flooding and lower production at plants in Europe, 2) slimmer product spreads brought about by inventory destocking—core EBITDA/tonne slipped to US$72 from $128 in 4Q10 and $113 in 3Q11—and 3) a higher SG&A/sales ratio (to 6.0% in 4Q11 from 4.6% in 3Q11, but down from 6.2% in 4Q10).

Outlook: IVL's earnings will rebound in 1Q12, driven by greater sales volume and improved product spreads. In addition, the firm's latest acquisitions are expected to start contributing earnings in 1Q12. Apart from higher utilization rates at existing plants, sales volume should increase QoQ throughout YE12, driven by the commercial start-up of a new PET plant in Nigeria in 1Q12, followed in 2Q12 by the restarts of the Lopburi facilities, the operational launch of a PTA factory in Indonesia, PET expansion in the Netherlands and a full operational year for assets acquired in FY11. Insurance should pay out for the Lopburi facilities this year.

What's changed? We have revised down our FY12 net profit forecast by 4% to Bt16,916m to reflect higher interest expenses brought about by debenture issuance last year.

Recommendation: We think that the recent share price rally together with market disappointment over the 4Q11 result may cap the share price performance in the near-term. However, expectations of an improved 1Q12 profit should then catalyze the share price. Moreover, the firm's robust earnings profile, driven by capacity growth and margin expansion—brought about by changes to the product mix—presents another potential share price booster going forward. The stock price currently implies a forward PBV/ROE ratio of 0.10x, a discount to a peer average of 0.14x.