This article first appeared in The Edge Financial Daily on August 2, 2017 - August 8, 2017

KUALA LUMPUR: Lotte Chemical Titan Holding Bhd (LCT) was not aware that the water disruption at its Johor-based petrochemical plant would have such an oversized impact on its second-quarter earnings during its initial public offering (IPO), said its president Lee Dong Woo (pic).

The water shortages occured in April, before the group went for listing. Lee claimed that the full impact was not known to the company until mid-July — after LCT had already been listed.

The water shortages were largely to blame for LCT’s shockingly poor second quarter ended June 30, 2017 (2QFY17) results, something that many analysts and fund managers did not anticipate because LCT’s management did not flag it as a potential concern. Compared with 1QFY17, earnings before interest, taxes, depreciation and amortisation (Ebitda) fell by 47.2% to RM259 million. Approximately 51% of the fall in Ebitda was blamed on the water shortage.

“We did not know that the water disruption would have such an impact on our bottom line,” Lee told The Edge Financial Daily in an exclusive interview yesterday.

Lee assured shareholders that the 2QFY17 results will not affect the earnings in 3QFY17. However, 3QFY17 earnings will be dampened by a scheduled turnaround of another plant, NC1, in Johor between July and August.

“That plant (NC1) is smaller than the other plant that was affected by the water disruption,” said Lee, adding that the LCT expects total plant utilisation to be higher than 71% in 2QFY17.

Additionally LCT also registered a non-operational loss of RM21.9 million in the quarter as a result of fair value changes in derivatives, namely total return equity swap, due to the fall in the share price of the underlying asset — LCT’s 95%-owned subsidiary PT Lotte Chemical Titan Tbk. LCT booked in a net gain of RM40 million in the preceding quarter; hence this resulted in RM62 million swing in Ebitda.

“Our fundamentals are strong, and our prospects are still more or less unaffected,” said Lee, who described things that happened in 2QFY17 were a “perfect storm”.

Its share price dipped by 23.33% to RM4.70 on Monday, on the day of the announcement. The loss was extended yesterday, as the stock dipped by further by 42 sen or 8.94% to its new low of RM4.28.

Over the last two days, some RM4.2 billion was wiped off from LCT’s market capitalisation after the fierce selldown of the counter, which made its debut on July 11, following the release of the quarterly earnings.

LCT’s net profit in 2QFY17 fell 72% to RM113.62 million from RM404.03 million in 2QFY16, on the back of an 11% revenue decline to RM1.78 billion. The decline was mainly due to an 11-day water supply disruption at its plant in Johor.

The water cut not only reduced production by 75,000 tonnes of polyolefins, but also translated into higher inventory costs in 2QFY17. This came after it kept additional feedstock on expectation that the newly serviced NC2 plant would resume operations in April — but the resumption was slowed down due to the water cut.

Lee said that the company could not evaluate the indirect impact from the water cut, apart from the production cut, as inventory costs may fluctuate depending on market price of the feedstock it had kept.

“We knew about the impact on production, as we have disclosed in the prospectus and to our advisers,” said Lee. “But the overall impact on our bottom line could only be measured by the time we closed our books in mid-July,” he said.

The lower 2QFY17 results were announced just under three weeks after its listing on July 11, which was the biggest in Malaysia since 2012. When asked if the trickle-down effect of the disruption apart from the production loss was brought to its advisers at the time, Lee said it was only discussed briefly.

“The impact on other parts [of the operations] was not discussed in detail because it could not be quantified at that point in time,” said Lee.

“We did the best we could with the information we had at the time. The issues have been discussed at the board, and we are looking at measures to prevent this from happening again,” he said.

According to Lee, the board had discussed the possible revision of its insurance scheme on utility disruptions, and better contingency plans, among others.

The Johor plant currently has reserve water for a single day of operation, which was not sufficient to meet the consumption for 11 days.