Lotte Chemical shares slump to record low on poor 2Q showing

by MARK RAO / pic by BERNAMA

LOTTE Chemical Titan Holding Bhd’s shares continue to hit new lows since its market debut two years ago, as the company registered a lacklustre second quarter (2Q) and a bearish outlook for prices of olefin and polyolefins.

The South Korean-controlled petrochemical producer’s share price closed at a record low of RM2.83 yesterday, 56.5% lower than its initial public offering (IPO) of RM6.50 two years ago.

This effectively erased some RM8.3 billion from the company’s market capitalisation since its debut on Bursa Malaysia Securities Bhd in July 2017, as disappointing corporate earnings amid a challenging business environment weighed on investor sentiment.

For the 2Q ended June 30 this year, Lotte Chemical — which predominately derives its income from the olefin and polyolefin businesses — posted a 66.7% year-on-year (YoY) decline in net profit to RM104.85 million on lower product selling prices resulting from the protracted US-China trade tensions which squeezed profit margins.

“The lower selling price is mainly due to diversion of polyolefin supply from the US into the South-East Asia region as a consequence of the US-China trade war, as well as softening of global economic growth,” the company told Bursa Malaysia yesterday.

It said the economic environment remains challenging due to unresolved trade tensions and the slowing of global economic activities, but said its key sales demographic — namely emerging and Asian markets — is expected to sustain growth this year.

Malaysia and Indonesia were the company’s largest markets, contributing 62% of group revenue of RM4.3 billion for the first half of 2019 (1H19).

The petrochemical company noted new additional capacities are forecast to create short-to medium-term supply and demand imbalances in the domestic market.

Lotte Chemical expects the additional supply to gradually be absorbed by high consumption growth in the Asian region.

Lotte Chemical’s 2Q profit was further impacted by higher distribution expenses, lower foreign-exchange gains and share of loss from associate companies. Higher expenses arose from the increases in sales volume, distribution cost and royalty expenses.

Turnover for the quarter dropped 6.2% to RM2.13 billion from the RM2.27 billion managed in the same period a year ago due to the fall in average product selling prices.

This was partially offset by the increase in sales volume driven by improvements in production quantity and plant utilisation.

The performance for the quarter brought Lotte Chemical’s net profit 71.3% lower YoY at RM160.68 million, while the RM4.3 billion revenue brought in over the same period represented a 4.2% YoY decline.

Its performance for the remainder of 2019 will be influenced by supply and demand dynamics in the petrochemical market and its production output, not to mention feedstock prices which are positively correlated to crude oil prices.

Lotte Chemical said the volatility in oil prices will have an impact on naphtha prices — the company’s main feedstock used for petrochemical production. Production cuts by the OPEC and Russia to offset higher US shale production, coupled with US sanctions on Venezuelan and Iranian oil exports, are expected to lend support to crude oil prices, Lotte Chemical noted in its exchange filing yesterday.

At the same time, the softer macroeconomic outlook and increasing US oil output and exports will offset potential increases in oil prices.

Lotte Chemical became the largest listing in Malaysia since 2012 when it raised some RM3.77 billion upon its July 2017 debut.

This was in spite of the company slashing its IPO price from RM8 to RM6.50 and reducing its offering size due to weak investor take-up.

The company, a relisting of Titan Chemicals Corp Bhd after it was taken private in 2011, also undertook stabilising actions from July 11 to July 24 upon listing in 2017.

This saw Maybank Investment Bank Bhd acting as the stabilising manager, purchasing 27.77 million shares or 4.8% of the total number of shares offered under the IPO during the period.

The shares were bought at an average price of between RM6.28 and RM6.47 apiece.