Indorama Ventures

Q4 2012 profit missed estimate; recovery expected

Indorama Ventures Plc (IVL)

Below expectations

IVL reported a 4Q12 net profit of Bt128m, a turnaround from a net loss in 4Q11, but down 92% QoQ. Stripping out extraordinary items, the 4Q12 core operation would have reported a core loss of Bt755m, deeper than the 4Q11 core loss and a reversal from a core profit in 3Q12. The result was somewhat below our estimate and the consensus, due to weaker-than-expected product spreads, deeper loss contributions from jointly-controlled entities and a higher effective tax rate than assumed.

Results highlights

The key factors behind the weak 4Q12 core operation were: 1) lower core EBITDA/tonne (US$77 in 4Q12 against $78 in 4Q11 and 3Q12), 2) a seasonal sales volume decline for PET—down 8% QoQ (but up 24% YoY) to 1.3mt, 3) deeper loss contributions from jointly-controlled entities (partly due to the one-time expense of relocating Trevira's machinery from Poland to Germany) and 4) a higher effective tax rate (to 47% in 4Q12 from -8% in 4Q11 and -1% in 3Q12).

It's worth noting that the firm's diversification strategy supports its earnings somewhat. While PET spread in the US and Europe (35% of IVL's capacity) softened only 5% QoQ to US$227/t, PET (Asia) spread (14% of IVL's capacity) fell by 11% QoQ to $123/t. In addition, PTA (Asia) spread dived 21% QoQ to $88/t, while polyester (Asia) spread dropped 11% to $179/t. The MEG (US) spread (5% of IVL's capacity) jumped 26% QoQ to $590/t.

Outlook

We expect earnings to improve both YoY and QoQ in 1Q13, led by sales volume and fatter product spreads. Sales volume is forecast to rise by 15% YoY and 5% QoQ. Spreads have improved in 1Q13-to-date, led by PET (Asia; up 24% QoQ to US$153/t) and polyester fiber (Asia; up 17% to $209/t), while PTA (Asia), PET (the US & Europe) and MEG (US) spreads have been sustained stable QoQ. However, sales volume may dip 3% QoQ in 2Q13, due to a 4-week planned shutdown at the MEG (US) plant.

What's changed?

We have revised down our FY13 net profit forecast by 12% to Bt7,869m to factor in: 1) a 5% lower EBITDA/tonne assumption to US$95, 2) a 2% lower sales volume expectation to 6mt, and 3) a higher interest expense estimate. Our YE13 target price declines to Bt28 (from Bt29.75).

Recommendation

We think the 4Q12 earnings disappointment will generate negative sentiment toward the stock in the near-term. However, expectations of an earnings recovery in 1Q13 and a strong rebound in 2H13, fueled by a spread recovery and sales volume growth should catalyze the share price going forward. IVL currently trades at an FY13 PER of 15.1x and an EV/EBITDA ratio of 9.8x, discounts to the regional averages of 30.8x and 11.5x, respectively.