Indorama brings first international IPO from Thailand in almost two years

Indorama Ventures, a Thailand-based petrochemical company focusing on polyester, has launched the international roadshow for what looks set to become the first initial public offering with an international component out of Thailand since April 2008.

The company is seeking to raise between Bt9.3 billion and Bt11.5 billion ($257 million to $347 million) from the publicly marketed portion of the deal and, if priced in the upper half of the price range, this could make it the largest Thai IPO since Rayong Refinery raised $719 million in May 2006.

And the free-float of Indorama will actually be a lot larger than that indicated by the IPO as the company is also in the process of delisting one of its subsidiaries, Indorama Polymers (IRP), through a share swap. Existing IRP shareholders are being offered to tender their shares in exchange for new shares in Indorama Ventures, making them holders of the larger and more integrated parent group instead. The shareholders will receive 1.232 Indorama Ventures shares for each IRP share.

The combined size of the two offerings - the IPO and the share swap - will be about $500 million with the IPO accounting for about $300 million and the swap for about $200 million. This means the market capitalisation at launch will be about $1.6 billion. The total number of shares on offer for the two transactions is fixed and the exact split between the IPO and the swap will depend on the final IPO price.

IRP, which is focusing solely on the production of PET, has been listed since August 2005 and has given investors a four-time return on their money since, including dividends. The share price has gained 260% to yesterday's close of Bt13.50, which equals the all-time high. However, international investors have had limited access to the stock since it is quite illiquid, and the combination of the existing listing vehicle into a larger entity should make the stock available to a lot more funds.

Issues out of Thailand will always face a certain amount of political noise and, not surprisingly, funds that specialise in Thailand or Southeast Asia -- those that are already familiar and comfortable with the risks -- will be targeted during the marketing. However, people familiar with the company stress that Indorama is not just a Thai company, it is a global company based in Thailand. And unlike Chinese companies that rank among the top global players in their sector thanks to their huge domestic market, Indorama is a true global player in the sense that it has production bases in both Europe and, according to one source, the US and 50%-70% of its revenues are generated outside of Thailand.

Its future growth is also likely to be centred around countries and regions like the Middle East, Brazil and Russia, as the strategy is to base new manufacturing plants either close to the raw materials or to the customers - and these regions have both.

As a result of this international exposure, the bookrunners also expect quite a lot of interest from global sector specialists, while the size, which will ensure that the stock gets included in key indices, may also attract broader emerging markets and Asia funds. Or as one source put it: "there aren't that many global leaders in Southeast Asia" so many investors are likely to at least look at it.

Indorama's largest business line, in terms of revenue, is polyethylene terephthalate, better known as PET, which is used primarily to make drinks bottles. But the company also has two other business lines - polyester fibre, which is mainly used in textiles and for industrial purposes including conveyor belts and technical fabrics, and purified terephthalic acid (PTA), which is a feedstock that is used for the manufacturing of various other polyester products, including PET.

The company is the second largest producer of PET globally, but Indorama's real strength is the integrated nature of its operations, which enables it to reduce costs and enhance margins and also makes for a more secure supply of feedstock. The combination of IRP and Indorama into one company will increase these benefits even further.

The company also has stronger earnings momentum than most of its sector peers, which is partly due to the fact that it has expanded its production capacity quite aggressively in recent years, mainly through acquisitions, and partly because it is focusing only on the polyester chain. This part of the petrochemical industry is less sensitive to economic downturns than for example olefins or aromatics, which has resulted in less volatile earnings. Most of the other large PET producers also have exposure to other petrochemical products.

Part of Indorama's strategy has been to buy underperforming production assets at attractive prices and then turn them around. This is likely to continue and the management is supposedly telling potential investors that they will be able to double the company's market value within the next three years. One syndicate research report projects that the company will be able to deliver an Ebitda compound annual growth rate of 48% between 2008 and 2011 by expanding it production capacity - not through acquisitions but by increasing the utilisation rate at its existing facilities, including a greenfield PET plant that came on stream in the fourth quarter of last year.

Indorama is offering to sell up to 913.4 million new shares through the IPO which, if sold in full, will account for 19% of the enlarged share capital. The offering can be increased by 15% if the greenshoe is exercised in full. The IPO and the shares issued as part of the swap will together account for 30% of the share capital.

The offer price ranges from Bt10.20 to Bt12.60 per share, which based on bookrunner estimates, translates into a 2010 price-to-book multiple of about 1.2 to 1.5 times. On a price-to-earnings basis, this pitches the company at a 2010 multiple between 7.1 and 8.7 times. Both multiples put it at a sizeable discount versus its regional peers, although analysts note that there are no pure-play comps since most of the other global PET players also have other petrochemicals businesses.

It will come at a slight premium to its Thai peers, which are trading at an average 2010 price to book of 1.1 times, according to syndicate research. Analysts argue that this is warranted given Indorama's greater international exposure and its higher return on equity.

For now, about 70% of the offering is expected to be sold to international investors, while the remaining 30% will go to domestic accounts. However, the final split will depend on the demand. The split between the number of shares being sold through the IPO, versus the shares being allocated through the swap will depend on whether the IPO is priced above or below the mid-point of the range. The announced swap ratio means that IRP shareholders will get the equivalent of Bt14 for each of their shares if the IPO is priced at the mid-point (Bt11.40). If the deal is priced below that, the swap ratio will change and the IRP shareholders will get more shares as compensation. The IPO will then be reduced by the same number of shares.

The international roadshow and bookbuilding kicked off on Tuesday and will continue throughout next week. The pricing is expected on January 23 and the trading debut is set for February 5. The domestic roadshow started last week and will end at the same time as the international marketing.

Bank of America Merrill Lynch and Morgan Stanley are joint bookrunners for the international portion of the deal, while Bualuang Securities is responsible for the domestic portion.