Very risky and volatile earnings
? 1Q22 core net profit of RM41m outperformed our very suppressed forecast of
only RM103m for FY22F but only made up 13% of consensus’s full year.
? Naphtha cost hikes in 1Q22 caused the quarterly performance to be very
weak but naphtha prices have moderated in Apr, which has helped spreads.
? Reiterate Hold, with a higher TP of RM2.43, based on EV/EBITDA multiple of
1.8x (-1 s.d. from mean since 2019), as we raise our core EPS forecasts.
In 1Q22, weakest earnings in seven consecutive quarters
LCT delivered 1Q22 core net profit of only RM41m, which was 91% lower than 1Q21’s
RM440m and 55% lower than the already-low 4Q21 core net profit of RM90m. While
1Q22 revenue rose yoy and qoq from higher average selling prices, naphtha feedstock
costs rose even faster, causing a sharp squeeze in spreads between selling prices and
naphtha costs. The rise in naphtha costs was driven by higher crude oil prices, which
began rising from 3Q21 as OPEC+ crude oil production increases lagged behind oil
demand improvements, and which caused oil stocks globally to decline. The onset of the
Russia-Ukraine war from 24 Feb 2022 pushed up oil and naphtha prices further in 1Q22,
due to the incorporation of a ‘w ar premium’, and efforts by US allies and Europe to avoid
purchases of Russian crude oil and oil products such as naphtha. While polymer selling
prices rose due to cost-push factors, it was not sufficient to offset the higher naphtha
costs, leading to a decline in LCT’s price spreads. On the US associate side, LCT’s share
of profits rose qoq in 1Q22 despite the decline in MEG-US ethane spreads, as the US
MEG plant underwent a 40-day turnaround during 4Q21, which had suppressed profits.
At the reported profit level, LCT’s 1Q22 w as RM104m vs. its core net profit of RM41m;
the difference w as due to RM46m in gains from the disposal of a 3.23% stake in the US
ethane cracker, and RM17m reversal of the 4Q21 write-down of inventories to net
realisable value (which w e consistently classify as an exceptional item).
Outlook hinges on direction of naphtha prices
Naphtha prices have moderated slightly in Apr to US$905/tonne, vs. US$993/tonne in
Mar; this has allowed polymer-naphtha spreads to improve on a mom basis. We think
that it is too early to celebrate, as the Apr naphtha price is still higher than the 1Q21
average of US$864/tonne. Also, since LCT’s naphtha actual cost of sales typically lags
by 1-2 months against spot prices, the high Mar naphtha prices may only hit LCT in Apr
or May. As Europe moves towards an embargo on Russian crude and oil product
imports, and if the Russia-Ukraine war drags on, w e think that risk premiums embedded
in oil and naphtha prices may remain high; the downside risk is that if these premiums
escalate, crude oil prices may be higher than our average forecast of US$98/bbl for
FY22F. With Petronas Chemicals likely to start up its Pengerang plants by mid-2022F,
domestic and regional competition could intensify, leading to potentially weaker polymer
selling prices. Upside risks include a potential resolution of the Ukrainian conflict, and a
potential US-Iran nuclear deal that will allow a swift upswing in Iranian oil exports.