Demand weakness and rising competition
- 1H22 core net loss of RM9m significantly underperformed our previous FY22F profit forecast of RM166m and Bloomberg consensus’ RM256m.
- This was due to the lagged impact of high naphtha costs which spiked from late-Feb onwards in the aftermath of the Russia-Ukraine war.
- We reiterate Reduce with a lower TP of RM1.87 (CY23F EV/EBITDA of 1.7x), as polymer and MEG prices are trending lower due to weak demand.
2Q22 loss from high naphtha costs and weak demand
LCT reported a 2Q22 core net loss of RM49m, vs. core net profit of RM383m in 2Q21 and RM41m in 1Q22. Demand for polymers was weak due to labour shortage among plastic converters, while the full impact of higher naphtha costs since the start of the Russia-Ukraine war in late-Feb hit LCT in 2Q22 and squeezed its PE and PP spreads. YTD 2022 MEG spreads have fallen dramatically vs. the 2021 averages, as MEG selling prices came under significant pressure from weak downstream polyester demand and capacity increases. Higher US ethane feedstock prices have aggravated the pressure on MEG spreads for LCT’s MEG plant in the US, causing LCT’s share of profits to fall to just RM1m in 2Q22, from RM34m in 2Q21. Aromatics BZ and TL were the bright spots, with spreads against naphtha widening sharply qoq and yoy in 2Q22, as refineries have responded to the jump in gasoline refining spreads by ramping up the production of gasoline which then increased the demand for aromatics as octane boosters. However, aromatics are only a small part of the overall LCT portfolio of products.
Polymer prices are falling faster than naphtha in Jul 2022
Naphtha feedstock costs have declined significantly in Jul 2022 vs. the Jun level, on the back of weakening demand for petrochemicals. Unfortunately, polymer prices have dropped as well, outpacing naphtha cost weakness and resulting in falling spreads. YTD 2022, the average polymer spreads are below the 2021 averages, with PP spreads falling faster than PE spreads, and we are bearish on polymer selling prices for the rest of the year as inflation is causing consumers globally to reduce their consumption of discretionary goods. Meanwhile, gasoline refining spreads have dropped sharply in the past three weeks, which spilled over into aromatics selling prices and currently putting pressure on the spreads of aromatics against naphtha.
Competition with PCG may widen LCT’s FY23F core net loss
Potential de-rating catalysts include rising competition with Petronas Chemicals (PCG) once the Pengerang plants are commissioned by late-2022F, which may result in LCT losing its Malaysian polymer selling price premium of US$50-100/tonne relative to broader SE Asian price benchmarks. Also, petrochemical capacity additions in 2022F may exceed demand growth, and together with weakening consumer demand, prevent petrochemical selling prices from rising sufficiently to cover the higher naphtha feedstock costs. Upside risks include possible delays in the commissioning of new petrochemical capacities, and fall in the utilisation of existing facilities due to weak demand and high feedstock costs.