Lotte Chem­i­cal re­mains op­ti­mistic de­spite set­backs

The Star Malaysia - StarBiz - - Companies & Strategies - By P. ARUNA aruna@thes­tar.com.my

IT has not ex­actly been smooth-sail­ing for Lotte Chem­i­cal Ti­tan Hold­ing Bhd since its July list­ing.

Its share price took a hit after a mi­nor fire out­break at its TE3 project site last month, and then a stop-work order by the Depart­ment of Environment (DoE) on one of its re­ac­tors at in Pasir Gu­dang.

The com­pany later said the fire in­ci­dent had a mi­nor and con­tained im­pact on its op­er­a­tions.

On Oct 1, the TE3 project site re­ceived a stop-work order fol­low­ing “odour emis­sion and sur­face oil sheen dis­charge” from its project site into a waste water treat­ment plant, which was then lifted on Oct 6.

The com­pany’s fi­nan­cial re­sults for the two most re­cent quar­ters have not been en­cour­ag­ing ei­ther.

Net profit for the sec­ond quar­ter ended June 30 plunged 72% to RM113.6mil after a water dis­rup­tion in­ci­dent in April 2017, and on Thurs­day, the com­pany an­nounced its re­sults for the third quar­ter, which saw net profit slide 33.9% to RM230.3mil.

The petro­chem­i­cal player cited an av­er­age lower util­i­sa­tion rate of 77% com­pared to 92% a year ago as among the pri­mary rea­sons for the fall in profit, caused by a statu­tory rou­tine turnaround for its Cracker 1 plant in Malaysia.

While the com­pany’s net profit for the third quar­ter was an im­prove­ment from the pre­vi­ous quar­ter, the com­pany seems to be in dire need for some good news to boost sen­ti­ment.

At its cur­rent share price, Lotte Chem­i­cal is still the cheap­est Asian petro­chem­i­cal stock, and of­fers re­spectable div­i­dend yields, May­bank In­vest­ment Bank Re­search pointed out in a re­cent re­port.

Lotte Chem­i­cal, with its pol­icy of pay­ing out 50% of its prof­its, re­mains an at­trac­tive op­tion for in­vestors, re­gard­less of its se­ries of un­for­tu­nate events of late, the re­search house added.

Div­i­dend at­trac­tion

Look­ing at its most re­cent fi­nan­cial re­sults, it is no­table that the com­pany’s earn­ings per share (EPS) for the first nine months of FY2017 stands at 36.29 sen.

Lotte Chem­i­cal re­ported an EPS of 10.42 sen for its re­cent third quar­ter.

As­sum­ing it main­tains this EPS per­for­mance in its com­ing fourth quar­ter, this would bring the full year EPS to 46.71 sen.

Ap­ply­ing this EPS of 46.71 sen to Lotte Chem­i­cal’s 50% div­i­dend pol­icy, this trans­lates to a div­i­dend per share of 23.35 sen.

Based on the counter’s clos­ing price of RM5.19 on Fri­day, this rep­re­sents a de­cent yield of 4.4%.

And this is just based on an as­sump­tion of 10.42 sen EPS for the fi­nal quar­ter, al­though the com­pany as well as an­a­lysts are fore­cast­ing a stronger fourth quar­ter.

“For a stock trad­ing at RM5.19, an EPS of 43 sen for the full year is still at­trac­tive, at al­most 12 times its price earn­ings (PE) ra­tio.

“Lotte Chem­i­cal re­mains a good pick in terms of its val­u­a­tions,” an an­a­lyst ex­plains.

Aside from this, it is also no­table that the com­pany has an im­pres­sive RM3.6bil in cash and zero debt.

Mov­ing for­ward, the com­pany has in­di­cated a strong fi­nal quar­ter, with no more sched­uled shut­downs of its plants, which means util­i­sa­tion rates and out­put will re­cover. Also, its new TE3 plant is ex­pected to be­gin com­mis­sion­ing dur­ing this pe­riod.

The TE3 project is Lotte Chem­i­cal’s KBR cat­alytic olefins tech­nol­ogy cat­alytic crack­ing re­ac­tor that will be at­tached to its ex­ist­ing sec­ond naph­tha cracker plant in Pasir Gu­dang. The com­pany says its re­sults for the full year will be pri­mar­ily af­fected by three fac­tors - the de­mand and sup­ply bal­ance of petro­chem­i­cal prod­ucts; its abil­ity to max­imise pro­duc­tion out­puts and op­er­a­tional ef­fi­ciency; and feed­stock prices, which are cor­re­lated to crude oil prices.

On the de­mand and sup­ply bal­ance, the com­pany tells Star BizWeek that it ex­pects the petro­chem­i­cals mar­ket to re­main re­silient in the near term. “We an­tic­i­pate that the petro­chem­i­cals mar­ket will con­tinue to be re­silient in the near term with de­mand growth for petro­chem­i­cals to out­pace the rate of new sup­ply ad­di­tions in the re­gion,” it says.

It also hopes to ride on the con­tin­ued in­crease in de­mand for poly­olefin prod­ucts fol­low­ing the im­pact of Hur­ri­cane Har­vey in the US. In terms of pro­duc­tion out­puts and op­er­a­tional ef­fi­ciency, Lotte Chem­i­cal looks to be on track as well, with its util­i­sa­tion rate set to re­cover.

The one fac­tor to watch, how­ever, will be crude oil prices, be­ing the main feed­stock for petro­chem­i­cals.

The petro­chem­i­cal in­dus­try is af­fected by fluc­tu­a­tions in crude oil prices, with lower crude oil prices over the past years hav­ing con­trib­uted to in­creased mar­gins for firms like Lotte Chem­i­cal and its lo­cal com­peti­tor Petronas Chem­i­cals Group Bhd.

Flammable liq­uid hy­dro­car­bon mix­ture, naph­tha, is the ma­jor feed feed­stock or raw ma­te­rial for the petro­chem­i­cals man­u­fac­tur­ing in­dus­try. The price of naph­tha tracks the price trend of crude oil, be­ing a prod­uct from the re­fin­ing of crude oil.

Lotte Chem­i­cal has pre­vi­ously stated that it is com­fort­able with oil prices at below US$60 per bar­rel.

Last month, a se­nior econ­o­mist from the World Bank said oil prices could re­main below US$60 per bar­rel for the long term, per­sist­ing at these lev­els un­til 2030, which would be good news for petro­chem­i­cal play­ers like Lotte Chem­i­cal.

Asked it has hedged its raw ma­te­ri­als to shield the com­pany from the pos­si­bil­ity of oil prices mov­ing above the US$60 mark, Lotte Chem­i­cal tells StarBizWeek it “does not hedge its raw ma­te­ri­als in any fi­nan­cial in­stru­ment”. It adds that the sup­ply and de­mand sit­u­a­tion has more im­pact on the petro­chem­i­cal in­dus­try, com­pared to the im­pact of oil price move­ment. Over­all, the fi­nal quar­ter looks promis­ing for Lotte Chem­i­cal, as long as there are no more un­ex­pected un­for­tu­nate in­ter­rup­tions at its plants, the de­mand for petro­chem­i­cals re­mains ro­bust as fore­casted and oil prices con­tinue to stay at its cur­rent lev­els of below US$60.

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