Indorama Ventures: Gradual margin recovery in 2024F
- 4Q23 turned a net loss of Bt12.42bn, hit by large impairment expenses and weaker performance of all business units
- Core EBITDA/tonne came in at US$74 (-10% y-o-y, -17% q-o-q), hit by new additional supply from Asia
- Inventory destocking to persist in 2024F, but with less impact
- Maintain HOLD rating with FY24F TP of Bt27
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Core EBITDA/tonne is reported at US$74 (-10% y-o-y, -17% q-o-q) alongside total production volume of 3.46m tonnes (+8% y-o-y, +2% q-o-q).
Note that normal operations, excluding inventory impact and non-recurring items, reported a net loss at Bt86m (vs. Bt3.63bn loss in 4Q22 and Bt321m loss in 3Q23).
IVL also announced the dividend payment of Bt0.175/share, XD date on 3 May 2024.
4Q23’s key operating statistics
- The performance of combined PET (c.50% of total 4Q23 EBITDA – PET, PTA, PX, recycled PET) deteriorated both y-o-y and q-o-q. This was hit by a) the impact from global destocking, and b) a rise in PET capacity and weak demand in China. However, this was partly offset by seasonal demand and a supply shortage in Canada as a result of plant maintenance. Total production volume and EBITDA/tonne came in at 2.38m tonnes (+3% y-o-y, +1% q-o-q) and US$54 (-52% y-o-y, -33% q-o-q).
- The performance of integrated olefin & derivatives (IOD) (c.43% of total 4Q23 EBITDA – EOEG, PEO, MEG) deteriorated both y-o-y and q-o-q. Despite improving downstream margins, weaker performance was hit by a) inventory destocking, b) softer MTBE margin, and c) energy hedging loss of c.US$10m. Total production volume and EBITDA/tonne come in at 0.68m tonnes (+20% y-o-y, +10% q-o-q) and US$165 (-26% y-o-y, -12% q-o-q), respectively.
- The performance of the fibre business (c.7% of total 4Q23 EBITDA – HVA products) deteriorated both y-o-y and q-o-q. This was due to a) weaker demand in the lifestyle business, and b) operating rate optimisation. Total production volume and EBITDA/tonne come in at 0.41m tonnes (+30% y-o-y, -5% q-o-q) and US$45 (-38% y-o-y, -47% q-o-q), respectively.
- IVL also booked an inventory loss of Bt1,774m (vs. 4Q22’s loss of Bt4,590m and 3Q23’s gain of Bt800m), as Brent dropped by c.US$16/bbl q-o-q.
- Extra items in 4Q23 included a) a forex gain of Bt169m and b) impairment expenses of Bt10.73bn for Corpus Christi assets (remaining booked value is c.US$310m).
Margin recovery in late 2024. For our short-term outlook in 1Q24F, we expect core EBITDA to stay at c.US$80-85/tonne (+6% q-o-q). Our view is supported by i) seasonality during the Chinese New Year, ii) supply tightness from the Red Sea tensions that results in longer delivery days and a rise in freight rates from China (+180% to US, +280% to Europe from Oct 2023). However, we deem the destocking situation from major players persists, while demand remains weak in the long term.
Looking towards 2024, management expects business to improve, due to:
- Production volume growth of 4%-5%, as destocking eases across all segments. This will be driven by a) a higher operating rate, and b) PET and fibre project expansions in India and the US.
- Consolidated core EBITDA is projected at US$125/tonne during 2024-2026F.
- A modest market recovery with improving PET margins, supported by interest rates peaking out, anti-dumping duties, and other trade barriers in markets like the EU, Mexico, India, and other countries.
- Energy hedging loss of c.US$103m in 2023 normalising in 2024.
- Maintaining disciplined cash conservation.
Maintain HOLD rating. Even though IVL’s share price has factored in the negatives and poor business performance, as its YTD share price performance of -32% means it has underperformed both SETPETRO and the SET Index, we still believe it is too soon to get exposure in the chemical business, as the excess PTA/PET supply capacity will persist in 2024 before recovering in 2025.
We maintain a HOLD rating with a FY24F-based TP of Bt27, pegged to a P/BV multiple of 0.85x, equivalent to 1.5SD below its five-year average reading. Our recommendation is on the back of i) persistent global inventory destocking; ii) the global economic slowdown, which caused slow consumer spending due to a high-interest rate environment; and iii) new PX, PTA/PET supply coming online from Asia.
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