Lotte Chemical’s 1Q18 falls short on raw material costs
KUCHING: A spike in raw material costs has eaten into the margins of Lotte Chemical Titan Holdings Bhd (Lotte Chemical) in the first quarter of 2018 (1Q18) as product prices rose slowly with a lag-effect.
To note, Lotte Chemical’s 1Q18 core net profit came in at RM242 million which was below consensus expectations at 17.2 per cent of full-year forecasts.
The investment arm of Maybank Investment Bank Bhd (Maybank Research) said underlying demand remained strong on tight global supply- demand and margins should improve in 2Q18 as average selling prices (ASPs) have caughtup of late.
“The overall factory utilisation rate in 1Q18 was 83 per cent – 25 percentage points higher yearonyear and three ppts lower quarter- on- quarter. This was however lower than management’s guidance for near 90 per cent utilisation rate in FY18,” it said in a note yesterday.
“The Indonesian operations were not profitable during the period due to insufficient margin converting ethylene (raw material) into polyethylene (final product).
“Therefore, the management has curtailed the Indonesian operations whenever there was negative margin. The margin has turned positive since late March 2018 and the operation has been reinstated.”
Maybank Research expected utilisation rate to climb higher and approach the 90 per cent level from 2Q18 onwards.
“All the major maintenance activities have been performed and Lotte Chemical has taken steps to enhance its operations. This should provide it with a higher degree of operational reliability and lower production cost.
“We make some adjustments to our FY18 core net profit forecast on the weaker- than- expected 1Q18 results. First, we lower our overall factory utilisation rate assumption by three ppts from 90 per cent to 87.
“Second, we raise our naphtha price assumption by US$20 per metric tonne from US$550 per mt to US$570 per MT, this represents an increase of 3.6 per cent.
“Based on these, our FY18 core net profit forecast is lowered by 7.1 per cent to RM1.30 billion which still represents a decent growth of 19.5 per cent y-o-y. Our previous earnings forecast was RM1.40 billion.”