Analyst expects QoQ improvement for Lotte Chemical in 3Q

A rise in product margin by 17% QoQ, boosted by recovering product prices, should help improve the company’s profit growth


HIGHER average selling prices and lower naphtha prices will boost Lotte Chemical Titan Holding Bhd’s (LCT) quarter-on-quarter (QoQ) performance in the third quarter ending Sept 30, 2019 (3Q19).

Maybank Investment Bank Bhd (Maybank IB) analyst Mohshin Aziz said a favourable combination of naphtha prices easing and prices of many basic petrochemical rebounding since June 2019 suggests the floor price was established in 2Q19.

He added that this was partly due to an improvement in the US-based supplies, as well as other major exporters, which has provided some clarity on global demand and supply.

“We forecast 3Q19 product margin to rise by 17% QoQ, boosted by recovering product prices. This should help improve Lotte’s QoQ profit growth and underpins our ‘Buy’ (recommendation).

“However, on a year-on-year (YoY) basis, the product margin is likely to be 9% lower,” Mohshin said in recent report on the company.

Maybank IB’s target price for LCT remains at RM3.18, pegged to a target of 6.1 times for the financial year ending 2020, enterprise value to earnings before interest, taxes, depreciation and amortisation, which is around the naphtha-based peer-group average.

Meanwhile, LCT expects the expansion of its RM18.3 billion integrated petrochemical facility (IPF) project in Cilegon, Indonesia, to boost growth of its petrochemical business.

This comes after LCT received the nod from its shareholders on Wednesday to divest 49% stake in PT Lotte Chemical Indonesia (LCI) to parent company, Lotte Chemical Corp (LCC), for US$65.39 million (RM274.12 million).

LCT president and CEO Lee Dong Woo said the project is expected to significantly boost the group’s overall production capacity by 80% or 2.8 million metric tonnes (MT) from the current capacity of 3.5 million MT.

He said about 60% or RM11 billion of the total IPF cost would be raised through borrowings, while the remai- ning 40% or RM7.3 billion through equity.

LCC will inject RM3.6 billion and another RM3.7 billion will be from LCT to develop the IPF project, he said.

“The business fundamentals are there, and we believe with this expansion in three years time, will increase our production capacity by more than 80% and should benefit the company and shareholders,” he told reporters at the company’s EGM in Kuala Lumpur yesterday.

LCT’s shares hit new lows since its market debut two years ago after the company registered a lacklustre 2Q financial results due to a bearish outlook for prices of olefin and polyolefins.

The South Korean-controlled petrochemical producer’s share price closed three sen lower yesterday at RM2.62, giving it a market capitalisation of RM6 billion.

Lee said LCI will likely commence the construction of IPF in the second half of 2020 and is expected to be completed by 2023.

“The new integrated complex with a capacity of a million tonne per annum naphtha cracker and other related downstream petrochemical facilities will provide better product mix and improve overall operational efficiency,” he said.

Lee noted that the current business environment is challenging and volatile due to the ongoing US-China trade war and fluctuations in oil prices, which is linked closely to its feedstock Naphtha.

“Financially, we need to be strong and resilient to face the challenging time. We believe the company will do well, as long as there is a continued growth and development in South-East Asia for plastic fabrication business,” he said.

Lee added that the US-China trade war has fuelled the influx of petrochemicals from the US in South-East Asia with the imposition of import tariff by China.

This has hit the group’s performance as margins were depressed. Lee, however, remains confident of the group’s long-term prospects.

“Our industry is linked to development and urbanisation as the plastic sector is important for the transportation, medical and other usage,” he said.

Although the petrochemical companies are expanding, he said the margins will be depressed, but the growing population will lead to demand exceeding supply.

Hence, he said margins will increase, while noting that this cycle has continued for the last 30 to 50 years.

“We hope to be able to ride on the cycle uptrend upon completion of the IPF project, and it is a key growth driver moving forward,” he said.