Lotte Chemical Titan profit slumps again, down 97% this time

This article first appeared in The Edge Financial Daily, on January 31, 2019.
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KUALA LUMPUR: Investors were left disappointed with Lotte Chemical Titan Holding Bhd (LCT) once again after it announced a 97% plunge in its latest quarterly net profit to RM10.13 million, from RM378.15 million a year ago.

The group’s margins were squeezed in the fourth quarter ended Dec 31, 2018 (4QFY18) mainly due to high feedstock costs coupled with falling profit prices, LCT said in an announcement yesterday.

This shocked analysts, who say the numbers were far below expectations. In fact, many thought they had seen the worst in 3QFY18 and were banking on a potential improvement in LCT’s bottom line due to lower naphtha prices.

But the 4QFY18 prices were the lowest the group has posted since its relisting on Bursa Malaysia in July 2017.

“It seems like they just can’t get their timing right,” TA Securities analyst Kylie Chan told The Edge Financial Daily.

She suggested that a mismatch between the group’s inventory holding time of three weeks and their lock-in time for sales could be to blame.

This view was shared by BIMB Securities analyst Azim Faris Ab Rahim.

“(LCT) was also affected by high 3QFY18 inventory costs even though naphtha prices dropped in 4QFY18,” he said when contacted.

This, according to him, was what had squeezed product margins in the quarter.

“Another concern is the average selling prices, which fell in tandem with naphtha prices,” Azim said, noting that the US-China trade war, which had seen petrochemical exports rerouted from the US into Southeast Asian markets, had resulted in additional supply that put pressure on selling prices.

Despite this, LCT reported a 10% increase in revenue for 4QFY18 to RM2.34 billion, from RM2.12 billion a year earlier on the back of higher sales volume.

For FY18 as a whole, the group saw net profit decline 26% to RM786.23 million, from RM1.06 billion in FY17. Revenue was up to RM9.24 billion from RM7.82 billion over the same period.

LCT has proposed a final dividend of 17 sen per share, subject to shareholders’ approval.

The investors had shied away from the stock after the noon break announcement yesterday. By the closing bell, LCT shares had lost 38 sen or 8.23% to RM4.24, leaving the group with a market capitalisation of RM9.79 billion.

The stock has lost RM2.26 or 34.77% since it was relisted at RM6.50 on July 11, 2017. (see chart)

This is not the first time the management has failed to adequately guide investors on their financial performance, said TA’s Chan, and might set the stage for further declines in share price.

“The market has been constantly disappointed by management guidance ... this might lead to some [further] avoidance of the stock,” she said.

It was just weeks after LCT’s listing in 2017 that the group announced an unexpected 71.8% decline in net profit to RM113.62 million for 2QFY17.

This had been due to an 11-day water disruption at the group’s Johor plant.

Last December, the group was slapped with a reprimand and penalties from the Securities Commission Malaysia for failure to inform the regulator of these developments prior to the company’s listing.

At the end of 4QFY18, however, Chan noted in a report that the management had guided for margin compression on the back of weaker demand from China and more expensive naphtha feedstock.

Going forward, LCT said yesterday it expected the economic environment to remain challenging, citing global trade tensions.

“Bracing for the global trade impact, emerging markets and Southeast Asia will experience similar headwinds where economic activities are expected to slow down in 2019,” it said.