• 9M23 core net loss of RM746m was in-line at 73% of our previous FY23F forecast, but we widen FY23-25F loss forecasts on higher feedstock prices.

• We expect the lagged effect of higher crude oil prices since mid-2023 to cause 4Q23F core net loss to widen from the 3Q23 level.

• Reiterate Reduce with a lower target price of 94 sen (from RM1), still based on P/BV of 0.2x (historical trough), but rolling forward to end-CY24F.

Sixth Consecutive Quarterly Loss in 3Q23

3Q23 core net loss of RM230m was flattish against 2Q23’s RM235m core net loss. The dip in crude oil and naphtha prices in 2Q23 helped narrow LC Titan’s 3Q23 EBIT loss from the immediately-preceding quarter, since LC Titan keeps stock of naphtha and any drop in spot feedstock prices tends to benefit LC Titan’s financial performance with a lag. However, any benefit to LC Titan in 3Q23 from lower feedstock costs was offset by the recognition of lower qoq tax credits, and wider qoq share of US associate losses due to the deterioration in the MEG-ethane spread. For 9M23, LC Titan’s core net loss of RM746m was 150% wider than 9M22’s RM299m core net loss, due to the sharp decline in polymer and MEG selling prices in 1H23 (vs. 1H22), which was followed by a weak recovery since mid-2023 from a partial flowthrough effect of rising crude and naphtha prices.

De-rating Catalysts Include a Likely Qoq Wider Loss in 4Q23F

The outlook for LC Titan in 4Q23F looks weak, since spreads against naphtha of polymer and MEG prices in the immediately-preceding 3Q23 declined to their lowest levels so far this year, which will impact LC Titan negatively with a lag . For example, HDPE-naphtha spreads dropped to this year’s low of US$371/tonne in 3Q23 (Fig 12-13), and we make the same observations for LDPE-naphtha, PP-naphtha, and MEG-naphtha spreads (Fig 14- 19). Consultancy Chemical Market Analytics (CMA) noted last week that Asian PE and PP demand has been subdued due to weak demand for finished goods exports from China, which is dependent on demand from the US and Europe. CMA also noted that supply of polymers is ample, which has prevented polymer selling prices from rising significantly in recent months. This delicate situation puts naphtha-based petrochemical producers like LC Titan at the mercy of potentially-higher feedstock prices, especially in an environment of heightened geopolitical risks. Furthermore, we think Petronas Chemicals may achieve commercial operations for its Pengerang plants in 1H24F, and the resulting output of polymers and MEG may intensify competition with LC Titan and erode domestic prices.

Another De-rating Catalyst Is the Potential Loss of Shariah Status

In our view, LC Titan may lose its shariah-compliant status at the May 2024F review by the Securities Commission. This is because LC Titan’s non-shariah-compliant debt drawdown for the construction of a new Indonesia naphtha cracker may breach the threshold of 33% to total assets by end-FY23F. Upside risks include an unexpected decline in feedstock costs, and better-than-expected consumer demand recovery in 1H24F.

Source: CGS-CIMB Research - 27 Oct 2023