PETALING JAYA: Stronger-than-expected polymer spread is likely to boost earnings of Lotte Chemical Titan Holding Bhd (LCT) for the second quarter (Q2) of financial year 2021 (FY21).
TA Research noted that spreads in Q2 averaged US$284 (RM1201.04) per tonne and while this was below the preceding quarter average of US$351 (RM1484.38) per tonne, there were “still robust, far exceeding FY20’s Q1 level of US$211 (RM892.32) per tonne”. “Hence, we believe this would boost LCT’s Q2 of FY21 profits,” it said in a company update on the stock.
For the first quarter ended March 31, 2021, the petrochemical producer saw its net profit grow multi-fold to RM440mil on the back of higher polymer prices amidst shortage in the United States and Europe.
Going by this, the research firm believes that annualised core earnings for the first half of FY21 is likely to exceed its full year forecast of RM596mil.
It estimates that this could come in the range of RM794mil to RM834mil.
TA said the group’s earnings in Q2 may also benefit from the relatively cheap prices of naphtha – the feedstock obtained by refining crude oil which is used to produce chemical products of LCT.
According to the research firm, LCT procures its naphtha inventory one-and-a-half months in advance of actual production. Therefore, when naphtha price is on uptrend, this translates to feedstock inventory lag gains for the group.
Since March last year, due to the oil price rise, both naphtha and polymer prices have soared in tandem.
Nevertheless, in LCT’s case, margin compression from higher feedstock cost is cushioned by relatively lower cost of naphtha procured in advance, TA said.
“As guided by management, there are no planned plant turnaround activities in Q2.
“Therefore, plant utilisation (PU) rates are expected to be strong, which would likely approximate Q1’s level of 88%”.
TA has a hold on the stock with a target price of RM3.08.