• Overview. LC Titan fell into a headline loss of RM146mn in 2Q22 mainly due to inventory write-down charges of RM97mn and unrealised forex loss of RM19mn. Excluding these items, it was still in core loss of RM30mn mainly due to the impact of higher feedstock cost which reduced its product spread and margin (see Chart 1). Consequently, EBITDA margin dwindled to 2% (2Q21: 23.6%, 1Q22: 6.0%) despite revenue rose by 10% YoY and 2% QoQ to RM2.8bn. Note that naphtha price peaked at USD1,000/mt in 1Q22 and this was expensed as cost of goods sold in 2Q22 as there is usually a 1.5- 2 months lagging impact. Income from associate company declined to RM1mn amidst higher ethane gas price and lower utilisation rate.

• Key highlights. Management reduced the plant utilization (PU) to 81% (2Q21: 86%, 1Q22: 85%) to mitigate the impact of weak product spread. This brings its 1H22 utilisation rate to 83%.

• Against estimates: Inline. The weak product spread is well within our expectation. While its 1HFY22 core profit of RM28m only made up only 9% of our full year forecast, we deem this as within our estimate. It also only made up 11% of consensus’ forecast.

• Outlook. Despite near-term challenges, the company’s balance sheet remains solid with net cash of RM3.2bn. Excluding RM2.3bn which is earmarked for its growth project in Indonesia, its cash balance remains healthy at RM900mn (or RM0.40/share).

• Our call. Maintain a HOLD call on Lotte Titan with unchanged DCF-derived TP of RM2.20 (see Table 4). Note that Our TP still excludes potential upside from its LINE expansion project in Indonesia which is targeted to begin commercial operation in FY25F. 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 Jul 2022