Indorama Ventures

Q4 2012F: Qtr-to Qtr profits to be lifted by better spread Neutral

Indorama 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.