Q4 2012F: Qtr-to Qtr profits to be lifted by better spread NeutralIndorama Ventures Plc (IVL)
Net profit could increase by 15% QoQ in 4Q12F. We expect 4Q12F net profit to grow
15% QoQ to Bt1.8bn, lifted by higher product spread, with an improvement in core
EBITDA/t of 16.3% QoQ and 33% YoY to US$100/t. This implies an EBITDA/t of US$93/t in
2012, down from US$127/t in 2011. Based on management guidance, we estimate an
inventory gain of US$11/t in 4Q12. Sales volume is expected to be flat QoQ at 1.4mt but
increase strongly by 33% YoY, due mainly to the acquisition of EO/EG capacity in the US,
i.e. Old World, in 2Q12. As a result, IVL should achieve sales volume growth of 23% YoY
to 5.3mt in 2012. 2012 full-year profit is expected to fall short of our projection by 6%.
More insurance compensation for damaged plant in Lopburi. Also driving 4Q12F
earnings will be partial payment on the insurance claim for damages caused by the
floods in late 2011. Compensation of US$40mn is to be received in 4Q12-1H13, but how
much will be booked in 4Q12 is not certain, therefore we assume a quarter of the
total. In all, IVL should receive US$95mn from insurance for property damage and
business interruption at its plant in Lopburi.
Integrated PET/PTA spread improved in 4Q12. Higher PET spread in 4Q12F was key
to Asia's rise in integrated PET/PTA spread of 12% QoQ to US$245/t, up from US$218/t
in 3Q12, though far below the historical average of US$350-400/t in 2009-2011. This
was due to PTA oversupply in Asia, mainly from huge capacity additions in China and
tight supply of PX and MEG. Integrated margin in the US and Europe stayed high at
~US$500/t and they supplied >70% of IVL's 9M12 revenue and operating profit.
Assured minimum margin for PTA. Despite a weak margin in Asia, IVL's cash cost
remained more competitive than peers. Management expects other high-cost PTA
producers to cut back on operating rates if PTA margin continues to weaken to below
their cash cost of ~US$150/t - well above the US$90/t for IVL. The company has also
negotiated to ensure margin of its contracted PTA sales (10% of total PTA volume) for
2013F at a minimum US$120-130/t.
2013F guidance. Management expects 2013 sales volume to rise 13% YoY to 6mt from
5.3mt in 2012. Backing this is the full-year impact of new capacity acquired in 2012,
including the MEG plant in the US and the expansion of its PET and PTA capacity in
Indonesia. IVL's total capacity at the end of 2012 stood at 7.5mtpa and this will rise to
8mtpa by the end of 2013F.
TP of Bt30/share and Neutral maintained. We maintain our Neutral rating with
the target price unchanged at Bt30, based on 2.2x PBV (-1SD). We will not turn positive
on the stock until we see more improvement in its product spread, especially in the
Asian market, which we believe could take place in 2H13 when more PX supply enters
the market. Key risks include volatile feedstock prices, lower than expected demand
due to the global economic setback and unplanned plant outages.