Morgan Stanley (MS) cut the price target of Indorama Ventures PLC (SET: IVL) by half to ฿27 in the latest research by its analyst. The firm believed IVL’s CAPEX growth will fall by half and the recovery of margin from plastic products (PET) would slow down as in the low cycle, adding to a pressure from increasing supply in US and China. Morgan Stanley expected that this would impact IVL’s debt reduction and closed the upside door for three years.
The research calculated target price by using 8x EV/EBITDA from MS’ estimate on 2024, giving the 18.9x P/E as a base case, with the assumptions of $75 -$77 WTI crude oil price and margin from PET at $210/ton.
Morgan Stanley pointed out its concerns over the rate increasing condition and not a single year in past decade that IVL had lower YoY debt. The current debt is at 1.4x of the market value and 4x of EBITDA. The previous thesis gave more positive outlook, assuming that IVL would take time to digest its $3 investment in US in 2020 and focus on the maintenance of CAPEX growth, which turned out CAPEX growth is still one-third of IVL’s mid-cycle operating cash flows, leading MS to see only 3-5% annual reduction in net debt by 2025.
Morgan Stanley noted that a slow reduction in net debt will limit IVL’s upside in equity value. Moreover, global and local peers have more visibility in debt reduction. With 19% of IVL’s debt due in 2024, it posts an upside risk to IVL’s financing costs.