LCTITAN is coming back to the local equity market again to raise RM5.92b for its capacity expansion programs. Currently, it is the largest polyolefin producer in Malaysia and Indonesia, and the fourth largest in Southeast Asia. With the new projects coming on stream over the next five years boosting its capacity by 73% to 5,208 KTA, LCTITAN should be able to ride on the huge demand potential in the region. We reckon the RM8.00/share offer price is fair and we value it at RM9.05/share. We recommend investors to SUBSCRIBE to the IPO. Another comeback kid. Lotte Chemical Titian Holding Bhd (LCTITAN) is making a comeback after being privatised by its parent Lotte Chemical Corp (LCC) of Korea six years ago. It is an integrated petrochemical producer involved in the production of two product categories, namely polyolefins and olefins. Polyolefins are used to produce a variety of consumer and industrial products while olefins are used as primary feedstock for the production of polyolefin products. Currently, 80% of revenue is generated from polyolefin products. In fact, it is the largest polyolefin producer in Malaysia and Indonesia, and the fourth largest in Southeast Asia.

Fund raising for capacity expansion. LCTITAN expects to raise RM5.92b from this IPO exercise, the biggest in recent years, with the issue of 740.5m new shares at an indicative retail price of RM8.00/share. The proceeds from this IPO will be utilised to fund its two projects in Malaysia, namely TE3 and PP3, and the ambitious USD3.5b Integrated Petrochemical Facility in Indonesia. We laud its decision to expand further in Indonesia given the huge demand growth potential there. In addition, LCTITAN also has a 40% equity stake with investment of USD511m in US Shale Gas project with LCC. All these four projects with total budgeted capex of RM15.77b will bring up its capacity by 73% to 5,208 KTA by end-2022 from 3,014 KTA currently.

Earnings to grow 12%-15% moderately. LCTITAN managed to turn around after a dismal year in FY14 with significant improvement of net profit of RM1.32b in FY16 from net loss of RM19.2m thanks to better market condition as well as improvement in operational and financial competitiveness. This is expected to grow further into FY17 and even stronger in FY18 with the completion of TE3 project in 2H of this year while the PP3 project is scheduled to commence production in 2H of 2018. Based on its dividend policy of distributing 50% earnings, it offers net yield of 3%-4%. On the other hand, the major earnings impact from the expansion plan will be felt in 2023 when the Integrated Petrochemical Facility in Indonesia starts commercial operations.

Offer price is reasonable; SUBSCRIBE. At RM8.00 offer price, the stock is priced at 11.7x of CY18 earnings multiple which we reckon is reasonable as it is priced at a 20% discount to its Malaysia peer

PCHEM (OP; TP: RM8.09) of 14.6x and a 10% discount to the regional peer average of 12.9x. PCHEM always trades at premium given its feedstock cost advantage. As such, we value LCTITAN at 13.2x CY18 PER, which is at 20% discount to our targeted PER of 16.5x for PCHEM, to derive a fair value of RM9.05/share. This valuation is fairly in line with regional peers’ current PER of 12.9x. Risks to our fair value include (i) decline in profit spread and sales volume and (ii) unplanned plant outages.

Source: Kenanga Research - 28 Jun 2017