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2009 earnings expected to rebound at Indorama Polymers

02
Dec '08
Analyisis of Indorama Polymers Public Company Limited by Kasikorn Securities:
Projection for IRP's net profit in 2008 by 37% to reflect the huge stock loss of Bt1.7bn in Q408. We expect no more large stock losses in 2009. Moreover, the lower price of PTA and MEG (its feedstock) will ensure earnings in 2009 drop no more than 11% from our previous forecast.

IRP's core earnings in 2009 will jump a significant 137% as we expect there will be no repeat of the huge stock losses seen this year while the first production line of its new 432ktpa-capacity PET plant in the US will start up in April 2009 and the second production line in June 2009 (as scheduled).

The sluggish world economy, especially in the US, may curb demand for PET products. However, IRP's PET polymers are mainly used in the manufacture of PET bottles used for daily-use products, so we believe that the impact will not be significant. Moreover, IRP is in a better position than its peers due to its lower investment cost per ton and its lower conversion cost.

Negative impact from the huge stock loss in 4Q08:
Although IRP's sales volume is expected to improve from 196.1 ktons in 3Q08 to around 225 ktons in 4Q08 (up 14.7% QoQ) and the PET spread (the spread between the price of PET bottles and that of PTA and MEG, its feedstock) is expected to jump from USD231/ton to USD300/ton due to the sharp drop in the MEG and PTA price, we expect IRP will report a net loss in 4Q08 of about Bt200mn mainly due to a huge stock loss and an impairment loss on its inventory of about Bt1.7bn. We thus cut our projection for 2008 net profit from Bt2.65bn to Bt1.67bn (which includes the booking of a huge gain of Bt930mn on fair value of assets over acquisition cost under TAS 43).

Expect 2009 earnings to rebound:
The company expects that 2009 earnings will return to normal as demand improves after buyers change from de-stocking to re-stocking status and there is no repeat of the huge 4Q08 stock loss. Moreover, IRP's total PET capacity will increase to 1.21 mn tpa (IRP will become the second-largest PET producer in the world) after the new 432ktpa-capacity PET plant in the US begins its commercial run in 2Q09. (This new plant has two lines; the first line will begin operations in April 2009 and the second line will start running n June 2009).

Construction of the new PET plant is 73% complete. Total capex for this project is USD172mn, of which USD87mn has already been paid. The remaining USD85mn, or Bt2.9bn, will be paid next year. The funds will be sourced as long-term loans (project finance from financial institutions) of Bt2.3bn and the rest from cash flow from operations.

TUNTEX will start to produce PET polymers for IRP to sell:
Next year, TUNTEX, which belongs to Indorama Ventures, IRP's major shareholder, will change its one production line to produce PET bottle resin for IRP with a total capacity of 30ktpa, or about 2.6% of IRP's total effective capacity of 1,174ktpa. We expect this transaction will not have any significant impact on IRP's earnings.

Indorama Polymers


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