The projects – a one-million-tonne per annum ethane cracker plant and a 0.7-million-tonne per annum mono ethylene glycol (MEG) facility – will add 0.64 tonnes or an additional 18% to Lotte Chemical’s total capacity based on the apportionment of its equity stake.
Maybank IB Research has raised the company’s financial year 2020 (FY20)-FY21 earnings forecast by 8.6% and 19.3%, respectively, on the back of higher expected contributions from the two projects.
“Previously, we assumed a contribution of RM40mil in FY20 and RM80mil in FY21. Based on our latest forecast, it was too modest.
“FY19 earnings estimates are unchanged as the US associates will break even and have zero impact on Lotte Chemical’s earnings, based on our forecast,” it said in a research note.
Contribution from the projects to Lotte Chemical are forecast to be RM162mil in FY20 and RM289mil in FY21.
The research house has also upgraded Lotte Chemical from a “hold” to “buy” with a target price of RM4.70, as the share price has de-rated and is now exhibiting deep value.
“Lotte Chemical’s share price has declined by 6% in the past month and is trading at a deep discount, relative to its peers, based on its price-to-earnings ratio, enterprise value-to-earnings before interest, taxes, depreciation and amortisation and price-to-book value.
“We forecast a 5.4% dividend yield in FY19 despite the current outlook,” the research house said in a note.
The two US projects begun operations in February and is now undergoing commissioning ahead of a full commercial production.
The official launch is scheduled for May 7 and the total project cost is US$3bil, consistent with its initial budget.
Lotte Chemical has associate stakes in both projects, 36% in the ethane cracker plant and 40% in the MEG plant.
These are from its 40% holding in Lotte Chemical US, which then has a 90% shareholding in Lotte Axial Chemical Corp LLC US (ethane cracker plant) and wholly owns Lotte Chemical Louisiana LLC (MEG plant).
The US$1.9bil ethane cracker is run with a local US partner, Westlake Group, which holds the remaining 10%. The MEG plant is a downstream facility, the single-largest of its kind in the US costing US$1.1bil.
Maybank IB Research said the new facility came at a time when US’ ethane cracker margins are under pressure due to the ongoing trade war between the country and China.
The bulk of the petrochemical new builds was meant for exports particularly to China but due to the additional barriers imposed, these have been diverted to non-traditional regions such as Africa, South Asia and SouthEast Asia, causing a big decline in product margin.
The research house believed the US investment would help to diversify and reduce Lotte Chemical’s systemic risk, including in foreign exchange.
It said the lower risk profile could potentially increase investor appeal to Lotte Chemical and warranted a re-rating.
Source: The Star