Lotte Chemical Pakistan reported a LPS of Rs0.41 in 1H2014

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  • As expected lcLotte Chemical Pakistan Ltd reported a LPS of Rs0.41 in 1H2014 where weak sales (-4%YoY) coupled with a rigid cost structure resulted in weak core performance for the company.
  • Following results, we revisit our assumptions for LOTCHEM and revise down 2014E/15F/16F earnings estimates by 50%/45%/23%.
  • Note that lowering of earnings is in spite of incorporating the recent hike in the import duty on PTA by 1% to 4%. Nonetheless, we are expecting some relief for the company from 3Q onwards on the back of this regulatory change where 2014E EPS is likely to clock in at Rs0.11.
  • However given that valuations are extremely demanding (2014E P/E of 61x vs. market’s 2014 P/E of 8.8x), we re-iterate our ‘Sell’ rating on the stock with a revised Target Price of Rs6.6 (Target Price previously at 6.7).

LOTCHEM’s loss clocks in at Rs0.41/share in 1H2014
In line with market expectations, LOTCHEM reported a loss after tax of Rs623mn (LPS: Rs0.41) in 1H2014. The weak performance of the company is attributed to the weak PTA-PX margins during the period under review. Note that international PTA-PX margins have averaged at US$80/ton in 2014 year to date which is 11%YoY lower compared to the same period last year. Consequently, the company reported a gross loss of Rs475mn in 1H2014 (compared to a gross loss of 156mn in 1H2013). Other key takeaways from the result are 1) 50%YoY rise in Administrative expenses and 2)122%YoY surge in Other Operating Income. Meanwhile, in 2Q2014, LOTCHEM reported a LPS of Rs0.22 vs. LPS of Rs0.19 reported in 1Q2014.
Earnings cut over 2014E-16F; ‘Sell’ rating intact
Following results, we revise down our EPS estimates for the company by 50%/45%/23% for 2014E/2015F/2016F. In tandem, we have also cut our Target Price for LOTCHEM to Rs6.6 (down from Rs6.7 earlier). The key reasons for lowering our EPS estimates are low international PTA-PX margins. Note that lowering of earnings is in spite of incorporating the recent hike of 1% in the import duty on PTA to 4%. Although, this positive regulatory change will reflect in the company’s financials from 3Q onwards but the prevailing unfavourable demand supply balance in the region is likely to keep margins under pressure through 2014. Hence, we expect 2014E EPS to clock in at Rs0.11. Our ‘Sell’ rating on the stock remains intact as we flag extremely demanding valuations for LOTCHEM (2014E P/E of 61x vs. market’s 2014 P/E of 8.8x).

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