• LCT’s 3Q18 core profit was flat yoy mainly due to low tax rate arising from overprovision made. Overall, 9M18 PBT came within our forecast at 72% but trailed consensus’ estimates at 63%.

• The higher PU rate of 87% (2Q18: 82%) helped to mitigate the impact of rising naphtha price which was higher by 4% qoq.

• We reiterate our BUY call on LCT with an unchanged SOP derived TP of RM7.25. We believe PP3 and US shale gas plants would provide LCT with earnings buffer against rising feedstock costs.

Profit flattish supported by low tax rate

Excluding the unrealised FX loss of RM25m, LCT’s 3Q18 core earnings were flat yoy at RM242m mainly on lower tax rate of 0.1% (3Q17: 6%) as the company made overprovision in prior year. The 9M18 effective tax rate was 11.3% while the management guided FY18 effective tax rate to be 15%. Overall, 9M18 PBT were largely inline with our estimate at 72% but trailed consensus at 43%.

Declining spread offset better operational performance

On qoq basis, core PBT eased 5% as rising naphtha hurt product spread margin. The average naphtha price rose by c.4% qoq to US$670/mt (2Q18: US$643/mt), causing the EBITDA margin to decline by 140b.p. to 14.3%. This is despite the company achieved higher PU of 87% (2Q18: 82%) as production volume grew by 10% qoq to 756k MT (2Q18: 689k MT). That brings 9M18 PU to 84% (9M17: 69%) which is slightly below management’s guidance of 85% for FY18.

PP3 will further cushion higher naphtha

Management shared that earnings contribution from the 200k MTPA PP3 plant in 3Q18 was minimal as the plant achieved commercial operation on 1 Sep 2018. As PP3 production ramps up, we believe this could enhance operating leverage and cushion the impact from rising naphtha price. This could be further supported by weakening Ringgit and, contribution from the US shale gas plant which is expected to achieve commercial operation in 1Q19.

Reiterate BUY call, undemanding valuation

Reiterate BUY with an unchanged SOP-derived TP of RM7.25. We note that the stock currently trades at undemanding multiple of 7.6x FY18 ex-cash P/E before easing to 7.1x for FY19. We believe the new PP plant and its plan to source for cheap shale gas feedstock plant in the US would mitigate the risk of tightening spread due to rising naphtha prices.

Source: BIMB Securities Research - 1 Nov 2018