October 30, 2017 OUTPERFORM Indorama Ventures (IVL TB) Share Price: Bt45.75 Target Price: Bt55.0 (+20.2%) Company Update Company Ready to take it all . 65% of newly acquired BOPET is HVA, underscoring healthy EBITDA margins in FY18F onward . M&G’s bankruptcy is an opportunity for IVL to gain more market share in North America . OUTPERFORM, raised TP to Bt55/sh; share price weakness upon weak 3Q17 results is an opportunity to buy IVL could become a major player of BOPET Early this month, IVL signed a share purchase agreement with DuPont Teijin Films (DTF) to acquire 100% stake in their PET film business. This marks an important step for IVL to diversify into PET film used in packaging, industrial, electrical, imaging, and magnetic media. 65% of Naphat CHANTARASEREKUL DTF’s products is ‘thick’ film, which commands the same EBITDA 662 - 659 7000 ext 5000 margin as IVL’s HVA portfolio of automotive and hygiene products. DTF [email protected] COMPANY RESEARCH | RESEARCH COMPANY is a leading producer of biaxially oriented Polyethylene Terephthalate (BOPET) and Polyethylene Naphthalate (PEN). Their business Key Data comprises of eight production assets in the US, Europe, and China with 12-mth High/Low (Bt) 46.5 / 28.25 global innovation center in UK with annual capacity of 277k tons. PET Market capital (Btm/US$m) 239,957/ 7,205 film uses the same feedstock as PET but the market is small at 4.1m ton 3m avg Turnover (Btm/US$m) 747.8 / 22.5 consumption p.a. We are optimistic IVL could become a major player in Free Float (%) 29.5 this market. Issue Shares (m shares) 5,245 Major shareholders: M&G’s bankruptcy opens an opportunity for IVL to fill in PET -INDORAMA RESOURCES L 58.5 market in North America -STOCK EXCHANGE OF TH 6.7 One of IVL’s PTA customers, M&G, filed a Chapter 11 bankruptcy due -BANGKOK BANK PCL 4.4 to financial difficulties. This led IVL to book a net tax provision for receivables of US$39m (Bt1.3bn) in 3Q17. IVL supplied 220k tons of Share Price Performance PTA to M&G but now plans to use half of that volume for its PET plant in US and the other half to third parties or supply to their PET plant in Mexico (currently buy from Alpek). M&G has 1.4m tons of PET capacity in US, Mexico, and Brazil and this will allow IVL to penetrate the PET market immediately. This will also affect M&G’s PTA (1.2m tons) and PET (1.0m tons) plants currently under construction in Texas. This could be an opportunity for IVL to acquire and consolidate the PET market in the North America. OUTPERFORM, raised DCF-based TP to Bt55/sh (from Bt50/sh) We incorporate BOPET and PEN of DTF into our model. Our key assumptions is 85% utilization and spreads of US$420/ton, US$470/ton and US$520/ton in FY18-20F respectively. This increases our earnings YTD 1Mth 3Mth 12Mth by 9%, 11%, 13% and raises our DCF-based TP to Bt55/sh, implying Absolute (%) 36.6 7.6 23.6 57.8 17.5x FY18F PE. We expect IVL to post core profit of Bt4.2bn in 3Q17, Relative to index (%) 25.3 4.9 15.3 42.8 +11% qoq, driven by higher production volume and PET spreads. Factoring in Bt1.3bn provision, net profit should be Bt2.9bn, flat qoq. Krungsri Securities vs Market Positive Neutral Negative Financial Summary (Btm) Market Year to Dec 2015 2016 2017F 2018F 2019F Recommend 16 1 1 Sales (Btm) 234,698 254,620 318,165 376,789 379,525 Krungsri Market % +/- Growth (%) (4) 8 25 18 1 Target Price (Bt) 55.0 48.2 14.2 EBITDA (Btm) 18,148 25,384 32,584 35,460 36,969 ’17 Net Profit (Btm) 12,124 12,954 (6.4) Growth (%) 21 40 28 9 4 ’18 Net Profit (Btm) 16,390 15,748 4.1 Recurring profit (Btm) 2,935 9,563 13,489 16,455 17,441 Growth (%) 685 226 41 22 6 Krungsri's earnings revision Net profit (Btm) 6,609 16,197 12,124 16,390 17,376 2018F 2019F FDEPS (Bt) 1.37 3.36 2.31 3.12 3.31 Earnings revision (%) 8.8 10.5 Growth (%) 295 145 (31) 35 6 Source: Bloomberg, Krungsri Securities PE (x) 75.0 23.0 17.8 14.6 13.8 DPS (Bt) 0.48 0.66 0.90 1.10 1.16 Yield (%) 1.0 1.4 2.0 2.4 2.5 BVPS (Bt) 16.58 18.50 21.47 23.59 25.77 P/BV (x) 2.8 2.5 2.1 1.9 1.8 Disclaimer: This publication constitutes information disclosed to the public and believed to be reliable but its accuracy and completeness are not guaranteed. All opinions, suggestions, or projections are for informational purposes only and shall not be construed as an inducement for the sale or purchase of securities. Amendments to this publication may be made without prior notice. Investors are urged to exercise caution in making a decision to invest in any securities. 