Oil Prices Seen Climbing in June
The author is an analyst of KB Securities. He can be reached at yc.baek@kbfg.com. -- Ed.
Target price raised to KRW532,000
We reiterate BUY on Lotte Chemical and raise our TP 5.6% to KRW532,000 because 2021E/2022E NP (attributable to controlling interests) was revised up 19.3%/1.7% to accommodate upward revisions to our Olefin/Aromatics/LC Titan earnings estimates. Our investment points include 1) earnings growth from rising prices for chemical products in 2H21 and 2) increasing enterprise value from strengthened environmental- and shareholder-friendly policies. We believe the long-awaited turnaround is imminent.
1Q21 earnings beat market consensus by large margin
Lotte Chemical posted 1Q21 revenue of KRW4.17tn (+27.3% YoY, +29.5% QoQ) and OP of KRW623.8bn (turn to black YoY, +188.5% QoQ), which beat the market consensus (KRW474.5bn; FnGuide, Apr 14) by a large margin. Olefin revenue came in at KRW1.93tn (+20.2% YoY) and OP at KRW313.1bn (TTB YoY). Earnings were boosted by growth in sales volume resulting from normalized operations at the Daesan plant and rising prices/spreads of mainstay products (e.g., PE, PP, BD, SM). Aromatics registered revenue of KRW527.8bn (+20.6% YoY) and OP of KRW39.9bn (TTB YoY). Earnings growth was largely attributable to PIA margin improvements stemming from growing demand for packaging materials. LC Titan exceeded our expectations, turning in OP of KRW133.1bn (TTB YoY; 11.1% OPM) on the back of strong PE/PP prices coming from a drop in North American output.
Earnings to improve in 3Q21
We advise a buy & hold approach to Lotte Chemical because earnings should continue to improve as the global economy rebounds. OP should dip QoQ in 2Q21 because of routine maintenance at the Daesan plant, but we expect a rebound to KRW643.6bn in 3Q21. We see oil prices climbing in June as the driving season begins in the U.S., pushing petrochemical prices up in 3Q21. Also, we note that input lags cause profit margins to improve when feedstock prices climb. We believe Lotte Chemical earnings will increase as the global economic recovery continues into 1H22.