Asia Pacific Fibers (formerly known as Polysindo) - JP Morgan

•         Asia Pacific Fiber (POLY IJ) is the largest Indonesian fiber producer, only integrated player, w/ mkt share ~17-18%.  Capacities: PTA 340k tpa; Polymers/PSF-Y chips etc 618k tpa.  POLY trades on 17x EV/EBITDA (annualized 3Q10), however in 4Q PTA & PSF spreads up ~$100 & $300 respectively should lift 4Q EBITDA to > $25mil… lowers POLY to ~8-10x EV/EBITDA (annualized 4Q10).  95% of EV is debt means huge operating leverage into what some characterize as a fiber/petchem supercycle.  Samuel ‘s {JPMA SLEE} industry contact likens the current period to the mid-90s when “everyone in the fiber chain made money.”

•         The outstanding ~$1bn debt is legacy Asia crisis/IBRA era & unrestructured, the manner & timing of its restructuring is the reward potential & the risk.  The vast majority of IBRA restructurings involved substantial haircuts and to my knowledge none brought a premium to bond holders.

•         POLY 2009 annual report notes 80% of secured bond holders (ie 80% of ~$1bn unrestructured) have agreed terms and simply await the 20% govt/PPA stake holder to approve.  An article on bloomberg cites mgt indicating in 2009 a final ~$1bn ($893mil) secured restructuring proposed to swap the remaining unrestructured debt to a 51.2% equity stake.

•         Regional peer PTA producer IVL TB trades on 15x EV/EBITDA.  POLY’s EV wld be ~$1.5bn (vs. current $1bn) on a similar 15x multiple.

•         Possible Scenarios:  (1) ~$1bn unrestructured debt gets “no haircut” = ~10x upside to POLY equity at 15x EV/EBITDA.  (2)  ~$1bn unrestructured debt coverts to 51.7% (mgt cited 09 proposal refered to in bloom article) = ~15x upside to POLY equity at 15x EV/EBITDA.  (3) Nothing happens anytime soon.  Timing appears to be the key risk. The first phase of restructuring (unsecured ~1bn debt converted to equity) took several years, the risk is less visibility to understand where fiber spreads will be in 3+ yrs were the final restructuring phase to take that long.

•         Upside to earnings (beyond the aforementioned bullet points):  (1) 1Q11 earnings may rise q/q from an already strong 4Q10, PTA is up 17% YTD… a strong 1Q cld see EV/EBITDA falling to as low as 5-7x.  (2) POLY has been gradually raising its capacity utilization yet most recent mgt indication shows its PTA running at only ~80% utilization = room for additional EBITDA growth beyond rising spreads.  (3) Post final phase restructuring, mgt expects it wld be able to tap cheap bank financing enabling the co to slash high financing costs.

•         My take:  The outcome appears binary.. either a 10 bagger or dead money, however at pre-final restructuring ~9x EV/EBITDA it appears to be trading close to a dead money view, ie big upside potential reward yet limited downside risk.

•         Risk of further delay is real, but I am encouraged that progress has been made (the unsecured debts restructured) and thus there seems to be a progression towards final phase restructuring.  Additionally the not completely disimilar Mandiri -Garuda debt  was recently resolved, this cld set the stage for the POLY debt issue to clear soon as the POLY secured 20% debt outstanding not yet approving the 80% bondholder proposal is similarly resulting from a SOE bank loan (BBNI IJ).

Additional Comment
•         Indonesia’s textile industry (POLY’s domestic customer base) roared in the 90’s, China killed it in the 2000’s, now it’s regenerating bigtime bc (1) Chinese labor costs are soaring & (2) Indo dom textile dmd is rising fast.  China overbuilt petchem/fiber capacity in 2000’s, but now capacity is stretched & meaningful capacity add will take yrs.  Given the resurgence of domestic textile industry, a domestic upstream petchem production base cld come to be seen by the govt as strategic, such a view may give rise to better support from the govt for a resolution of the 20% govt claim.  As spreads sustain at highly profitable levels, M&A activity has surged in this fragmented industry, peer IVL TB has undertaken 8-10 acquisitions including a smaller Indonesian competitor SK Keris.  An M&A angle may exist to the POLY story as HF investors appear to be in the money and are “distressed investors” yet POLY’s operations have already emerged from distress, POLY’s integrated platform wld give any off-shore new entrant tremendous domestic breadth in the upstream space.