Vinythai

Q4 2012 earnings missed our estimate; a better quarter ahead

Vinythai Plc (VNT)

Below expectations

VNT reported a weak 4Q12 net profit of only Bt60m, down by 69% YoY and 90% QoQ. Stripping out an FX gain of Bt45m and a Bt7m loss on the disposal of equipment, core earnings would be Bt21m, down by 89% YoY and 97% QoQ. The result was far below our estimate and the consensus, due to lower-than-expected sales volume and product spreads and higher SG&A expenses than modeled.

Results highlights

Revenue rose YoY, driven by: 1) greater PVC sales volume, 2) a higher PVC sales price and 3) income recognition from VNT's Epichlorohydrine (ECH) project. The PVC sales price rose by 5% both YoY and QoQ to US$963/t. As such, we assume that weaker sales volume was behind the QoQ revenue contraction.

The key reasons behind the core earnings decline were: 1) lower sales volume (there was a two-week unplanned shutdown, due to a technical breakdown), 2) slimmer product spreads and 3) higher SG&A expenses. The 4Q12 PVC-0.5Ethylene spread declined by 8% YoY and 10% QoQ to $292/t, while the full product spread (PVC spread plus caustic soda margin) is assumed to have fallen by 13% YoY and 4% QoQ to $627/t.

Outlook

The price and spread of PVC have improved in 1Q13-to-date, driven by a demand recovery. The average PVC spread in 1Q13-to-date has fattened 8% QoQ. In addition, sales volume is expected to rebound QoQ, as VNT's plant has resumed normal operations. We, therefore, expect 1Q12 earnings to improve QoQ.

What's changed?

While we have cut our FY13 net profit forecast by 15% to Bt1,654m to factor in higher interest expense assumptions, we have raised our long-term earnings projection by 18%, as we have added contributions from the Epichlorohydrine (ECH) project into our model. As such, our YE13 DCF-derived target price rises to Bt23.20 (from Bt21.20).

Recommendation

The 4Q12 earnings disappointment may generate negative sentiment toward the stock in the short-term. But we think the worst quarter is now behind us. Expectations of better numbers for 1Q13 in tandem with a broad recovery in chemical demand should catalyze the share price going forward. The scale of the demand improvement following Chinese New Year will be the key factor to watch. If it is sustained strong, we would expect spreads to rally and the stock to re-rate. VNT currently trades at an FY13 PER of 14.1x and an EV/EBITDA of 7.5x—steep discounts to the regional means of 26.9x and 11.4x.