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LCTITAN
ALL TIME HIGH SALES VOLUME AT ELEVATED ASPs?
HOW LONG CAN THIS LAST?
AND, AIMING TO TRIPLE REVENUE IN 5 YEARS.
MACRO VIEW: GLOBAL POLYOLEFIN MARKET GROWS IN TANDEM WITH POPULATION GROWTH
Source: Mordor Intelligence
The Polyolefin market is segmented by 4 material types: Polyethylene (PE), Polypropylene (PP), Polyolefin Elastomer, and Ethylene Vinyl Acetate.
As PE and PP are used almost throughout the entire plastic fabrication industry, the demands of PE and PP are expected to grow in tandem with global population growth.
North America has the largest polyolefin market.
Asia Pacific has the fastest-growing polyolefin market.
CYCLICAL PETROCHEMICAL INDUSTRY
The petrochemical industry has been cyclical. It is characterised by periods of tight supply, leading to high utilisation rates and margins, followed by periods of oversupply primarily resulting from significant capacity expansions, leading to reduced utilisation rates and margins.
The demand and supply may favour one position or the other for an extended period of time and may not rebalance quickly. Due to various factors such as market conditions, natural disasters and geopolitical dynamics, it is not possible to predict the supply and demand balances accurately.
Recently, due to a natural disaster, PE & PP in the US and US export markets are now undersupply. This phenomenon may benefit LCTITAN.
DUE TO NATURAL DISASTER, PP & PE IN THE US ARE NOW UNDER-SUPPLIED
1 September 2020
(Source: Plastic Today,https://www.plasticstoday.com/resin-pricing/weekly-resin-report-hurricane-caused-disruption-further-tightens-pp-pe-supplies)
9 September 2020
(Source: Plastic Today, https://www.plasticstoday.com/resin-pricing/weekly-resin-report-spot-resin-prices-soar-trading-sets-hectic-pace)
11 September 2020
(Source: ICIS, https://www.icis.com/explore/resources/news/2020/09/11/10551826/insight-prolonged-us-chemical-plant-shutdowns-squeeze-tight-markets)
LCTITAN MANUFACTURES PE & PP, RAW MATERIALS FOR THE PLASTIC FABRICATION INDUSTRY
LCTITAN’s main products are PE and PP. They make up more than 80% of LCTITAN’s revenue.
LCTITAN’s PE products include HDPE, LDPE & LLDPE. They are the most commonly used forms of polyethylene. LCTITAN’s PP products include PP homopolymer, random copolymer and impact copolymer.
LCTITAN’s products, PE, PP, olefin, and derivate products are raw materials for the plastic fabrication of multiple industries, including healthcare (gloves, masks, syringes, hazard bins), yarn & fibre, buildings and construction, industrial, automotive, household products, consumer packaging (food packaging, bottles and containers) and electrical appliances.
Amidst the COVID-19 pandemic, the demand of healthcare products, including gloves, masks, syringes and hazard bins increased. The demand of consumer packaging, including food packaging, bottles and containers also increased due to practices of food takeaways and social distancing.
NEAR ALL-TIME LOW RAW MATERIAL COST, ALL-TIME HIGH SALES VOLUME, POTENTIALLY ALL-TIME HIGH ASPS, ALL-TIME HIGH EARNINGS SEEMS POSSIBLE
LCTITAN generates earnings from the margin spread between polymers ASP and naphtha (raw material). Naphtha price is near all-time low. At the same time, ASP of PP and PE are expected to increase sharply in September and October due to the undersupply situation.
According to LCTITAN, highest sales volume recorded in the month of May of June, since its inception 29 years ago. Well, sales volume could go even high in August and September due to potential orders from the USA, at higher ASPs.
With near all-time low raw material cost, all-time high sales volume with potentially all-time high ASPs, all-time high earnings for Q3 seems possible. However, it is hard to determine exactly how long this situation will last.
LCTITAN’S PAST 3-YEAR EARNINGS BATTERED BY OVERSUPPLY
In the past 3 years, US polymer suppliers diverted cheaper products to Southeast Asia to avoid China’s tariff hike. There was also additional supply from China. This led to oversupply issues that eroded LCTITANS’s margins and earnings. In the same period, LCTITAN’s share price has dropped from RM6 to RM1.84 per share.
GROWING EXISTING MARKET, COULD BENEFIT FROM THE LARGEST POLYOLEFIN MARKET
Having existing customers from Malaysia, Indonesia, China, Hong Kong, Southeast Asia, Northeast Asia (also Indian Sub-Continent and others), LCTITAN is exposed to Asia Pacific, the fastest-growing polyolefin market. Due to recent supply and demand disrupts in the USA, LCTITAN may also benefit from America that includes North America. North America has the largest polyolefin market.
AIMING TO TRIPLE REVENUE IN 5 YEARS
LCTITAN envisions to be a top-tier petrochemical company in SEA and aims to achieve USD6.0 billion (RM24 billion) revenue in 2024, a 3x jump from USD2.0 billion (RM8 billion) revenue in 2019.
DECENT FINANCIALS
LCTITAN is net-cash. It has a healthy current ratio of 7.4x and zero gearing. LCTITAN has a cash balance of RM3.9 billion and a market cap of RM4.2 billion. Investors are only paying a ‘nett RM0.3 billion’ to ‘acquire a RM4.2 billion LCTITAN’. LCTITAN has an NTA of RM5.34. At a share price of RM1.84, the market is valuing LCTITAN at only 34% of its NTA – despite potentially all-time high earnings for its Q3.
RISKS
LCTITAN is positioned in the cyclical petrochemical industry. The oversupply situation has suddenly become an undersupply situation due to unforeseen natural disaster. If the issue of undersupply softens sooner than expected, LCTITAN's PE & PE's selling volume ASPs may normalise sooner than expected, too. On the other hand, the cost of raw material price, naphtha, may increase.
CONCLUSION
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Created by jomnterry | Oct 21, 2020