Research firm puts Lotte fair value at a discount to IPO price

PETALING JAYA: Hong Leong Investment Bank (HLIB) Research opined that the fair value for Lotte Chemical Titan Holding Bhd is at a 7.6% discount to the initial public offering of RM8, at odds with other research houses that put it at least a slight premium to the IPO price.

HLIB Research values the petrochemical firm at RM7.39 pegged to 12 times FY18 price-to-earnings ratio (PER), a discount to the 13 times to 16 times PER of its significantly larger peers – Petronas Chemicals Group Bhd (PChem) and Formosa Chemicals.

The research house is of view that Lotte is at a disadvantage to PChem’s valuation of 15.9 times PER due to several reasons: PChem is two times larger than Lotte; PChem possesses cost advantage over Lotte as it uses ethane feedstock, which results in a lower and more stable feedstock cost structure as compared with naphtha feedstock; PChem’s higher earnings before interest, taxes, depreciation and amortisation (ebitda) margin at 38.7% versus Lotte’s 25.6% in FY16.

Furthermore, HLIB Research believes petrochemical product margins for Lotte appear to have peaked and the risk of margins reverting to lower levels is high at this level, given the expectation of capacity expansion in regional and global market.

Kenanga Research however, reckons the RM8 offer price is fair, with a valuation of RM9.05 per share pegged to a 13.2 times FY18 PER.

Meanwhile, PublicInvest Research has put Lotte at a slight premium of 13 times PER, translating into a fair value of RM8.08. However, it said Lotte’s valuation is still reflective of its Southeast Asian peers average of 12.2 times.

HLIB Research expects Lotte to achieve core net profits compound annual growth rate (CAGR) of 4.8% over the period of 2017-2019, premised on the assumptions of gradually lower revenue per metric tonne; narrowing ebitda margin from 25.6% to 19.1% on lower expectation of product spread due to global capacity expansion; 7% growth in product volume (three-year CAGR) after factoring in TE3 and PP3 capacity.

PublicInvest Research estimates a three-year CAGR revenue of 4.1% for Lotte despite the increase in capacity, due to fluctuations in raw material price of naphtha as the primary feedstock for the group’s plants, which would affect the overall selling price of its products.

Lotte is expected to incur RM16 billion of capital expenditure (capex) for the next five years. Bulk of the capex would consist of integrated petrochemical facility in Indonesia for RM15.1 billion in total, of which 67% of the capex would be funded via borrowings.

HLIB Research believe the group is able to fund its capex without requiring further equity cash call as it is in a net cash position of RM965.1 million, with net incoming IPO proceeds of RM5.8 billion.

Lotte, slated for listing on July 11, is expected to raise about RM5.9 billion from the new issuance of 740.5 million shares.