• Maintain HOLD (TP: RM1.39). Lotte Chemical Titan (LC Titan) FY23 core LATAMI of RM899mn was slightly better than both our and consensus’ estimate at 85% of FY23F forecast. On QoQ basis, 4Q23 loss before tax (LBT) was largely flattish at RM232mn as utilisation rate (UR) was maintained at 66%. Demand remains subdued amidst intense competition from the oversupplied market condition but we believe this has already reflected in the share price. We maintain a HOLD call on LC Titan with an unchanged DCF-derived TP of RM1.39. This implies 0.3x FY24F P/B.

• Key highlights. UR was largely flattish at 66% in 4Q23 (3Q23: 66%) amid weak demand. Sales volume experienced a significant 11% QoQ decline, reaching 387k MT compared to 436k MT in 3Q23, marking the weakest quarterly performance since 2018. Total debt rose to RM5.9bn (3Q23: RM3.7bn) to finance the construction of Lotte Indonesia New Ethylene (LINE) project which has reached circa 80% mechanical completion. This surge raised its debt to total asset ratio to 26% (3Q23: 17%). As this is still below the threshold set by Shariah Advisory Council of Securities Commission (SACSC), the company is expected to retain its Shariah status in the upcoming review.

• Earnings Revision. No change is made to in our FY24-26F earnings forecast.

• Outlook. Amidst the Red Sea crisis, the company expects to incur marginal increase in transportation cost of c. USD10/MT for its naphtha feedstock that is sourced mainly from Middle East. There could also slight increase in polymer products which could offset the higher cost, but it will be on lagging basis. Overall, demand is expected to remain tepid as management guided UR of 65-70% for FY24 which is largely similar to FY23 UR of 67%. Despite near-term challenges, we are positive on its long-term outlook due to (i) its counter-cyclical capacity expansion project in Indonesia (LINE project), and (ii) strong financial condition with further gearing headroom to withstand current downcycle in petrochemical sector.

Source: BIMB Securities Research - 30 Jan 2024