• LCT, a large consumer of naphtha at c.2-2.3m MTPA would be a significant beneficiary of depressed crude oil prices, in our view.

• We expect product spread to improve as naphtha and ethylene prices have dropped in tandem; this is positive for its profit margins as PU at its Indonesian ops is also ramping up.

• We estimate that for every US$10/mt drop in average naphtha price would rake in savings of c.US$23m in feedstock costs.

• We reiterate our BUY recommendation on the stock with an unchanged SOP-derived TP of RM7.25. We believe prolonged lower oil price is a key catalyst to the stock price.

Key beneficiary of low crude prices

The plunge in crude oil price has sent naphtha prices lower; naphtha price is now at c.US$500/mt, over 20% lower than 3Q18 average price of US$680/mt. We believe LCT is a key winner in the current low crude price scenario; its annual consumption of c.2-2.3m MTPA of naphtha (produced mainly from crude oil) as its main production feedstock accounts for c.50-70% of total operating cost.

RM18m savings for each US$10/mt drop in naphtha

Prior to 2018, LCT consumes 2m MTPA of naphtha, on average. With the new TE3 plant (began operation at end 2017), LCT now consumes c.2.3m MTPA (Table 1). We estimate that every US$10/mt drop in average naphtha price could net annual savings of US$23m (RM92m @ RM4/US$) in feedstock cost. Assuming it retains 20% of the savings (from being passed on to buyer), LCT’s could add c.RM18m in gross profits or +1.5%.

Ethylene-PE spread widened

The plunge in ethylene price has widened the ethylene-PE spread to c.US$300/mt (Chart 2). We expect the PU at LCT’s Indonesia plants to improve as management noted PU was kept low at c.70% during unfavourable ethylene-PE spread market.

Maintaining utilisation rate

Its 9M18 PU stood at 84% (9M17: 69%), slightly below the guidance of 85% for 2018. Management noted that the TE3 plant is currently under a 3-month general maintenance shutdown and would resume by Jan 2019. Still, management believes it is on track to achieve its target as other downstream plants will be running as normal.

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 9.3x FY18 ex-cash P/E before easing to 8.1x in FY19. We believe prolonged lower oil price is a key catalyst to share price.

Source: BIMB Securities Research - 27 Nov 2018