Asia Pacific Fibers (POLY IJ; Not Rated) Company visit note: An Awakening Giant?

Company in brief. Established in 1984, Asia Pacific Fibers (POLY) is the largest polyester manufacturer in Indonesia ,holding 27% market share, with combined polyester chain (PTA, Polymer, Polyester Fiber, Filament Yarn, and Synthetic Fabrics) production capacity of 950k tonnes/year and Fabric of 66m yards/year. Its production facilities currently run at a capacity utilization level of more than 95%. The products are sold both in domestic (76%) and export markets (24%). The Company has four subsidiaries: PT Texmaco Jaya, Polysindo International Finance (PIFC), Polysindo Mauritius and PT Eastindo Polymertama (Eastindo). All of its revenue and the largest portion of its costs are denominated in USD.

· Earnings gain momentum. Driven by strong margin improvement on polyester product on the back of i) robust market conditions for polyester influenced by cotton shortages resulting in spurt in cotton prices and ii) favorable raw material supply contract terms , POLY delivered strong performances in 2010 with sales and EBITDA growing by 42% and more than double to IDR4.4tn and IDR520bn , respectively. This solid performance continues to 1Q11 with revenue and EBITDA coming in at IDR1.5tn (+15% q-o-q, +50% y-o-y), IDR297bn (+42% q-o-q, +360% y-o-y), respectively. In 1Q11, Polyester fiber price rose 62.5% y-o-y to IDR19,500/kg and polyester yarn prices went up by 36% y-o-y to IDR21,200/kg. The company could pass on the increase in the raw material prices Paraxylene and MEG, which is linked to oil price, due to continued strong demand for the products as cotton continued to be in short supply. POLY is planning its capacity expansion, which will be funded by internal cash if it can’t obtain new loan.

· Expecting solution in debt restructuring. POLY carries on its efforts to find a suitable solution for its secured debt restructuring by the end of 2011. The secured debt restructuring has not yet been completed, as POLY is still waiting for a response from its one of debtor, PT. Perusahaan Pengelola Aset (PPA) which hold 29% portion. Damiano Investments BV, the majority shareholders is also the majority holders of secured debt. Damiano has provided working capital loans and a LC facility for the procurement of raw materials. This has helped considerably to maintain a reasonable capacity utilization of the company’s production facilities. The completion of the secured debt restructure would also enable a “quasi-reorganization”, whereby adjustments and write downs of some of its liabilities will improve the balance sheet.

· Attractive valuation but bad balance-sheet. The company reported net profit of IDR410bn (EPS: IDR173) in 1Q11. Stripping out forex gain of IDR269bn, 1Q11 core net profit was at IDR137bn. Annualizing its 1Q11 core EPS of IDR58/share, POLY is trading at core PER of only 1.1x. Due mostly to its huge debt balance of around IDR10tn, POLY is trading at annualized 1Q11 EV/EBITDA of around 10x. Meanwhile its peers Indo-rama Synthetic (INDR IJ) and Indorama Venture (IVL TB) are trading at around 3x (annualized basis) and 13.3x 2011 EBITDA, respectively. POLY’s poor balance sheet with Debt/EBITDA of around 10x and deficiency in equity might be a concern of investors, although it might see a strong improvement when the planned debt restructuring program is completed.

Summary;
Revenue (IDRbn):
1Q10 = 1,028.30
2Q10 = 1,121.60
3Q10 = 1,010.50
4Q10 = 1,301.20
1Q11 = 1,499.7

EBITDA:
1Q10 = 64.60
2Q10 = 116.10
3Q10 = 132.10
4Q10 = 208.00
1Q11 = 296.50

EPS (IDR):
1Q10 = 96.00
2Q10 = 7.40
3Q10 = 62.00
4Q10 =-24.00
1Q11 = 173.00


source: OSK dated 9 May 2011