IVL – 3Q26F: Weaker profit QoQ expected

We remain positive on IVL’s earnings outlook despite an expected 3Q26 slowdown following the exceptionally strong 2Q26. We believe the company’s asset optimization efforts over the past two years, along with improved inventory management under its Sales & Operations Execution (S&OE) framework, will continue to support earnings in 2H26 and 2027 despite challenging industry conditions. Meanwhile, ongoing deleveraging should strengthen the balance sheet, reduce financing costs, and enhance financial flexibility over the long term. We maintain our OUTPERFORM rating with a target price of Bt33, based on 1.5x PBV, in line with its five-year average.

PET spreads remain the key swing factor. We expect IVL’s 3Q26 profit (due Nov. 9) to fall 42% QoQ to Bt3.5bn from the exceptionally strong 2Q26, mainly on weaker product spreads as temporary supply disruptions fade. We forecast adjusted EBITDA/t to decline 39% QoQ to US$135/t but rise 53% YoY and remain above the three-year average of US$103/t. PET spreads, particularly in Asia, remain the key swing factor. Management noted that margin pressure has led inefficient Chinese producers to cut operating rates, supporting PET spreads in Asia. While industry oversupply persists, IVL should continue to benefit from its integrated business model, local-for-local footprint, and ongoing operational improvements.

Working capital optimization remains a key focus. Management remains focused on improving free cash flow through tighter inventory and working capital management. While the company aims to reduce inventory levels and increase inventory turnover to enhance cash conversion and reduce exposure to raw material price volatility, inventory turnover could temporarily weaken in 3Q26 due to longer procurement lead times caused by Middle East-related shipping disruptions. As vessels continue to reroute via the Cape of Good Hope, higher inventory buffers may be required, leading to a temporary increase in working capital, weaker free cash flow, and a slower pace of net debt reduction.

Deleveraging remains on track. Management continues to prioritize balance sheet improvement through working capital optimization and deleveraging. IVL repaid nearly Bt10bn of debt in 1H26 and targets a further Bt10bn reduction in 2H26 if operating cash flow is supportive. This should lower financing costs, improve liquidity, and support its target of reducing net debt-to-EBITDA to below 3x by 2028 from 5.3x at end-2Q26. Management reiterated that its 2028 goal of doubling EBITDA will be driven by the IVL 2.0 program, asset optimization, and higher asset utilization rather than a recovery in industry spreads.

OUTPERFORM rating is maintained with TP of Bt33. Despite QoQ drop in 3Q26 profit, we remain positive on IVL's earnings outlook following several quarters of restructuring aimed at reducing the impact of industry oversupply and cyclicality. We maintain OUTPERFORM and our mid-2027 TP to Bt33, based on 1.5x PBV (5-year average) and 7.3x EV/EBITDA, compared with more than 10x for regional peers.

Key risks include: 1) weaker-than-expected demand, 2) slower efficiency gains from new assets, and 3) changes in regulations affecting plastic products. Key ESG risks relate to the environmental impact of operations and the company's ability to adapt to the transition toward clean energy and a circular economy.