PETALING JAYA: Lotte Chemical Titan Holding Bhd
(LCT) could incur huge losses when its Lotte Chemical Indonesia New Ethylene (Line) project in Indonesia starts commercial operations after its targeted completion in the middle of next year.
CGS International Research said the Line project, which has not been factored into its earnings projections, has the potential to significantly widen its core net loss forecasts.
The research house explained that LCT would see incremental depreciation and finance costs incur earnings before interest, taxes, depreciation and amortisation-level losses for the Line naphtha cracker, as the company is currently experienced by its Malaysian cracker.
“The depreciation and interest expense of the Line project will impact LCT’s profit and loss (P&L) only when the project is commercially operational; hence, we believe it is in LCT’s interest to defer commercial operations until price spreads against naphtha are better than what they are today,” it added.
The research house pointed out that LCT had so far drawn down US$1.6bil in project financing as at June 30, 2024 versus US$300mil a year ago.
This has resulted in a ballooning of its interest cost to RM336mil in the first half of the year from RM51mil a year ago.
“But this is not visible on its P&L as the majority is being capitalised on the balance sheet as construction work-in-progress.
“Nevertheless, the debt burden has expanded materially as LCT’s net debt rose to RM7.6bil as at June 30, 2024 from RM1.1bil a year ago,” it added.
CGS International Research believed that LCT will always be at a disadvantage compared to naphtha-based petrochemical operations that are integrated with the upstream refinery because the refinery can be profitable even though the petrochemical operations may not be.
“Unfortunately, LCT does not have the benefit of refinery operations and this compares unfavourably against the Petroliam Nasional Bhd group that can continue producing profitably as an integrated complex in Pengerang,” it explained.
The research house said LCT could see an upside in share price on the back of a possible white knight for the company given that its South Korean parent company is preparing to sell its entire stake in LCT.
LCT posted another large quarterly core net loss of RM209mil in the second quarter ended June 30, 2024 (2Q24) as production volume fell 27% quarter-on-quarter.
