not vested
Analysts have mixed views on Lotte ChemicalsBy INTAN FARHANA ZAINUL
NORMALLY, cash-rich companies with low borrowings are highly sought after by investors.
That, however, does not necessarily seem to be the case with Lotte Chemical Titan Holdings Bhd (LCT). Although it is sitting on
RM4bil cash with zero gearing, the cash position was due to underutilisation of the proceeds it raised from its initial public offering (IPO) back in 2017.
Listed at RM6.59 per share in July 2017, the stock has been on a downtrend since then to hit a low RM1.15 on March 20,2020.
However, in recent weeks, the stock has climbed by almost 50% to close at RM1.70 on Thursday.
Maybank IB Research recently upgraded LCT to a “buy”, giving the stock a target price of RM1.85 per share.
Despite its billion ringgit sales, LCT is trading at a single-digit price-earnings (PE) ratio of 8.8 times.
LCT earnings have been lumpy as the company is mainly in the commodity business, which is driven by economic swings.
The company, when announcing its first quarter results last week, said it will be impacted by the economic slowdown due to the coronavirus pandemic.
Interestingly, during the movement control order (MCO), which started on March 18, LCT said its operations continued as it is deemed an
essential service.LCT provides vital
raw materials to the plastic packaging and healthcare sector.
LCT is in the business of petrochemicals which are converted into products like plastic, gels, paint and fertilisers.
For the first quarter ended March 30, the company posted
RM170mil in losses compared with a loss of RM55.83mil a year earlier. This was due to
lower average selling prices, expensive raw materials, a decline in sales and writedowns in inventories.LCT’s revenue for the quarter dropped by 2.63% to RM1.46bil from RM2.17bil previously.
However, many equity analysts are bullish on the company’s prospects due to the collapse in global crude oil prices, which brings down LCT’s raw material costs. Maybank IB Research expects that the worst is over for LCT and that the company could turn profitable in the second quarter stemming from demand recovery in May and June.
Despite giving a “buy” recommendation on LCT, the research house cut its earnings forecast on LCT’s financial year 2020 by 87% to include losses in the first quarter, and lower sales and profit from its associate in the US.
However, the research house believes the market has already priced-in LCT’s first quarter loss, with the stock having lost around a third of its value, year-to-date.
Meanwhile, CGS-CIMB Research said the losses in the first quarter were higher than its earlier forecast due to LCT’s plant turnaround activities.
CGS-CIMB reckons that with the recent sharp drop in naphtha prices, which is LCT’s main feedstock, the company would see a better result in the second quarter.
The research house also has a “buy” call on LCT but expects sales to drop by 21% this year.
According to Bloomberg data, four analysts are recommending a “buy” on LCT, one suggests “hold” while another three have a “sell” on LCT.
TA Research, which has a “sell” call, says that lower naphtha feedstock costs may not translate to a profit turnaround given the potential weakness in average selling prices and sales volumes. The research house has cut its earnings forecast for LCT by 118% for this year and expects the company to record losses of RM47.3mil for the year.
Delay in Indonesia project
In 2017, LCT went into the public market to raise money to finance its expansion in Indonesia among others. The group had planned to use IPO proceeds to fund the development of an
RM18bil integrated petrochemical facility in Indonesia.On Wednesday, LCT hinted that the project’s commissioning date may be delayed as a result of the current global oversupply situation.
The company had targeted to start construction in the later part of 2020 with hopes to
complete the project by 2023.Last year, LCT sold a 49% stake in the Indonesian petrochemical facility to its major shareholder Lotte Chemical Corp (LCC) for RM3.6bil.
While the partnership is a boon for LCT, the company would
need to raise another RM11bil to fund the project that may be tough as some banks are shying away from oil and gas-related companies.
Notably when LCT was listed in 2017, it was initially planned to be priced at RM8 per share but that price was cut down to RM6.50, after the book building process. The floatation was also downsized by about 33% via a cut down in issuance to institutional investors after the price discovery process.
Since its IPO, LCT’s share price has been on a downward spiral. Looking at the current volatility in the market and slow down in economic activity, will LCT’s price ever recover to anywhere near its IPO price?
Source: The Star
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