\KUALA LUMPUR (June 28): Hong Leong IB Research has valued the soon-to-be listed Lotte Chemical Titan Holding Bhd (LCT) at RM7.39. LCT has an initial public offering (IPO) price of RM8.

In an IPO note today, the research house said LCT has an integrated value chain that involves input of naphtha into its crackers, of which olefin (ethylene, propylene) would be produced with by-product, which in turn would be channelled into plants to be converted into derivatives.

It said the olefin produced, on the other hand, would be further processed in LCT's plants to be converted in to polyolefin (end product for sale).

HLIB Research said this enables the group to enjoy better margins than players that only own plants to manufacture polyolefin (with olefin being its feedstock) across the value chains.

The research house said RM4.9 billion of IPO proceeds would be used to fund expansion of plant in Indonesia which would add 1,000KTA ethylene production facilities.

It said that in Malaysia, TE3 and PP3 project would improve group capacity by 10% to 20% while enabling utilisation of idle OCU plant.

HLIB Research said the TE3 project involves the extension on its current facilities in Malaysia, and it would be completed in 2H17.

"PP3 (new propylene plant) will be completed in 2H18. Overall, the group's capacity would be improved by 15% to 20% approximately depending on market conditions. That aside, current idling OCU plant (which produces propylene) would be ramped up to produce feedstock for PP3 plant," it said.

HLIB Research said post 2017, chemical product spread is expected to be toppish given expected capacity additions in ASEAN, China and US.

"Forecast core net profit CAGR of -4.8% over 2017-19 premised on assumption of weaker product prices.

"Stock is fairly valued at RM7.39 pegged to 12x PER, which is at discount to Petronas Chemicals Group Bhd (Not Rated) which is at 16x.

"Petronas Chemicals' valuation premium over Lotte Chemical is justified given its bigger size, higher EBITDA margin and usage of cheaper feedstock (ethane) with more stable prices," it said.