This article first appeared in The Edge Financial Daily on December 4, 2017

KUALA LUMPUR: Investing in Lotte Chemical Titan Holding Bhd (LCT) has been tough this year. Not only has weak investor appetite dealt a blow to its initial public offering (IPO), but a 13-day water supply cut in April eroded its second-quarter earnings and caused its share price to sink lower. News of a fire that broke out at its plant in Johor didn’t help investor sentiment.

Shares of LCT have been on a downtrend since its listing in July at RM6.50. It fell to a low of RM4.28 in August but has since recovered. However, the share price has continued to be on a downtrend after it hit RM5.80 in September.

It closed at RM4.75 last Thursday, which is at a three-month low. LCT’s share price has been trading in the range of RM4.14 to RM6.53 since its listing.

Despite the stock’s volatility, analysts see the weakness as a buying opportunity for long-term investors.

According to Areca Capital Sdn Bhd chief executive officer Danny Wong, the recent foreign selling has created a “value buy” in LCT, which is trading below its net tangible asset (NTA) of about RM5.

“It’s a value buy for long-term investors who are keen to buy and hold for about five years. The stock is currently trading below its book value and when viewed from a price-earnings ratio (PER), it is also very attractive compared with its peers. The current dividend yield is also decent for long-term investors, especially if the earnings of LCT were to normalise,” Wong said.

The management has guided that the dividend payout ratio for the financial year ending Dec 31, 2017 (FY17) to be about 50%.

For the cumulative nine months ended Sept 30, 2017 (9MFY17), the group recorded a net profit of RM686.08 million or 36.29 sen per share. Even without taking into consideration its fourth quarter’s results, the dividend per share would have been about 18.1 sen per share or about 3.8% yield based on its current price of RM4.75.

Recall that LCT’s management has guided that its Malaysian plants should achieve a strong utilisation of 90% in 4QFY17 in view of no major planned shutdown and the expected commissioning of its new TE3 plant in the fourth quarter.

The management also expects demand for polyolefin products to be stable, with the Latin American market continuing to look out for supply outside of the US until supply from the US is stable post-hurricane impact.

Nonetheless, Wong cautioned that the increase in cost per unit of production during 3QFY17 may be a concern among some investors, especially if the trend continues. Still, he believes that this is a buying opportunity for long-term investors.

TA Securities Holdings Bhd analyst Kylie Chan concurred, deeming LCT attractive. She predicts LCT to report a net profit of RM819.6 million in FY17, with its core earnings per share coming in at 42.8 sen. Under such an assumption, the group’s dividend payout would have been about 23 sen per share, and translated into about 4.8% dividend yield.

Chan is also optimistic about the group’s outlook despite the latest selldown that saw its share price fall below the RM4.80 level last week.

“We think that the group’s earnings will be rather resilient with crude oil price remaining at a subdued level currently compared with the US$100 (RM409) per barrel level. With operations now normalised and the disruption of the water supply issues behind us, the results for the coming quarter should be rather decent,” she said.

She added that LCT’s multi-year earnings growth story remains intact, with significant new capacity coming on stream in the coming years as well as the supports to the group’s robust margin from the subdued oil prices in the near- to medium-term.

Last Thursday, Brent crude was hovering at US$64 a barrel ahead of the Opec meeting in Vienna. Chan has set a target price of RM6.66 for LCT, indicating a potential return of 40% to its current price of RM4.75.

Other analysts covering LCT are also “positive” of its outlook, with all of the eight research houses recommending a “buy” call on the stock and an average 12-month TP of RM7.20. Based on its closing price of RM4.75 lsat Thursday, this implies an upside of 52%.

Rakuten Trade Sdn Bhd vice-president Vincent Lau is also of the view that LCT’s value is emerging amid the current price weakness. He, however, thinks that it is worth a look should the share price drop further to RM4.50 level.

The lacklustre performance of the group’s share price was seen from its debut on Bursa Malaysia after a relaunch of its IPO at a lower price of RM6.50 compared with its initial RM8 as well as the reduction of its offerings by a fifth, following an overestimation of demand for its shares by bankers. The group had to buy back shares amounting to RM226.25 million, rendering it non-compliant with the public shareholding requirement, that at least 25% of the stocks must be in the hands of public shareholders.

It didn’t take long for another negative surprise to hit LCT, when a 71.9% plunge in its net profit to RM113.6 million due to a water supply interruption in April. While the group included the incident in its prospectus documents, there was no disclosure of any financial impact from the event.

It was indeed a series of unfortunate events for LCT as there was a fire incident on the TE3 project in September. In October, there was a stop-work order issued by the environment department on its KBR Catalytic Olefins Technology catalytic cracking reactor within its TE3 project, due to odour emission and surface oil sheen/film discharge. The stop-work order was lifted a few days later after the group completed the requested remedial actions.

While all these are in the past, confidence has been hampered and despite a strong recovery in its 3QFY17 from the previous quarter, the share price remains weak. While it could probably be a story of another Felda Global Ventures Holdings Bhd that has lost about 58.8% since its IPO in 2012, LCT could also see a rebound similar to the rocky IPO that Facebook Inc has gone through in 2012.

The social media which was famously known for its disastrous IPO that saw technical glitches on its first minutes of trading, took more than a year to bounce back above that mark. Today, investors in Facebook would have seen a total return of 508.3%.

Maybank Investment Bank analyst Mohshin Aziz best summed LCT as the cheapest Asian petrochemical company based on enterprise value-to-earnings before interest, tax, depreciation and amortisation and price-to-book measures.

“Based on these attractive valuations and coupled with respectable dividend yields, we advocate accumulating LCT’s shares,” he said.