LCC has Initiated a Selling Process for LC Titan
Media has reported that Lotte Chemical Corp (LCC) is exploring to sell all its 74.7% stake in Lotte Chemical Titan (LC Titan) by approaching potential buyer via investment banks. Following the media report, LC Titan has confirmed that its parent is considering various strategic measures related to its stake without making any decision thus far.
Portfolio Review could be the Main Motive
We are not too surprised with the news as it barely echo weak market sentiment over the outlook of petrochemical segment particularly in basic petrochemicals. However, we believe portfolio review is the main intention behind this move. Based on current LC Titan market cap, it is estimated that LCC will be able to generate a sale proceed of c.USD400mn which can be channelled towards investment in highvalue and growth markets such as materials for batteries, specialty chemicals and renewable energy.
Will LCC Exit Marks the End?
Even if the disposal of LC Titan’s shares to be materialised, we believe it will not lead to a total break-up given existing entrenched business relationship between the companies particularly in investment of two large-scale petrochemical complexes in US and Indonesia. To recap, LCC and LC Titan have respectively formed a 60:40 JV in an investment project worth USD3.1bn that leverages on competitive shale gas feedstock in Louisiana, US. Besides that, a 49:51 JV was also formed to invest in a new ethylene cracker project (LINE project) that is worth USD4bn located in Indonesia with close proximity to strong growth market in SEA. We think LCC will continue to hold on to these assets given the strategic benefits that both sites offer. As such, we think the exit of LCC will not have a direct impact to the fundamental of LC Titan. Hence, no changes is made to our earnings forecast.
Upgrade to TRADING BUY, TP Maintained at RM1.39
We upgrade LC Titan to a TRADING BUY (from a HOLD) with unchanged TP of RM1.39. Our TP implies 0.3x FY24F P/B (Table 1). Note that our TP still excludes earnings potential from its LINE expansion project in Indonesia which is targeted to begin commercial operation in FY25/26F. Against its peers, we note that the stock is trading at 0.2x FY24 P/B which is at discount to Chandra Asri and KPIC (refer to Table 2) which currently are trading at 5.4x and 0.5x of FY24 P/B respectively.
Source: BIMB Securities Research - 11 Mar 2024
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