This article first appeared in The Edge Malaysia Weekly on August 28, 2023 - September 3, 2023

CONTINUING losses at Lotte Chemical Titan Holding Bhd (LCT), which put a dampener on its share price, have sparked discussions in investor forums of a corporate exercise, specifically a privatisation by its South Korean parent Lotte Chemical Corp (LCC) that has a 75.86% stake in the company.

LCT’s net profit of RM1.04 billion for the financial year ended Dec 31, 2021 (FY2021), was the second-best ever since its relisting on Bursa Malaysia in 2017, when it raked in RM1.06 billion. However, in FY2022, LCT slipped into the red with a net loss of RM745.1 million, no thanks to a decline in margin spread on the back of higher feedstock cost and weak market demand.

As a producer of olefins and polyolefins in Southeast Asia, LCT’s business profitability is dependent on the polymer-naphtha spread trend. Naphtha feedstock prices are closely correlated with crude oil prices, which are trading at above US$80 a barrel.

For perspective, the margin spread between polymer and naphtha widened to average above US$800 (RM3,720) a tonne in early 2021, before easing to US$650 a tonne in 1Q2022 and subsequently just slightly over US$200 a tonne in August 2023. In 2020, it averaged US$530 a tonne.

The still-challenging operating environment has added to the talk of a corporate exercise by LCC — from a privatisation to a paring down of its stake — in relation to its investment in LCT. Other major shareholders of LCT are Amanah Saham Nasional Bhd (2.45%) and Kumpulan Wang Persaraan Diperbadankan (1.07%).

In 2011, LCC spent RM1.11 billion on taking LCT, then known as Titan Chemical Corp Bhd, private after acquiring a stake in the company in 2010. LCT returned to the local bourse in 2017.

At the current price, it would cost LCC RM632.3 million to privatise LCT.

In terms of a stake sale, analysts whom The Edge spoke to say this may not be the right time as LCT’s share price has been under pressure. Its shares have been on a downward trend since its relisting at RM6.50 apiece.

Year to date, the counter is down 19% to close at RM1.15 last Thursday for a market value of RM2.62 billion. At the current share price, this represents a 78.1% discount to the net tangible assets per share of RM5.25 as at end-June 2023.

“LCT’s share price does not look good. So, it is unlikely that LCC will sell at the current share price,” an analyst with a bank-backed research house says.

Apart from that, the parent company’s healthy financials do not warrant an urgency to sell the stake in its Malaysian unit. A look into LCC’s financials shows that it reported a net profit of KRW72.82 billion (RM252.2 million) in 2022, with analysts forecasting that this will more than double to about KRW200 billion in 2023. Its share price has slid 28.12% since early this year.

Questions sent by The Edge to both LCC and LCT were unanswered.

On a bright note, the RM18 billion Lotte Chemical Indonesia Ethylene (LINE) project in Indonesia is seen as a key catalyst for LCT upon its completion in 2025, as it is set to propel the group into the top three companies in the industry in Southeast Asia, with the other two being Thailand-based Siam Cement Group pcl and PTT Global Chemical pcl.

The project funding is made up of 40% equity and 60% bank borrowings. The equity injection into the project owner, PT Lotte Chemical Indonesia (LCI), was completed early this year. LCT holds an effective equity interest of 51% in LCI while LCC holds the remaining 49%.

The project will help stop Indonesia from being a net importer of petrochemical products while boosting LCT’s production capacity by 65% to 5,878 kilo tonnes per annum (KTA) from its current 3,568 KTA. Construction work on the LINE project started in January 2022.

As at end-June 2023, LCT entered a net debt position of RM1.13 billion from a net cash position of RM1.28 billion as at end-December 2022. This was due to gross borrowings of RM1.83 billion in the form of secured term loans to fund the development work on the LINE project. LCT had been in a net cash position since its relisting in 2017.

In its latest quarterly results, LCT reported a wider net loss of RM313.47 million for 2QFY2023, compared with a net loss of RM145.92 million in the same quarter a year ago. This is its fifth consecutive quarter in the red since 2QFY2022. In 1QFY2023, its net loss was RM224.76 million.

CGS-CIMB Research, in a July 28 note, reiterates its “reduce” call on LCT on expectation that petrochemical price spreads against naphtha will remain below break-even levels in 2HFY2023. Its target price has been revised upwards slightly to RM1 from 99 sen after slightly narrowing the loss forecast. LCT’s core net loss in FY2023 is forecast to be wider than its record loss in FY2022.

Meanwhile, TA Securities expects LCT’s losses to continue in 2HFY2023 as its product spreads are likely to still languish given the challenging global economic environment.

To minimise losses, LCT reduced its plant utilisation rate to 68% in 1HFY2023, from 71% in 2HFY2022 and 83% in 1HFY2022. Its operating rate guidance for FY2023 is 70% to 75%.

An analyst with a non-bank-backed research house believes LCT has bottomed out, saying: “Demand is still not robust this year. Even if there is any significant demand growth, it’s likely only to be seen next year. So, margin spreads will remain under pressure for the remaining quarters of 2023.”

“The problem with the industry is the increased supply as China is expanding capacity because of security reasons,” he says, adding that it ultimately boils down to LCT’s cost optimisation measures.

Of the five analysts covering the stock, four recommend a “sell” with only one “buy” call from BIMB Securities. The consensus target price is RM1.09, which does not suggest any upside potential for now. 

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