- Overview. Lotte Chemical Titan (LC Titan) core loss widened to RM296mn in 3Q22 amidst weak demand. Product margin spread deteriorated further which prompted the management to reduce plant load by opportunistically conducting statutory turnaround activities at selected cracker and polymer plants. This resulted in weaker utilisation rate of 69% and EBITDA turning negative at RM221mn. Its associate company, LC USA also fell into losses as it was affected by falling MEG price and higher gas feedstock cost.
- Key highlights. On QoQ basis, average polymer product margin spread plunged to USD315/mt from USD460/mt in 2Q22.
- Against estimates: Below. 9M22 core loss of RM267mn was below our expectation, mainly due to shortfall in 9M22 utilisation rate of 78% against our assumption of 87%. Following this, we cut our FY22- 23F earnings forecast to core loss of RM600-650mn as we tweaked our utilisation rate assumption lower to 78%.
- Outlook. Note that we have imputed the worst case scenario assumption (i.e., market downturn to last until end FY23) in our projection. Notwithstanding that, the company’s balance sheet remains solid with net cash of RM2.6bn. Excluding RM1.7bn which is earmarked for its growth project in Indonesia, its cash balance remains healthy at RM900mn (or RM0.40/share).
- Our call. Maintain a HOLD call on LC Titan with lower DCF-derived TP of RM1.56 (from RM2.20) following our earnings downgrade. Note that our TP still excludes potential upside from its LINE expansion project in Indonesia which is targeted to begin commercial operation in FY25F. Key risk to our call is prolonged market downturn that is against our assumption that market will recover beginning FY24.
Source: BIMB Securities Research - 28 Oct 2022
