Lotte Chemical Pakistan (LOTCHEM) has posted a net profit of PKR1.6bn for 1QCY21 (EPS: PKR1.08), up a massive 28.0x yoy and 51% qoq. The qoq increase can be attributed to an increase in PTA-PX spreads and resultant gross margins to 15.4% from 13% in 4QCY20. The 1Q result has come below our EPS estimate of PKR1.23, majorly because of lower than expected gross margins (15.4% instead of 19% expected).

Key highlights of 1QCY21 result:

• Revenue has clocked in at PKR14.6bn up 25% yoy and 22% qoq, on the back of an increase in international PTA prices (42% yoy and 40% qoq).
• Gross margins have risen by 2.4ppt qoq, coming in at 15.4%. The uptick in margins can be attributed to (i) average PTA-PX spreads of US$135/ton during the period (spreads were US$97/ton in 4QCY20), (ii) partial PX inventory held at lower prices from the previous quarter (PX prices rose 38% qoq). The gross margins were lower than our estimate of 19% most probably due to lower than expected inventory gains.
• Distribution and Administration expenses came in at PKR29mn and PKR115mn, staying flat qoq and in line with our estimates.
• Other income has declined 47% qoq to PKR277mn, most likely due to LOTCHEM selling short-term investments and using cash for working capital needs, whereas the effective tax rate for the period was 29%.
• The company has posted a finance cost of negative PKR98mn, compared with a finance cost of PKR286mn in 4QFY20. We await quarterly accounts for further clarity on the matter.

The result is below our expectations and we expect the gross margins to decrease in the future as the PTA-PX margins are likely to normalize given new PTA capacities will come online in the region. However, we maintain a favorable view on the scrip with a Buy stance and December 2021 TP of PKR18.0/sh.

Courtesy – Intermarket Securities Limited.