Lotte Chemical’s spread to sustain in 2H21


LOTTE Chemical Titan Holding Bhd’s product price spread will remain healthy for the rest of the year despite some weakening as global supply gradually recovers from disruptions caused by the winter storm Uri.

Maybank Investment Bank Bhd (Maybank IB) analyst Lee Yan Ling, in a note last Friday, expects the chemical company’s earnings in the second quarter of 2021 (2Q21) to be sequentially weaker albeit still being strong as Uri’s effects dissipate.

“Earnings in the second half of 2021 (2H21) could be weaker as supply from China and Malaysia comes on stream,” Lee added.

The research firm has upgraded its call for Lotte Chemical to ‘Hold’ from ‘Sell’ with a higher target price (TP) of RM3.10, up 48%, after Lotte Chemical posted exceptionally strong results for its 1Q21.

The higher TP is based on the company’s financial year 2022 (FY22) enterprise value to Ebitda of 4.2 times on the healthy spread outlook and also assumed for higher capital expenditure (capex) ahead.

Maybank IB raised its FY21-FY23 earnings per share for the group by 190%, 55% and 66% respectively on the higher spread assumption.

Excluding the unrealised foreign exchange gain of RM16 million, Lotte Chemical’s 1Q21 core net profit was RM424 million, making up 159% and 125% of Maybank IB’s and market’s full-year forecasts respectively.

Lee said the results were above expectation due to better than expected spread as polymer spread peaked in March on Uri-led disruption and shortage of containers.

As supply normalises, the polymer spread fell by US$50 (RM205.20) to US$100 per tonne from the peak in March and is US$20-US$60 per tonne lower than 1Q21 average.

“Management will share more details on its joint-venture greenfield cracker in Indonesia by mid-year. The initially guided capex was US$4.4 billion over three years and Lotte Chemical’s 51% portion would be RM9 billion versus net cash of MYR4.65 billion as at end-March,” Lee said.

Maybank IB raised Lotte Chemical’s FY22 and FY23 capex to RM2 billion and RM2.5 billion respectively.

JP Morgan Chase & Co in a separate note last week, expects Lotte Chemical to post strong earnings in 2Q21 though it anticipates some normalisation into 2H21.

The investment bank expects spreads to remain healthy into 2H21 and 2022 as it forecasts FY22 polyethylene (PE) and polypropylene (PP) spreads to be between US$600 and US$675 per tonne versus US$710 and US$850 per tonne range currently.

“We upgrade our FY21/FY22E net earnings by circa 2.5 times to three times as we raise our December 2022 TP to RM5.50 from RM4, which accounts for an 84% potential upside,” it said.

The firm reiterated its ‘Overweight’ call on Lotte Chemical.

Due to the strong PE/PP spreads experienced by Lotte Chemical, JP Morgan raised the company’s FY21 and FY22 Ebitda to US$199 and US$163 per tonne respectively.

Lotte Chemical recorded a net profit of RM440 million in 1Q21 compared to a net loss of RM170.06 million in the same period last year due to the increase in average selling price (ASP) and sales volume.

Revenue rose 61.9% to RM2.37 billion in 1Q21 against RM1.46 billion in the corresponding quarter last year.

“The average plant utilisation rate was higher at 88% in 1Q21 compared to 66% in the corresponding period which was attributable to the plant’s major statutory turnaround activities that commenced in March 2020,” the company noted in a recent Bursa Malaysia filing.