LOTTE BHD CHEMICAL TITAN HOLDINGS

Target Price: RM8.50

LOTTE Chemical Titan Holdings Bhd’s fire accident at its PP3 expansion plant in Pasir Gudang, Johor was reported to be minor, according to CIMB Research.

Plants are operating as usual interruptions.

Meanwhile, after the disappointing second quarter 2Q17 results due to the unplanned shutdown because of water shortage and multiple non-recurring items, CIMB Research expects Lotte’s net profit to recover in the third quarter of 2017.

“We project average utilisation rate of 80% in the third quarter of 2017 for Lotte.

“This is higher than the 70% in second quarter due to water shortage and 60% in the first quarter due to the 53-day planned shutdown of naphtha cracker #2 (longer with no than the planned shutdown of 33 days in 3Q17 for naphtha cracker #1).

In the meantime, CIMB Research has projected Lotte to continue to improve its overall utilisation rate from 80% in the third quarter of 2017 to 90% in the fourth quarter of 2017, bringing the average utilisation rate for FY17 to 75%.

“This is in line with our projection. We believe the third quarter and fourth quarter 2017 earnings will be strong at RM0.2bilRM0.5bil per quarter, thanks to high margins for HDPE-naphtha, benzene-naphtha and PP-naphtha, which would more than offset the weak BD-naphtha margin,” the house said.

The research firm does not think that the water damage caused by the unplanned water shortage during the second quarter would recur because Lotte plans to expand its water storage capacity from one day currently to two days by the end of fiscal 2018 forecast.

The company has decided to only start plant operations when it is confident that there will be sufficient and consistent water supply.

The stock is trading at only 3.2 times FY17 forecast earnings before interest, tax, depreciation and amortisation, significantly below its regional peers’ average of 8.3 times.

CIMB thinks Lotte remained attractive given the anticipated strong earnings growth recovery post second quarter 2017.

This is driven by utilisation rate improvement that is expected to go on in the third to fourth quarter of 2017.