Review

• Lotte Chemical Titan Holding Bhd’s (LCT) 1HFY23 core net loss of RM543.5mn (1HFY22: RM93.8mn loss) came in below ours and consensus expectations. We previously forecasted a core profit of RM206.5mn for FY23. The negative variance is largely underpinned by lower-than-expected average selling prices (ASP) due to subdued demand.

• 1HFY23 revenue plunged 31.3% YoY mainly due to weakening ASP as well as lower sales volume from lacklustre regional demand. Sales volume for 1HFY23 declined 16.9% YoY while ASP was lower across the olefins and polyolefin products. Consequently, the group registered a LBT of RM676.8mn in 1HFY23 compared with LBT of RM87.5mn in 1HFY22. The deterioration in LBT is compounded by decline in margin spread, higher electricity costs (from electricity tariff hike) and higher share of loss from associate company Lotte Chemical USA Corp.

• Similar to 1QFY23, LCT intentionally reduced utilisation rates in 2QFY23 in-lieu of lower demand. This was reflected in lower plant utilization of 66% in 2QFY23 (1QFY23: 70%, 2QFY22: 81%).

• Not that the group’s borrowing has increased to RM1.8bn as of 2QFY23 from RM158.1mn as of 1QFY23 as the group finances the Indonesia LINE project. Management disclosed that the project is more than 50% completed and is targeted to complete by 2025.

Impact

• We lower our ASP and sales volume assumptions for olefins and olefin products for FY23-FY25. Following this, our FY23/FY24/FY25 forecasts are changed to -RM429.2mn/RM32.6mn/RM427.8mn (previously RM206.5mn/RM425.8mn/RM551.6mn).

Outlook

• Near-term earnings outlook remains challenging. We expect product spreads will continue to remain languish given the challenging global economic environment. On the back of relatively resilient naphtha costs and sluggish reopening of China’s economy, we expect losses to continue for the group in 2HFY23.

Valuation

• We roll forward our base year to CY24. Following the revision in our earnings forecasts, our target price is lowered to RM0.86/share (previously RM0.93/share). This is pegged to 10x CY24 EV/EBITDA. We maintain our Sell recommendation.

Source: TA Research - 28 Jul 2023