Lotte Chemical remains optimistic despite setbacks
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.