Can Lotte Chemical maintain its share price rally?

The company is anticipating demand to outstrip supply in the petrochemical industry in 2018

By MARK RAO / Pic By BLOOMBERG

Lotte Chemical Titan Holding Bhd’s substantial jump in profit boosted investors’ confidence in the petrochemical firm and raised the share price of the South Korean-controlled firm.

However, an analyst said the share price increase, following a 30% year-on-year (YoY) jump in net profit to RM378.15 million for the fourth quarter ended Dec 31, 2017 (4Q17), was largely contributed by the lower effective tax rate and higher non-operating income.

Pretax profit for the olefin and polyolefin producer declined 9.8% to RM381.91 million due to the sharp increase in oil and feed stock prices for the quarter. Turnover for the South Korean-controlled petrochemical producer also slipped 1.4% to RM2.12 billion on reduced plant load at its Indonesian polyethylene plant and lower sales volume of its by-products.

For the full-year 2017, net profit and revenue were lower by 19.1% YoY and 3.9% YoY at RM1.06 billion and RM7.82 billion respectively.

Shares of Lotte Chemical rose 28 sen to close at RM5.36 on Tuesday, adding RM635.6 million to its market capitalisation after the company announced its full-year result.

The share price boosted the company’s market capitalisation to RM12.17 billion.

“Investors were reacting to the bottom line numbers and it was likely a knee-jerk reaction to the jump in net profit,” an industry analyst, who spoke under the condition of anonymity, said to The Malaysian Reserve.

“They were buying into the headline number and this is not the ingredient needed to sustain a long-term rally.”

The source said improving margins, as opposed to headline numbers, are more supportive of a rally.

Lotte Chemical told Bursa Malaysia that it is anticipating demand to outstrip supply in the petrochemical industry in 2018.

The analyst said Hurricane Harvey hitting US shores in August last year resulted in an uptick in polyethylene prices as supplies and productions from US Gulf of Mexico producers were disrupted.

“While this helped bolster Lotte Chemical’s margins on a quarter-on-quarter (QoQ) basis, we can expect the capacity shortage situation to normalise by the first half of this year.”

In 4Q17, the company improved its revenue by 5% QoQ due to the higher average selling price and sales volume recognised, while pretax profit jumped 56% on an improved sales volume and lower production costs.

It said its FY18 performance will be contingent on the supply and demand of petrochemical products, production and operational capability, and feedstock prices, which are positively correlated to crude oil prices.

“We anticipate that the petrochemicals market will continue to be resilient in the near term with demand growth for petrochemicals to outpace the rate of new supply additions in the region,” the company told the local bourse.

The leading polyolefin producer in Malaysia said demand should remain stable in South- East Asian markets as it will help offset the reduction in polyolefin product deliveries in the Chinese and Malaysian markets due to the coming Chinese New Year festivities.

For the olefins and derivative business segment, the second-largest olefin producer in the country expects a better performance due to the upcoming regional crackers turnaround from March this year onwards and active restocking by China, coupled with higher derivative margins for styrene monomer and ethylene glycol.

It said there are no major planned plant shutdowns for the year which will help production output in 2018 to normalise.