Looking back to the market dip in March 2020 and many will wonder why they did not take the plunge and buy into the market when it was at an all time low. But then not many had the courage to take the bet amid the massacre in the global equity markets.
A year later and things are very different. The market is surging with some stocks at three times the level it was in March of last year leaving some to question ‘what if I had the courage’.
One such stock is Indorama Ventures Ltd Plc (IVL), a company that is diversified across the globe with operations running from the Philippines to Israel, Nigeria and Egypt through to Spain, Estonia, and Poland and as far as the United States, Brazil, and Mexico.
Thailand based IVL, which started its operations just 3 decades ago, now have 123 operational sites across 33 countries. Despite the pandemic, the companies volume has risen by as much as 18 per cent from their numbers seen in 2019.
IVL, which had been professing the fact that its sales volumes may actually surge amid the need for cleaner bottle packaging saw its core food & beverage packaging rise by as much as 4.5 per cent in 2020.
PET which is the raw material for this segment is the single largest contributor to IVL’s revenue stream.
Phatra Securities estimates that IVL’s integrated PET unit is its mainstay, accounting for 58 per cent of its total core earnings before interest, tax, depreciation and amortization (EBITDA) of about $1.1 billion in 2020.
Phatra’s sector analyst Komsun Suksumrun, said in a recent report to clients that IVL sold around 2.6 million tons of PET in Q3 (third quarter) 2020 against its effective capacity of 2.8 million tons/quarter.
He said that around 50 per cent of its global PET volume sales are based on a contracted/fixed margin basis and the remaining 50 per cent is sold on a spot basis. In terms of region, around 70 per cent of US PET volume sales are on a fixed basis while Europe PET is 55 per cent for Europe. Around 95 per cent of Asia PET volume shipments are linked to spot prices.
Against this backdrop, IVL stands to gain from a rapid rise in integrated PET spread in H1 (1st half) 2021, given its high PET exposure. To add to this is the fact that H1 traditionally has been a period when the spread for PET rises amid rise in demand for bottled water throughout the world and especially Asia.
Analysts believe that the usual rise in spreads for PET in 2021 is already earlier than it was during 2020. During the 1stweek of March 2021 when it hit $275/tonne against the $266/tonne seen during the summer of 2020.
This integrated PET spread usually lasts up until August of each year due to the seasonal factors and across all markets bottle grade PET demand rises from March until August of each year be it in Asia, Europe or in the United States.
The spread in the western hemisphere is similar and one can see that the spread in Europe and United States continues to remain very strong with spreads reaching to the highs not seen since Q2 2018.
Higher Freight Rates to the rescue
The surge in the share price of IVL from the lows seen on March 23, 2020 when it was trading at a mere 16.90 baht a share can be taken as something of the past and once in many years buying opportunity. Today the shares of IVL are trading at nearly 300 per cent higher than the low of 16.90 bath a share seen on March 23, 2020 and if things go the way they have in the past few weeks/months, IVL could see further rise in the share price.
To help IVL has been the fact that global freight rates are witnessing sharp increases that have not been seen in years if not decades.
One would wonder what is freight rates got to do with products such as PET or PTA. Well, firstly the rising freight rates would also mean that there is an increase in raw material cost to be shipped and secondly is the fact that some countries in Asia have been famous for dumping their products and thus keeping the spreads in Asia to be softer than other parts of the world.
With higher freight cost, the margins (if any) of those companies/countries dumping their PET/PTA would shrink.
Suppata Srisuk, analyst at Bualuang Securities notes this issue in her note that the rise in freight rates is likely to benefit IVL due to its widespread production facilities.
“The firm will profit from prevailing high freight rates from Asia to the US/Europe, as it is a local producer in every region in which it operates and it sells products at import-parity prices,” she said.
Suppata also said that the demand for PET will be across all regions and that compared to 1st quarter and 4th quarter the spread for both the West and Asia for PET is usually 13 per cent and 31 per cent quarter on quarter higher respectively. And comparing the 2nd quarter with the 1st quarter, PET (West) and PET (Asia) spreads expand by a further by 9% quarter on quarter and 15% quarter on quarter, respectively, on average.
Bualuang also said that the resilient demand for food & beverages (so for containers to carry them in) and supply tightness (limited MEG feedstock availability) have boosted PET spreads in Q1 2021 until now.
Apart from this bigger contribution of the PET business should mitigate the negative effects of the 14-day unplanned shutdowns of its Integrated Oxide and Derivatives (IOD) plants in January (due to a winter storm in Texas). Note that the firm expects to receive an insurance reimbursement of $35-40 million in H1 20201.
All this has helped raise the company’s stock price to levels that has already surpassed some of the estimates by analysts who had earlier projected it in the range of 42 to 46 baht a share with Maybank Kim Eng having a target price of 46 baht a share based on assumption of integrated PET spread being at $220/tonne but now that spreads are at $275/tonne, there is every likelihood that most analysts would revise their target prices for the firm.
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