• Maintain BUY (TP: RM1.32). Lotte Chemical Titan (LC Titan) 9MFY23 core LATAMI of RM735mn exceeded our forecast of RM656mn and thus below our estimate. Nonetheless, it remains in recovery trajectory with core losses narrowing by 11% QoQ to RM213mn. That was driven by higher sales volume despite utilisation rate (UR) was underwhelming at 66%. Following weak 9MFY23, we cut our earnings estimate accordingly. We maintain a BUY call on LC Titan, but with a lower DCF-derived TP of RM1.32 (from RM1.56). This implies 0.3x FY24F P/B. We believe the company will pose further recovery ahead despite at gradual pace.

• Key highlights. In 3QFY23, UR was largely flattish at 66% (2Q23: 66%) as the company undertook maintenance activities at Indonesian plants. Nonetheless, sales volume rose by 9% QoQ to 436k MT (2Q23: 400k MT) which led to higher revenue to RM2bn (5.5% QoQ) and narrower core loss. Total debt rose to RM3.7bn (2Q23: RM1.8bn) as it made further drawdown from its term loan facility amidst the construction progress of Lotte Indonesia New Ethylene (LINE) project. Hence, gross debt to equity ratio rose to 18%. Further drawdown is expected in 4Q23 which put the company at risk to exceed the conventional debt threshold of 33% and losing its shariah compliance status by May 24.

• Earnings Revision. We tweaked our FY23-25F earnings forecast lower to net loss of RM1bn/RM513mn/RM7mn (Table 4) as we lower down our UR assumption to 73%/78%/85% (from 78%/88%/88%) for FY23F/FY24F/FY25F respectively.

• Outlook. Management has further lowered down its FY23 UR guidance to 65-70% from 70-75%. Despite near-term challenges, we are positive on its long-term outlook due to (i) its counter-cyclical capacity expansion project in Indonesia (LINE project), and (ii) strong financial condition with further gearing headroom to withstand current downcycle in petrochemical sector.

Source: BIMB Securities Research - 27 Oct 2023