KUALA LUMPUR (Oct 28): Shares in Lotte Chemical Titan Holding Bhd (LCT) dropped as much as 10% on Friday (Oct 28), after posting a second straight quarterly loss of RM355 million for the third quarter ended Sept 30, 2022 (3QFY2022).

The counter, which earlier opened at RM1.35, lower than its previous closing price of RM1.47, later fell as much as 10.88% or 16 sen to RM1.31 in the morning trading session.

At 11.25am, the stock was still down 14 sen or 9.52% at RM1.33 per unit, bringing the group a market capitalisation of RM3.07 billion, with more than 4.6 million shares transacted so far.

On Thursday, LCT posted a net loss of RM355.5 million or 15.61 sen per share for 3QFY2022, compared to a net profit of RM48.48 million or 2.41 sen per share for 3QFY2021, despite higher revenue.

This was LCT's second straight quarterly loss. It made a wider net loss for the quarter under review, compared with the RM145.92 million loss for 2QFY2022 on a revenue of RM2.82 billion.

LCT attributed the wider quarterly loss to a decline in its margin spread of 26%, write-down of inventories to net realisable value of RM71.9 million, and the share of loss from associated company Lotte Chemical USA Corp, which was profitable a year ago.

Quarterly revenue, however, grew 6.12% to RM2.37 billion, from RM2.24 billion for the previous corresponding quarter, mainly due to an increase in average product selling prices.

For the cumulative nine months ended Sept 30, 2022, LCT made a net loss of RM397.43 million, versus a net profit of RM871.14 million a year ago, although cumulative revenue increased 11.3% to RM7.95 billion from RM7.15 billion.

CGS-CIMB analyst Raymond Yap in a note on Friday wrote that LCT suffered a substantial RM290 million core net loss in 3QFY2022, which may have been its widest-ever loss in history.

“LCT was not just in the red at the profit after tax and minority interest (Patami) level, it was also loss-making at the gross profit and earnings before interest, tax, depreciation and amortisation (Ebitda) levels, which we have never witnessed before, underlying how dire market conditions have been this year,” he said.

Yap further noted that although spot naphtha prices declined quarter-on-quarter (q-o-q) in 3QFY2022 from 2Q, LCT carried one to two months’ of naphtha inventory in its tanks and, as such, it booked the expensive naphtha purchased in 2Q into 3Q’s cost of sales on a lagged basis.

Polymer selling prices, on the other hand, fell 20% q-o-q in 3QFY2022, causing selling price-to-naphtha spreads to be insufficient to cover conversion cost and other manufacturing overheads.

Separately, LCT also booked in a large RM39 million share of loss from its 40%-owned US mono ethylene glycol (MEG) plant, which suffered from a marked reduction in MEG selling prices despite increases in US ethane feedstock cost.

“A negative gross margin suggests that the more LCT produces, the greater its loss will be,” he said.

Citing consultancy Chemical Market Analytics, Yap nonetheless said LCT’s situation was not unique, as many integrated producers across Asia cannot cover their cash production cost.

He said LCT had continued to produce to meet its customers’ needs in order to maintain the business relationships despite the negative gross margin in 3QFY2022.

“LCT did, however, throttle its plant utilisation rate to just 69% in 3QFY2022, and used the opportunity to perform plant turnaround activities — contrast this to the 87% utilisation in the first half of 2021, when margins and spreads were very supportive, after naphtha feedstock cost collapsed in the early days of the Covid-19 pandemic,” he added.

Looking ahead, Yap who maintained his “reduce” call with a lower target price of 94 sen from RM1.87 previously for LCT, said the outlook for 4QFY2022 remains dire, as average polymer and MEG prices declined in October relative to the average levels in 3Q.

However, he observed that naphtha prices also dropped q-o-q, and by more than the sequential decline in crude oil prices, as naphtha demand from crackers fell.

“Hence, we think that it may be possible for LCT to report a lower loss for 4QFY2022 compared to 3Q, although our estimated 4Q core net loss of RM216 million remains material,” he said.