This article first appeared in The Edge Financial Daily on May 3, 2018

Lotte Chemical Titan Holding Bhd
(May 2, RM5.64)
Maintain buy with a target price (TP) of RM7.25: First quarter of financial year 2018 (1QFY18) core profit fell 15% year-on-year (y-o-y) and 33% quarter-on-quarter (q-o-q) to RM253 million as margin was squeezed by lagging price effect. Overall, it ran ahead of our forecast but trailed consensus estimate at 19%. Ethylene market remained firmer than polyethylene (PE) due to expectation of tight supply during upcoming plant shutdown at several naphtha crackers in North Asian regions over the 2QFY18 and 3QFY18. We reiterate our “buy” call on Lotte Chemical Titan Holding Bhd (LCT) with unchanged sum-of-parts (SOP)-derived TP of RM7.25. We believe PP3 and US shale gas plants will provide LCT with an earnings buffer against rising feedstock costs.

Core profit fell 15% year-on-year (y-o-y) and 33% quarter-on-quarter (q-o-q) to RM253 million mainly on narrower product spread albeit this is partially offset by higher interest income and joint venture (JV) contribution. Despite expectations of higher average product prices in tandem with higher crude oil price, management noted that selling prices lag feedstock by two months. Overall, 1QFY18 core earnings came ahead of expectations at 33% but trailed consensuses at 19%.

LCT recorded lower plant utilisation at 83% (4QFY17: 86%) on lower plant load at both of its Malaysian and Indonesian PE plants. This was due to the unfavourable PE market. Instead, LCT focused on the ethylene market due to better product spread for ethylene to defend operating margin.

Management shared the PP3 project and US shale gas project are well on track. At end 1Q18, the PP3 project was at 91% of its mechanical completion and is expected to begin commercial operation in second half of 2018 (2H18). Meanwhile, US’ cracker and MEG plants are progressing at 78% and 83% respectively of their  completion, and are expected to commercialise in 1H19.

We raised our earnings forecast for FY18 by 16% to RM882 million solely to account for higher-than-expected interest income and JV contribution assumption. At this juncture, we retain our product and feedstock price assumptions as 1QFY18 core earnings before interest, taxes, depreciation and amortisation (Ebitda) were in line with estimates at 25%.

The y-o-y earnings drop were within expectations. We look forward to its structural earnings growth from the PP3 and US shale gas project that is poised to gradually contribute by 2H18. Hence, we reiterate our “buy” call on the stock with unchanged SOP-derived TP of RM7.25. We think recent weakness in the stock price offers opportunity to collect at dips. — BIMB Securities Research, May 2