KUALA LUMPUR (Aug 1): Following Lotte Chemical Titan Holdings Bhd's (LCT) weak first half of financial year ending June 30, 2019 (1HFY19), CGSCIMB Research has cut its earnings forecast for the group and target price to RM2.83.
"1HFY19 core net profit was only 20% of our previous FY19 forecast (14% of consensus) due to continued weakness in product price spreads versus naphtha," said CGSCIMB Research analysts Raymond Yap and Calyne Ti in a report dated July 31.
The research house has cut LCT's core net profit forecast for FY19 to FY21 by 59% to 69%, while its target price was revised downwards from RM3.69 previously, a 23% cut.
Additionally, Petronas Chemicals Group Bhd (PCG) is expected to start up its polyethylene (PE) and polypropylene (PP) plants by 4Q19F.
"PCG will commission its 900,000 metric tonnes per annum (mtpa) PP plant, which will add to LCT's 640,000 mtpa PP plant, upon which LCT will see its market share of PP production capacity in Malaysia decline from 100% (monopoly status) to 42%," said CGSCIMB Research.
The research house added that LCT's market share of PE production capacity in Malaysia will also decline from 50% currently (with PCG taking the other 50%) to 30% once PCG commissions its 350,000 mtpa linear low density PE plant and 400 mtpa flexi-high density PE plant at Pengerang.
"We expect the increase in production capacity to be in excess of Malaysia's domestic demand, triggering price competition between LCT and PCG for domestic and export sales, particularly to regional markets like Indonesia," CGSCIMB Research noted.
Despite the unattractive petrochemical cycle and the modest earnings outlook, CGSCIMB Research has retained a "hold" call on LCT in view of the significant 20% share price correction over the past three months, and because the research house expects LCT's end-FY19 cash balance to comprise 50% of its current share price.
On a price over book value (P/BV) basis, LCT is already trading at 0.5 times, which is at the bottom of its peers' valuation range, said CGSCIMB Research.
The research house noted that upside risk for LCT is a potential end to the US-China trade war, which may see US PE exports rerouted back to China and could lift business sentiment globally, while downside risk is larger-than-expected compression of spreads as a result of strong competition and market oversupply from PCG's commissioning of its Pengerang plants in late-2019.
At 10.19am, shares of LCT were down two sen or 0.71% at RM2.81, valuing the company at RM6.43 billion.