• Overview. LC Titan 1Q22 core profit plunged 76% yoy and 43% qoq to RM58m mainly due to contraction in product spread and lower utilisation rate. Revenue rose by 17% yoy and 3% qoq to RM2.8bn but EBITDA margin dwindled to 6% (1Q21: 18.6%, 4Q21: 7.2%) as feedstock costs rose amidst high oil price. Income from associate company, LC USA, declined 33% qoq to RM68m from RM101m. This includes one-off gain from disposal of investment amounted to RM45.7m in 1Q22 (4Q21: RM101m) as a result of disposal of a marginal 3% stake in LC USA’s ethane cracker to Axiall.

• Key highlights. 1Q22 plant utilization (PU) declined to 85% (1Q21: 88%, 4Q21: 88%) as the company reduced its ethane cracker plant load due to high feedstock costs. Management also lowered its guidance on FY22F utilisation rate to 80-85% from 85-90% after taking into account both challenging product spread and PP3 plant turnaround scheduled in May 2022 for 20 days.

• Against estimates: Below. 1QFY22 core profit of RM58m was below both our and consensus’ forecast at 9% and 17% respectively.

• Outlook. Product spread remains volatile in tandem with oil price movement. However, it could potentially be further pressured by the new supply from Petronas’ Pengerang Integrated Complex which may be commercialised starting 2H22. As such, we trim our FY22F earnings forecast by 51% to RM320m.

• Our call. Maintain HOLD on Lotte Titan with lower DCF-derived TP of RM2.20 (from RM2.40) (see Table 4). Our TP excludes potential contribution from its LINE expansion project in Indonesia which is targeted to begin commercial operation in FY25. Our TP also implies 17x FY22F P/E which is close to its 4-year mean forward P/E (see Chart 2). At current price level, we think the market has fairly price in its earnings risk from product spread contraction.

Source: BIMB Securities Research - 29 Apr 2022