Indorama Ventures

Volume growth & cost savings

Indorama Ventures Plc (IVL)

Investment thesis

The key messages from the analyst meeting yesterday reaffirmed our positive view of IVL's long-term growth prospects. However, we think the unexciting short-term outlook for product spreads may limit investor interest in the stock. Further ahead, expectations of a strong 2H13 earnings rebound, fueled by a spread recovery and sales volume growth should boost the share price later this year. IVL currently trades at an FY13 PER of 14.7x and an EV/EBITDA ratio of 9.6x, discounts to the regional averages of 31.6x and 11.4x, respectively.

Spread recovery in 1Q13-to-date

High seasonal demand together with supply rationalization brought about by exceptionally low spreads in Asia have pushed up Asian polyester chain product spreads during the last two months. The PET (Asia) spread in 1Q13-to-date has jumped 25% QoQ to $154/t, while the polyester fiber (Asia) spread has increased 14% QoQ to $204/t. Moreover, the PTA (Asia) spread has rebounded to above $100/t. In the meantime, PET (the US & Europe) and MEG (US) spreads have been sustained stable QoQ at around $227/t and $590/t, respectively.

Potential upside to margins from industry supply rationalization

As a slew of new PTA/PET/polyester fiber capacity will go on-stream this year, polyester chain product spreads are expected to remain under pressure. However, industry rationalization—the shutdowns of uncompetitive and non-strategic plant—would mean scope for upside to margins. About 14% (1mt) of PET polymer capacity in North America is subscale, while 38% (1.8mt) of PET polymer plant in Europe is subscale. Furthermore, 19% (6mt) of PET polymer capacity in Asia is subscale. If this plant were shuttered, it would boost the run rates and earnings of the remaining producers.

Volume growth and cost savings—profit growth drivers for FY13

Given that product spreads are not expected to improve significantly this year, volume growth and cost savings are set to be IVL's key earnings growth drivers for FY13. Sales volume is expected to rise 15% YoY to 6mt, driven by increased operating rates at existing assets (to 87% in FY13 from 84% in FY12) and capacity expansion (a 300kta polyester fiber plant in Indonesia is slated to start up in 2H13). Moreover, the firm will implement "operational excellence" projects aimed at saving US$35m this year.

Global footprint provides a cushion against profit downside risk

Unlike other polyester value chain producers, which mostly operate in only one region, IVL has a global presence which helps mitigate earnings downside risk caused by weakness in a particular region. If the firm had operated only in Asia, its integrated margin would have been only US$175/t in FY12 against an actual margin of $247/t—it is diversified both geographically and in terms of products.