Lotte Chemical Pakistan
Case for margin remains bleak; Time to SELL
We value LOTCHEM, the sole PTA manufacturer in Pakistan, at PkR12.7/sh implying a downside of 14% from last level. Contrary to consensus estimates, we model weak earnings growth. Our base case builds on muted PTA-PX margins and reduced downstream operating rates from 2HCY21 onwards. We believe the current capitalization amply reflects the positives of the cash laden balance sheet. However, threat to core earnings from low margins outweigh investment earnings upside. We initiate our coverage with a SELL stance.
Hiccups to outlook
We factor in PTA-PX margins at 103/100/100 for CY21/22/23E, reduced downstream operating rates from 2HCY21 onwards and weak earnings growth from core business. We feel it is too early to factor in a capacity expansion in the absence of any official announcement in PSF and PET segment.
Profitability to remain unexciting
We think a turnaround in core profitability to CY17-CY19 level is now distant given weak product prices and subsequent depressed primary delta. We feel the current price reflects positives of uplift in earnings as well as recovery in margins. We take cues from PTA demand supply imbalance in China. We see slower earnings accretion of 11% for the next 3 years as compared to 3-yr CAGR of 158% witnessed in CY19.
Expansion hinges on broader downstream capacity
Analysis of the global polymer industry suggests the demand for PTA is expected to remain under 770k MT, making LOTCHEM’s base case expansion plant size of 1.0mn MT unfeasible on economics. Till the downstream sector expands, we do not forecast and incorporate an expansion. Ultimately, volumetric upside is capped leaving revenues limited to the product pricing, an unexciting investment rationale for us given regional PTA trends.
Our Dec’21 TP of PkR12.7 provides a downside of 14%.
The stock is currently trading at one year forward P/E and EV/EBITDA of 9.9x and 2.1x, respectively. At present levels, our TP of PkR12.7/sh presents a downside of 14%. We think this should largely be expected with the shares also having lagged some of the more cyclical chemical names over the past three months.