“Lotte is expected to benefit from lower naphtha feedstock costs following the collapse in crude oil price. Additionally, its plant utilisation rates are also expected to recover following completion of statutory plant turnarounds in April, ” TA Research said in a report.
PETALING JAYA: Lotte Chemical Titan Holding Bhd saw renewed investor interest as a turnaround in earnings is potentially seen for the company in the second quarter on the back of higher product spreads because of the sharp drop in naphtha prices.
Its shares ended 16 sen or 10.39% higher to RM1.70 with 68.03 million shares done. The stock was one of the most actively traded yesterday.
“Lotte is expected to benefit from lower naphtha feedstock costs following the collapse in crude oil price. Additionally, its plant utilisation rates are also expected to recover following completion of statutory plant turnarounds in April, ” TA Research said in a report.
The prices of naphtha, which is a main feedstock used for petrochemical production, are highly correlated with crude oil as it is generally produced during the refining of crude oil.
The manufacturer of petrochemicals and polymers posted a net loss of RM170.06mil in the first quarter ended March 31,2020 due to margin squeeze following a plunge in average selling prices (ASPs) of its products. Tepid demand saw sales volume coming in lower by close to a quarter year-on-year (y-o-y).
The company also made a larger writedown of inventories as raw material inventory costs were higher, plus there was a surge in associate losses.
Maybank IB noted that in April, the domestic polymer sales volume fell by about 50% y-o-y, while the export is supported by sales to China.
Polymer accounts for 80% of Lotte’s sales volume, out of which half is derived from the domestic market.
“Imputing for a gradual demand recovery in May-Jun, we expect the group’s total sales volume to be weaker by 10%-20% y-o-y but to increase by 10%-20% quarter-on-quarter (q-o-q).
“Coupled with a higher spread q-o-q, we expect Lotte to turn profitable in the second quarter, ” Maybank IB said in a report.
It said the present high-density polyethylene (HDPE) and polypropylene spread are higher than first-quarter 2020 level and similar to that of first quarter 2019 (where first-quarter 2019 core profit after tax and minority interests came in at RM71mil).
Maybank IB sees the worst is over for the company and has upgraded the stock to a “buy” from a “sell” previously with a higher 12-month target price of RM1.85 (from RM1.70 before).
It believes the market had already priced in the first quarter losses with the stock having lost more than one-third of its value year-to-date.
Similarly, CGSCIMB has also upgraded the stock to an “add” from “reduce” and upped the target price to RM1.97 from RM1.62 previously.
The research firm said Lotte’s second-quarter 2020 forecast earnings would no longer be significantly dragged down by the lagged impact of high naphtha costs after writing down the carrying value of its naphtha inventory to the end-March spot price of US$175 per tonne, which is not too far from today’s US$160 per tonne.
“While the selling prices of polyethylene and polypropylene have also dropped, their decline has not been as sharp as the naphtha cost decline, resulting in a substantial expansion of spreads. The HDPE-naphtha spread, for instance, has increased from an average of US$471 per tonne in 2019 and US$400 per tonne in first quarter 20, to US$554 per tonne in April, ” said CGSCIMB.
The spread began to widen in March, after the start of the Saudi-Russian oil price war. Assuming that the April spreads persist for one entire year, Lotte’s annual core net profit could rise to RM600mil to RM700mil, said the research firm.
However, CGSCIMB said its FY20 core net profit forecast for Lotte is currently “only RM434mil”, as it assumes the spreads would gradually narrow as more players ramp up production to take advantage of the strong spreads, not least PETRONAS CHEMICALS GROUP BHD at Pengerang, Johor.
On the other hand, TA Research said lower naphtha feedstock costs may not translate to profit turnaround, given potential weakness in ASPs and sales volumes. The latter is underpinned by demand destruction caused by Covid-19 lockdowns and economic recession. It maintains a “sell” on the stock.
https://www.thestar.com.my/business/business-news/2020/05/01/lotte-shares-up-on-potential-turnaround-in-q2
