This article first appeared in The Edge Malaysia Weekly on May 3, 2021 - May 9, 2021

IT has been a good start to the year for Lotte Chemical Titan Holding Bhd (LCT). It posted its best quarterly profit of RM440 million since its relisting on the local bourse in July 2017.

If the growth momentum is maintained, this could be the best-performing year for the group. In fact, its financials started to pick up in the fourth quarter ended Dec 31, 2020 (4Q2020), with net profit almost doubling to RM151.16 million from RM78.77 million in 3QFY2020.

In a recent interview with The Edge during a visit to its plants in Pasir Gudang, Johor, new LCT president and CEO Park Hyun Chul says he expects a brighter outlook this year, given that the margin spread has significantly improved from last year. According to him, the margin spread between polymer and naphtha had widened more than 50% to average at US$820 a tonne in the first quarter of this year, compared with US$530 a tonne in 2020.

“This is a record spread, driven by high demand from the packaging industry amid rising demand for food delivery. Additionally, we are now seeing renewed relevance and higher demand for usage of plastic materials, given the importance of hygiene and clean food packaging, and higher demand for personal protective equipment (PPE) as well as e-commerce packaging during and post the pandemic period,” says the 54-year-old.

LCT’s business profitability is dependent on the polymer-naphtha spread trend. Naphtha feedstock prices are highly correlated to crude oil prices.

With the bullish prospects, is the company poised to see a rerating catalyst?

CGS-CIMB Research has raised its target price for LCT shares to RM3.95 from RM2.86 on the back of its higher earnings forecasts. “We believe our target price is not excessive as we have excluded the cash set aside for the Indonesia naphtha cracker project and because we have based our target price on CY2022 Ebitda of RM841 million, which is 46% lower than CY2021 Ebitda of RM1.54 billion, on the assumption that petrochemical selling prices will correct next year from their peaks this year,” it says in an April 29 note.

The research house expects the margin spread to edge even higher in 2Q from 1Q. “Based on our calculations for April and May 2021 (but excluding June for now), we believe LCT will earn a weighted average polymer spread of US$856 per tonne in 2Q2021, which is higher than 1Q2021’s US$730 per tonne, and substantially higher than LCT’s historical low spread of US$382 per tonne in 1Q2020.”

Despite that, LCT has conservatively guided that core net profit in 2QFY2021 will be slightly below the RM440 million achieved in 1Q, mainly due to the quarter-on-quarter slowdown in sales volume.

LCT’s shares are trading at trailing and forward price-earnings ratios (PERs) of about 9 and 16 times respectively. The counter has been on an upward trajectory since touching a low of RM2.07 two months ago.

Thanks to the company’s decent financial results, the stock jumped to a two-year high of RM3.37 before closing at RM3.23 last Friday. The counter had climbed 68 sen or 27% in April alone.

According to Bloomberg data, of the research firms covering the stock, there are six “buy” calls, one “hold” and one “sell”. Their average 12-month target price of RM3.91 indicates that there is still a 21% upside from the current level.

An oil and gas analyst says LCT’s share price is unlikely to return to its initial public offering price of RM6.50 in the near term. At that price, the company was valued at a trailing PER of about 11.6 times.

It is worth noting that LCT was in a net cash position of RM4.7 billion at end-March. Based on the closing of RM3.23 last Friday, excluding the cash pile, the company’s petrochemical business is valued at only RM2.75 billion, which is a PER of 3.7 times with the consensus net profit estimate of RM745.3 million.

“The uptrend [in margin spread] is not going to last forever. I think the downturn will start in the second half of the year,” says the O&G analyst.

“Bear in mind that in the past, there was a very long upturn. But now, the expectation is different, mainly because of more incoming supply from other players globally.”

A fund manager highlights that the previous valuation was also dependent on the stock market’s performance at that time. The benchmark FBM KLCI was close to 1,800 points when LCT was listed.

“Every period has a different risk appetite. Investors paid a higher PER when the equity market was at a high level,” he points out.

LCT posted net earnings of RM1.06 billion in 2017. Since then, its financial performance has been weak, falling to a low of RM154 million in 2020, due to a squeeze in margins. Nonetheless, much has to be done to spark investor interest in the company as the stock has halved from its IPO price of RM6.50 per share.

A series of unfortunate events plagued LCT in 2017 before and after its relisting, starting with an IPO hiccup that saw its offer price slashed by one-fifth to RM6.50 from RM8 previously, owing to tepid market response. Three weeks after the flotation of its shares on Bursa Malaysia, the group surprised the market with a sharp fall in earnings due to water supply disruptions at its Pasir Gudang plants. News of a fire incident at a plant a few months later added to its woes.

Nonetheless, Park stresses that the group has learnt the painful lesson of the water supply cut. LCT has installed three water tanks to ensure the sustainability of its operations. Each tank has a capacity of 18,500 cu m, which is equivalent to 7.4 Olympic-size swimming pools, allowing for uninterrupted operations for 48 hours in the event of a water cut.

To maintain operational stability, achieve higher utilisation and minimise wastage, the group has an annual capital expenditure of between RM200 million and RM300 million for routine maintenance, says Park. Its facilities in Johor are currently running at a utilisation rate of more than 85%.

Titan Chemical Corp Bhd was taken private in 2011, a year after Lotte Chemical Corp, an affiliate of South Korean retail giant Lotte Group, bought into it.

Park expects the strong average selling prices (ASPs) of polymers to sustain in the coming months amid a further reopening of regional markets as well as post-pandemic recovery with more vaccination programmes worldwide. He foresees oil prices hovering at US$60 to US$65 per barrel, which will still be comfortable for the group, given the high ASPs of polymers.

Park says the industry’s prospects remain intact, and expects improvement to persist throughout 2021 with the reopening of the domestic and regional economies, led by the strong recovery of China and Asia-Pacific. “Our business is closely tied to regional and domestic economic growth since it is essential to the key manufacturing sector and, hence, is consumption-driven.”

Citing the International Monetary Fund’s recent economic outlook report, he adds that the strong post-pandemic recovery forecast for the year will be supported by more vaccination programmes around the world and accommodative monetary policies in the major economies.

For FY2020, the company posted a net profit of RM154 million, down from RM443 million a year ago, due to weaker demand because of the impact of Covid-19 as well as the major statutory plant turnaround, which led to lower sales volumes.

Nevertheless, the group declared a dividend of 3.27 sen per share, amounting to RM74.3 million, for FY2020, representing a dividend payout ratio of 50%. In FY2019, it paid a higher dividend of seven sen per share.

LCT operates an integrated petrochemical complex, comprising 12 plants in Pasir Gudang and Tanjung Langsat, Johor. In Indonesia, it operates three non-integrated downstream polyethylene plants.

LCT is one of the largest producers of polyolefins in Southeast Asia, and Malaysia’s largest producer of olefins. Its products cater for customers in various industries, including electrical appliances, consumer packaging, household products, healthcare, automotive, construction and industrial.

Underpinned by a higher premium on top of market pricing, Malaysia and Indonesia have been the group’s main markets, accounting for 61% of its total sales in FY2020. It also has a presence in China and Southeast Asian countries.

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