IVL: Stronger earnings in 2Q10 - Positive

Results:


IVL announced stronger net profit in 2Q10 at Bt2,089m (EPS: Bt0.48), up 37% QoQ and 18% YoY. Its 1H10 earnings were Bt3,619m, up 26% YoY, representing 56% of the full-year estimate by the consensus.

These healthier net profits were mainly due to higher sales volume from the start-up of AlphaPET (line 2) and the realization of extra income of Bt563m from the acquisition of utility assets at the Rotterdam site at a lower price compared to the fair price. However, IVL was negatively hit by the depreciation of the Euro and US$ currencies against the Thai baht by 17% and 5% YoY throughout the first six months of 2010.

Looking forward, we expect IVL’s operating performance to remain strong as its overall product-to-feed margin will continue to benefit from lower feedstock costs (PX). Additionally, the greater production volumes from the full-quarter operation of new PET production facilities in the US will further enhance the overall performance in the quarter. However, there will be no gain from the bargain purchase of the assets at Rotterdam as was the case in 2Q10. Given its 1H10 earnings represent 56% of the 2010 profit estimate by the consensus, the market is likely to maintain its forecast at Bt6.5bn.

IVL announced that its subsidiary Indorama Polymers PCL (IRP) will set up a 75,000-ton/year SSP plant at Port Harcourt , Nigeria . This new capacity represents about 6% of IVL’s total PET production capacity. This is the first PET investment by IVL in Africa , which possesses demand for PET of about 450,000 tons/year. The competition in Africa is relatively low compared to other regions as there is currently only one PET producer on the continent. This new plant is expected to begin commercially operating in 3Q11.

Recommendation and valuation

Maintain a positive view:

We are positive to IVL due to the strong earnings growth, with a potential stock re-rating in the near future—although IVL’s share price currently trades at 15.0x of FY10 PER (estimated by consensus) compared to 13.0x-16.0x of the major petrochemical players in the region, we expect the stock price to be re-rated as IVL’s ROCE has significantly increased to 25% from 12%-16% over the past few years as a result of the completion of major expansion projects, particularly AlphaPET in the US. Additionally, the aggressive capacity expansion through acquisitions has caused IVL to be traded at a premium valuation to other petrochemical stocks. The consensus estimates IVL’s target price at Bt22.2.


Contractor: ITD will replace CK as the lowest bidder for the 1st contract of Blue Line – Neutral

Event - According to Kaohoon newspaper, a source from the Transport Ministry revealed that ITD will replace CK as the lowest bidder for the 1st contract of the Blue Line due to an error in the sum-up of the contract price. This refers to the MRTA consultant’s verification of the details of the bidding documents, with certain items in ITD’s bid being overstated by up to Bt60m. The source said that all bidders were informed of this issue and it was found to be acceptable. Thus, ITD becomes the lowest bidder (with the bidding price to be lowered from Bt10.79bn to Bt10.73bn) instead of CK (with a bidding price of Bt10.75bn).

Comment – Our sources from the MRTA, CK and ITD have not yet been able to confirm this news. In our view, if it’s true, this could be the reason behind the 11% price rally since last week. However, although this news is positive for trading sentiment, it is still not enough to turn ITD profitable. The project should raise ITD’s backlog at the end of 2010 to around Bt120bn (including subsidiaries), but this is still far from the turnaround level of Bt150-160bn required in our estimate. We maintain our view of expected losses of Bt0.55bn in 2010 given the risk that more exposure overseas might distort the profit margin. Maintain SELL rating with TP of Bt2.89 (P/BV of 1.1x).

Although this news is negative for CK, we view that it should minimally impact its 2011-12 outlooks. Stripping out this project would reduce new contracts in 2010 from Bt103bn to Bt92bn, as the 2nd contract of the Blue Line, SPP and Xayaburi worth totally ~Bt90bn would remain the key drivers. We maintain a BUY rating with a TP of Bt8.30 based on P/BV of 2.44x (average five-year PBV +0.5std)