1 Company Update | IVL October 30, 2017 Acquiring DuPont Teijin Films (DTF) IVL signed a share purchase agreement with DuPont Teijin Films (DTF) on 10 October 2017 to acquire 100% stake in their PET film. DTF is a leading producer of biaxially oriented Polyethylene Terephthalate (BOPET) and Polyethylene Naphthalate (PEN, made from Naphthalene Dicarboxylate (NDC) and Mono Ethylene Glycol (MEG)). Their business comprises of eight production assets in the US, Europe, and China (51% stake) with global innovation center in the UK with film and polymer capacity of 277k tons per annum and a revenue of US$525-550m. IVL produces NDC from its BP Chemical plant in Decatur, Alabama. IVL did not disclose the acquisition price but should be around 6-7x EBITDA multiples, the same multiples IVL paid for previous acquisitions. This implies US$300-350m, which IVL will use the proceeds from IVL warrant (IVL-W1) exercise (Bt15.5bn) to fund the transaction, which is expected to be completed by early 2018. BOPET market is split into ‘thin’ and ‘thick’ films. Thin film is 50 microns or less, while thick film is over 50 microns. The industry capacity is identified by film thickness. The major end uses of BOPET can be categorised into five segments - packaging, industrial, electrical, imaging, and magnetic media. Thin film accounts for 75% of total global PET film consumption, and the balance is thick film. Of total production, DTF produces 65% thick film and 35% thin films. Thick films command higher margins ranging US$50/ton or higher, depending on application. DTF’s target industries Source: Company, Krungsri Securities Krungsri Securities Research 2 Company Update | IVL October 30, 2017 Value chain of polyester business 0.35x 0.65x=1 Ethylene MEG Polyester fiber Clothing, fiber, automotive tires 0.67x=1 0.86x Paraxylene (PX) PTA Polyester PET resin Bottles, packaging Chip 0.7x=1 0.02x Food wrap, packaging, electrical appliances, Metaxylene IPA PET film LCD screen DuPont Teijin Films (DTF) Source: Company data, Krungsri Securities Leverage on the same feedstocks as PET BOPET is using PTA and MEG as feedstocks while PEN is using NDC and MEG as feedstocks. PEN offers more heat resistance, which is used in electronics such as smart phone and LCD screens. BOPET is used in food packaging. There is a total of 6.0m tons of PET film capacity globally at end 2016, while demand is 4.1m tons (68% utilization). We estimate demand will grow by 200-300k tons per annum in 2017-19, outpacing new capacity. But, starting from this year, there will not be new capacity addition. This would reduce the excess supply for at least two years. We expect PET film spreads to stay around US$400-500/ton, compared to US$1,000+ in 2008- 11. The improving balanced demand-supply dynamics should support spreads and utilization in the next two years. PET film demand vs. supply (unit: m tons) 2015 2016 2017F 2018F 2019F Demand 3.8 4.1 4.3 4.5 4.8 Supply 5.8 6.0 6.1 6.1 6.1 Demand growth - 0.3 0.2 0.2 0.3 Net capacity addition - 0.2 0.1 - - Supply - demand situation - 1.9 1.8 1.6 1.5 Source: PCI, Company data Krungsri Securities Research 3 Company Update | IVL October 30, 2017 Price, cost and spread of BOPET Source: Krungsri Securities Revise up earnings in FY18-20F by incorporating DTF into our model We incorporate BOPET and PEN of DTF into our model. Our key assumptions is 80% utilization and spreads of US$420/ton, US$470/ton and US$520/ton in FY18-20F respectively. This increases our earnings by 9%, 11%, 13% and raises our DCF-based TP to Bt55/sh, implying 17.5x FY18F PE. We expect IVL to post core profit of Bt4.2bn, +11% qoq, driven by higher production volume at 2.3m tons (vs. 2.2m tons in 2Q17) and PET spreads. The former comes from higher operating rate of PET because of production disruption at M&G and JBF, start-up of its new PTA Rotterdam (+320k tons) in August, and higher utilization rate of MEG (shutdown for five weeks in 2Q17). Note that M&G and JBF have financial difficulties. JBF has PET plants in India, Belgium, Bahrain and UAE with total 1m ton capacity.