LOTCHEM posted a 9MCY20 NPAT of PKR1.04bn (EPS: PKR0.69) down by 78%yoy, compared to NPAT of PKR4.73bn (EPS: PKR3.13) in SPLY. Majority of the 9M profits was contributed by 3Q, where the company posted an NPAT of PKR0.93bn (EPS: PKR0.61) compared to PKR1.68bn (EPS: PKR1.11) in SPLY.
Company’s revenue plunged by 44%yoy during 9MCY20, primarily stemming from Covid-19 induced lockdown and lower demand from the downstream Industry (Textile and PET). Sales have recovered sequentially, gaining momentum post easing of lockdowns and healthy textile demand since 3Q.
PTA-PX spreads have remained under pressure during CY20 (avg US$88/ton YTD) due to the excess PTA capacities coming online and the management expects spreads to hover around US$85-90/ton.
PTA plants in the region are able to achieve breakeven levels at c.US$85-90/ton, with new plants achieving breakeven at as low as US$80/ton. Furthermore, Chinese government is mulling shutting down old PTA plants in China, which can materially lift spreads.
The management expects domestic PTA demand to grow at 5% per annum (from a low base) as operating rates of Polyester plants have dropped to 71% in FY20 from a high of 89% in FY18. The government remains focused on providing a conducive environment to textile exporters – also beneficial for LOTCHEM.
Approximately 65% of the demand is driven by the textile sector (PSF, PFY) and the rest by PET manufacturers. Two major players Gatron and Ibrahim fibers comprise c.70% of the total demand, with remaining 30% emanating from remaining PSF players (ICI, Rupali etc).
The company awaits further clarity from the courts on GIDC and Infrastructure cess; however, it has been prudently providing for it till a final decision is reached on the matter.
PTA demand is entirely domestic as of now (can export if required) and the management has ruled out any capacity expansion until total demand crosses 800,000 tons/annum (currently c.700,000 tons/annum). The minimum expansion will be c.1mn tons and a capex requirement of US$400-500mn with a minimum construction period of 2 years.
Despite demand gaining traction and operations marching towards normalcy, the management remains uncertain of how the second wave unfolds and impacts demand and spreads, going forward.
We have a Neutral stance on the stock with a Dec 2021 TP of PKR14/sh.
Intermarket Securities Limited