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Indorama Ventures

HVA acquisition to create value

Indorama Ventures Plc (KCE)

Investment thesis

The acquisition should generate positive sentiment toward IVL, as it will immediately add value to the firm. Moreover, expectations of earnings expansion from 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. The stock currently trades at an FY14 PER of 17.7x, a discount to its long-term average of 24.5x (but still a premium to the Asian mean of 14.1x).

Acquisition of a global leading HVA manufacturer

Yesterday, IVL announced the acquisition of 80% of PHP Fibers GmbH (PHP). The remaining 20% is held by Toyobo Co Ltd, a Japanese manufacturer of high value automotive products. PHP is a globally-recognized maker of branded high-tenacity polyamide and polyester filament yarns and a leading European supplier to the automotive safety supply chain. PHP has a total production capacity of 95kta. Its production facilities are located in the US (10kta), Europe (74kta), and China (50% JV, 11kta).

Not only capacity expansion, but an enhanced HVA portfolio

The acquisition of PHP will not only increase IVL’s polyester capacity by 7% to 1.3mta (and expand its total capacity by 1% to 7.2mta), but will enhance its High Value Added (HVA) product portfolio with the addition of high performance automotive and industrial products. The proportion of sales revenue from HVA products will increase to 26percent from 25% previously (74% of sales will be commodity products).

Value creation expected from the acquisition

PHP is an operating business with an 80% utilisation rate at the moment. As such, we expect it to generate immediate earnings for IVL. Note that HVA products normally yield fatter margins than commodity products (margin could be in the US$400-800/t range, depending on the HVA product). Furthermore, HVA margins are more stable than commodity product margins. We preliminarily estimate that the acquisition will boost our long-term IVL earnings forecast by 5% and add Bt0.76/share of value to our DCF-derived target price.

Acquisition cost should be easily financed

As the deal has not yet been closed (the transaction is expected to be completed by March), the acquisition cost has not been announced. We have used earlier purchases of HVA makers to estimate a ballpark price for PHP. In 2012, IVL acquired Fibervision at an average cost of US$1,000/t. Our scenario analysis assumes an acquisition cost of US$900-1,200/t, so the price for the 80percent stake in PHP should be in the range of $64m-86m. IVL could easily finance the investment with internal cash flows and debt. We assume that its net debt/equity ratio will rise slightly from 0.92x at end-Sept 2013 to 0.96-0.97x.

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