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Wednesday, May 1, 2019

Tough second quarter seen for Lotte Chemical

Wednesday, 1 May 2019
by gurmeet kaur

Challenging outlook: A Lotte Chemical Titan plant in Johor. According to CIMB Research, fundamentals of the petrochemical giant remained challenging in April.

PETALING JAYA: After a weak first quarter, Lotte Chemical Titan Holding Bhd (LCT) is expected to see an equally tough second quarter (2Q19).

According to CIMB Research, fundamentals of the petrochemicals giant remained challenging in April.

It said that from February onwards, oil prices have staged a rebound and naphtha prices have followed.

However, while spot product prices have crept up, the increase has not been enough to keep up with rising naphtha prices, hence spot product spreads have declined in April from 1Q19 averages.

“While LCT is partially protected by lagging naphtha inventory costs, 2Q19 forecast earnings are unlikely to be strong.

“If such conditions continue for the rest of the second quarter and into the second half of the year, our earnings estimates are at risk,” it said in a report yesterday.

The research house has downgraded the stock from an “add” to “hold” and brought down its target price to RM3.69 from RM4.70 previously.

On Monday, Lotte Chemical said its profit fell by 77.1% in the first quarter ended March 31 due to higher effective tax rate as there was no further reinvestment allowance claimable and lower profit and a fall in the selling prices of its products.

On a more positive note, Maybank IB Research think that the mismatch between naphtha and petrochemical prices will be short-lived.

Petrochemical prices, according to the research house should gap-up in the coming months as global economic growth remains in positive territory.

It noted that average selling price (ASP) has been fairly weak since November last year due to the lower crude oil prices. But oil prices have largely recovered, Lotte Chemical’s ASP has been stubbornly moving sideways.

Expecting a recovery in 2H19 as global demand is positive, it has raised the house’s average naphtha price assumption by US$20/MT from US$570/MT to US$590/MT – representing an increase of 3.5%.

“Based on these, our FY19 core net profit forecast is lowered by 13.3% to RM867mil,” it said keeping its buy call but has lowering the 12-month target price to RM4.25 from RM4.70 before.

The research house said its revised earnings is based on an unchanged 4.9x FY19 EV/EBITDA.

This is a 10% discount to comparable peers in the region. It said the discount was to factor in the company’s higher risk due to its sensitive nature to naphtha price volatility.

Shares of Lotte Chemical, which plunged by 8% on Monday, continued to trend south. It fell another 14 sen or 3.81% yesterday to close at its all-time low of RM3.53. At this level, its market cap stood at RM8.14bil.


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