Analyst Sees a Growth in IVL’s 2H20 Earnings after Oil Prices Rebound, Giving TP at ฿38

Krungsri Securities (KSS) has maintained the recommendation of “BUY” on Indorama Ventures Public Company Limited (IVL) at a target price of ฿38/share, seeing a rebound in oil prices and gasoline demand to reinforce earnings growth in 2H20.  

 

MTBE, oil-linked products to lead 2H recover 

The ramp-up of MTBE plant and recovery in oil prices would lead to strong earnings recovery in 2H20. MTBE (gasoline additive) demand will recover along with gasoline demand. MEG and ethylene from gas crackers, representing 7% of IVL’s capacity, are linked to oil prices. Margins for these products should improve following higher oil prices in 2H20. Meanwhile, integrated PET spreads remain healthy in 2Q. 

 

MTBE recovery will drive earnings growth in 2H20

Higher MTBE output and recovery in oil prices should result in moderate earnings recovery in 2Q. IVL’s earnings momentum will accelerate in 2H20 as gasoline demand continues to recover, which will drive up gasoline additive MTBE demand. Mexico and Latin America are IVL’s key MTBE markets and will see higher MTBE demand as pandemic-related restrictions that curbed traffic begin to lift. Pemex, Mexico’s state-owned petroleum company, produced 300k bpd of gasoline in the first week of June, up from 190k bpd in March. Demand for MTBE in other regions is rising as normal transportation resumes. MTBE export from the US is expected to hit 600k bbl in June up from 510k bbl in April but still below 1.2m bbl/month in 2019. MTBE spreads are at US$90/t in June vs. US$304/t in 1Q. Every US$100/t increase in MTBE spreads will lift IVL’s earnings by ฿500m per quarter.

 

Other oil linked products will enjoy higher oil prices

IVL has other products in the integrated oxide derivatives (IOD) value chain, including surfactant, PEO, MEG, PG and LAB. Surfactant, PEO, and PG are classified as specialty products, making margins of these three products quite resilient. The major end uses are in personal care and household products. Surfactant spreads have been stable at US$900-940/t. IVL is planning to expand another 70k tons from current 391k ton capacity, completed in 2022. This will contribute additional US$50m EBITDA pa in 2023. MEG and ethylene, representing 7% of IVL’s capacity, are linked to oil prices. Margins for these products should improve following higher oil prices. The IOD portfolio contributed US$50m or 16% to group EBITDA in 1Q20 and should increase to US$80m per quarter in 2H20.  EBITDA/t should increase to US$250 from US$128 in 1Q (IVL’s overall avg US$92 in 1Q). Margin recovery for IOD is crucial to IVL’s operations.

 

IVL’s earnings should show moderate recovery in 2Q20 and strong recovery in 2H20. Meanwhile, integrated PET spread in Asia remains healthy at US$256/t in 2Q20 vs. US$206/t in 1Q20 while production output should grow to 2.4mt from 2.25mt in 1Q20. The combined PET segment accounts for 72% of IVL’s capacity. Our TP implies 22.6x FY20F PE and 1.5x PBV (6.5% ROE).