Review

• Lotte Chemical Titan Holding Bhd (LCTITAN) registered a ninth consecutive quarterly loss in 2QFY24. 2QFY24 results came in within expectations. Core net loss was RM402.8mn compared with our forecast of RM653.0mn loss and consensus forecast of RM759.0mn loss respectively.

• QoQ: 2QFY24 revenue decreased 7.3%, primarily attributed to scheduled statutory maintenance, resulting in lower sales volume. This is despite the increase of ASP from the favourable movement in exchange rate of USD against MYR. LBT widened from RM213.7mn to RM331.7mn, due to changes in write down of inventories to net realisable value (from reversal of write down of RM24.7mn in 1QFY24 to write down of RM39.7mn in 2QFY24) and increased in share of losses from associate LC USA (+73.6% QoQ). Nonetheless, excluding extraordinary items such as write down of inventories, the core loss narrowed marginally to RM200.2mn from RM202.5mn in 1QFY24, driven by higher tax credit from unused tax losses.

• YoY: 2QFY24 revenue dropped 4.3% due to lower sales volume, dragged by the scheduled statutory maintenance. Despite lower revenue, LBT narrowed by 15.1% YoY from RM390.4mn to RM331.7mn, attributed to (i) lower gross negative margin (from better product spread); and (ii) lower write down of inventories. Excluding the impact of extraordinary items, the core net loss decreased by 14.2% YoY to RM200.2mn.

• Due to major statutory turnaround mentioned above, LCTITAN’s utilisation rate has dropped significantly to 47% in 2QFY24 (1QFY24: 65%, 2QFY23: 66%). The YTD utilisation rate is sitting at 56%. Management is still maintaining the 2024 full-year utilisation rate guidance at around 65-70%.

Impact

• No change to our earnings forecasts.

Outlook

• We expect losses to narrow slightly in 3QFY24 due to improvement in product spread for LDPE and LLDPE. LDPE and LLDPE may see slight improvement in ASP in 3QFY24 from seasonal increase in demand for flexible consumer packaging to cater for year-end holiday sales. Overall, LCTITAN is expected to continue facing losses in the coming few quarters as product spreads are unlikely to improve due to supply glut from massive capacity expansion (mainly in China) that outpaces the demand growth.

• The construction of LINE project in Indonesia is expected to be completed in 1H2025. However, management may defer the commercial operation of the plants if product spreads remain unfavourable.

Valuation

• As we incorporate an ESG Premium of 3%, we raise our TP to RM1.06/share (previous: RM1.03/share) pegged to 0.22x CY25 P/B ratio. Maintain Sell.

Source: TA Research - 1 Aug 2024