Thursday 28 Mar 2024
By
main news image

This article first appeared in The Edge Financial Daily on August 2, 2018

Lotte Chemical Titan Holding Bhd
(Aug 1, RM5.26)
Maintain add with an unchanged target price (TP) of RM7.50:
Lotte Chemical Titan Holding Bhd’s (LCT) second quarter of financial year 2018 (2QFY18) net profit surged 177% year-on-year (y-o-y) to RM315 million (+29% quarter-on-quarter [q-o-q]) due to higher y-o-y utilisation of 82% (though a slight decline from 83% in 1QFY18) given the higher utilisation rates for its downstream polyethylene (PE) plants in Indonesia, and higher earnings before interest, taxes, depreciation and amortisation (Ebitda) margin of 20%, up from 17% in 1QFY18 and 2QFY17, due to higher product margins.

Net non-recurring income was RM79 million, comprising RM52 million foreign exchange (forex) gain, RM25 million interest income, and a RM2 million associate income that came from RM39.5 million gain of interest swap from LCUSA.

The higher group overall Ebitda margin to 20% indicated the company’s continued improvement in operational performance despite higher naphtha costs, further supported by the non-recurring income of forex gain and reduction of loss on fair value changes in total return equity swap. The Ebitda margin for olefins and derivatives (O&D) declined to 23%, dragged down by the higher naphtha cost while the Ebitda margin for PE dipped slightly to 14%, from 15% in 2QFY17 and 1QFY18, due to the higher naphtha cost.

We project earnings to improve in second half of 2018 (2H18), driven by higher utilisation rates and improved margins for PE and O&D. While we remain cautious on LCT’s utilisation rate, projecting overall utilisation rate to range from 80% to 90% in FY18 forecast (FY18F) to FY20F, we remain positive on its operating margins, driven by high density PE (HDPE)-naphtha, butadiene-naphtha and PP-naphtha, due to tight supplies and strong demand, which should partly offset the higher naphtha feedstock costs.

Management expects its three growth projects (PP3, integrated petrochemical facility in Indonesia, and ethane cracker in the US) to be on track. The PP3 project to expand its polypropylene (PP) capacity by 200 kilotonnes per annum (ktpa) will commence operations in the second half of FY18F (2HFY18F). It aims to make the final investment decision for the one million tonnes per annum ethylene project in Indonesia in 1HFY19F. LCT’s 40%-owned ethane cracker in the US to produce 360ktpa ethylene and 280kt monoethylene glycol is now 78% completed and slated for commercial start-up in 1HFY19F.

We believe LCT remains attractive as we expect: i) its strong earnings recovery to continue into 2HFY18F and FY19F, driven by potential utilisation rate improvements in FY18F to FY20F, higher margins for PE and PP, and the commercial start-up of its TE3 project in December 2017 and PP3 in FY18F; and ii) high dividend yield of 5.8% to 6.8% in FY18F to FY20F. Trading at only 6.7 times to 7.2 times FY18F to FY20F price-earnings ratio currently, LCT is attractive given its improving earnings growth visibility and growth outlook, in our view. Potential rerating catalysts are higher HDPE-naphtha margin. Risks to our call are lower HDPE-naphtha margins and unplanned plant shutdowns. — CGSCIMB Research, July 31

      Print
      Text Size
      Share