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Indorama Ventures

Mild spread recovery, starting 4Q13 (more to come)

Indorama Ventures Plc (IVL)

Investment thesis

Expectations of earnings expansion in 4Q13 onward—driven by a mild spread recovery, operational normalization and the start-up of a new polyester fiber plant in Indonesia—will boost the share price going forward, we believe. IVL currently trades at an FY14 PER of 17.2x, a discount to its long-term average of 24.6x (but still a premium to the regional mean of 14.2x). Within the Petrochemical sector, we still prefer PTTGC at the moment for its strong earnings visibility, cheap valuation and high dividend yield.

Core profit improvement expected for 4Q13

We expect IVL to post a 4Q13 net profit of Bt725m, down by 4% YoY and 34% QoQ. But stripping out extra items, core earnings for the quarter would be Bt636m, a turnaround from a core loss in 4Q12 and up 278% QoQ. The key factors behind the assumed YoY core turnaround were: 1) a 5% YoY sales volume rise, 2) a fatter PET spread and 3) an expanded polyester fiber spread. The key drivers of the modeled QoQ core profit growth were: 1) a fatter PET spread, 2) an expanded polyester fiber spread and 3) a fatter MEG spread (note that sales volume slipped 7% QoQ). However, the PTA spread weakened further, both YoY and QoQ (details in Figure 2).

1Q14 core earnings to increase further

The key drivers of the forecast 1Q14 core earnings growth (and YoY turn-around) are: 1) greater sales volume—improved PET demand on seasonality and increased polyester sales volume, enabled by a new 200kta plant in Indonesia (started up in Dec 2013)—and 2) a fatter PTA (Asia) spread (up 6% QoQ in 1Q14-to-date). Note that we expect other product spreads to be sustained broadly flat QoQ.

Weaker-than-expected spreads prompted deep profit forecast cuts

In 2013, the PTA spread was in line with our assumption of US$100/t, while the PET (Asia) spread of $185/t was slightly above our expectation. But the polyester fiber spread of $200/t and the MEG (US) spread of $500/t were lower than our assumptions of $280/t and $520/t, respectively. Apart from revised spread assumptions, we have factored extra expenses booked to 4Q13 into our model. As such, we have slashed our FY13 net profit estimate by 28% to Bt2,520m. We have also cut our 2014 polyester fiber spread assumption by 25% to $240/t and sliced 24% off our FY14 profit forecast—it is now Bt5,752m. Consequently, our YE14 DCF-derived target price falls to Bt25.30 from Bt25.90.

Minimal impact from baht depreciation

As IVL's capital structure has natural hedging features and it manages its FX policy well, baht depreciation should have only a minimal impact on its earnings. Our sensitivity analysis indicates that the firm would see a net FX gain of Bt20m if the baht were to depreciate against the euro and the US dollar, given that IVL has net-euro-denominated assets and net-dollar-denominated debt.






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