• 4Q18 core profit plunged 63% qoq and 77% yoy to RM89m mainly on declining spread and PU.

• Overall, FY18 core PATAMI of RM791m (-28% yoy) trailed ours and consensus’ estimates at 90% and 87% respectively.

• A lower DPS of 17 sen was declared for FY18 (FY17: 23 sen DPS), implying 50% payout and yield 3.7%.

• We are positive on plans to improve cost competitiveness but oversupply concern could further squeeze product spread. Our recommendation and TP are under review.

Weakest quarterly earnings since IPO

LCT posted its weakest quarterly performance since IPO as core earnings plunged 77% yoy and 63% qoq to RM89m in 4Q18, mainly on narrowing spread and lower plant utilisation (PU). The core earnings are after adjusting for one off items such as inventory write down worth RM46m and unrealised FX loss of RM31m. The bottomline was also affected by RM19m loss from interest rate swap transaction entered by associate company, LC USA, but was negated by recognition of tax credit of RM35m. Overall, FY18 core PATAMI of RM791m (-28% yoy) trailed ours and consensus’ estimates at 90% and 87% respectively.

Lower PU on TE3 plant general maintenance

On qoq basis, product spread narrowed on weak ASP (-7% qoq) and high inventory costs carried forward from 3Q18. Also, PU dropped to 81% (3Q18: 87%) as the TE3 plant underwent a 3-month general maintenance until Jan 2019. These eroded EBITDA margin by 610bps to 8.2% (3Q18: 14.3%). In 2019, management expects higher PU of 90% (FY18: 83%).

Growth projects remain intact

Management shared that LC USA's new plant achieved 100% mechanical completion and will commence operation by 1Q19. Meanwhile, construction of Lotte Indonesia New Ethylene (LINE) complex is expected to start in 2019/early 2020.

Declared lower dividend

A DPS of 17 sen was declared which is lower than the 23 sen DPS announced for FY17. This implies 50% payout ratio, in line with its policy of 50% PATAMI and implies 3.7% dividend yield.

Recommendation and TP under review

While we are positive on plans to improve cost competitiveness, global trade conflict and new supply from RAPID could further squeeze product spread. Our recommendation and TP are currently under review.

Source: BIMB Securities Research - 31 Jan 2019