Report
EUR 8.70 For Business Accounts Only

Lotte Chemical Pakistan Ltd: Margin turnaround yet to be priced in; BUY

  • We initiate coverage on Lotte Chemical Pakistan Ltd (LOTCHEM), Pakistan’s only PTA producer, with a BUY rating and a DCF based TP of PKR13.47, offering 29% return.
  • A strong near-term rebound seen in PTA margin is a big positive for LOTCHEM. Going forward, we believe, margins may find a higher bottom given PTA/PX supply outlook.
  • For LOTCHEM, improved margin outlook is further complemented by a robust domestic demand on the back of improved energy situation and debt free balance sheet (cash balance of PKR5.0bn or 32% of market cap).
  • Given local price of PTA and hence margins are driven from import parity, every 5% devaluation above our base case has the potential to enhance the bottom-line by 14-16% in CY18-20E.
  • A 35% outperformance in LOTCHEM’s stock price in the last 3 months partially reflects the improved margin dynamics. The stock trades at P/E of 7.4x which is at an 18% discount to BMA Universe and implies PTA margin of only USD102/ton vs an average of USD92/ton over CY12-CY17 and current margin of USD165/ton. BUY!
Underlying
Lotte Chemical Pakistan

Lotte Chemical Pakistan Limited (LCPL) is a Pakistan-based manufacturer and supplier of Purified Terephthalic Acid (PTA). The Company has the capacity to produce approximately 500,000 tons of PTA per year through its plant located at Port Qasim, Karachi. It operates in the manufacture and sale of chemicals segment. The Company is a supplier for the domestic polyester and polyethylene terephthalate (PET) industries. For producing PTA, it imports its feedstock (Paraxylene) from suppliers based in Asia and Middle-East region. PTA is the primary raw material for producing polyester fiber, polyester filament yarn, polyester film and PET.

Provider
BMA Capital Management Limited
BMA Capital Management Limited

​BMA is amongst the leading financial groups in Pakistan. BMA Capital’s core areas of business include Capital Markets, Corporate Finance & Advisory, Asset Management, and Financial Products Distribution. BMA Capital is the leader in privatisation advisory in Pakistan, having successfully advised on over 50% of all privatisations in Pakistan, by value, in transactions valued in excess of US$4 billion. Recent transactions include joint lead managing the $813 million GDR Offering of 10% of OGDCL on the London Stock Exchange in 2006-07, and advising Etisalat on their successful acquisition of a 26% strategic stake in Pakistan Telecommunications Company Limited (PTCL) for US$2.6 billion, the largest M&A transaction and foreign direct investment in Pakistan’s history. The firm is among the top brokers in the Pakistan equity and treasury markets, and is among a handful of firms that comprehensively cover all segments of the capital markets. This is supported by a very strong and independent research capability, which is quoted regularly in both local and international media. BMA Capital’s retail brokerage brand, BMA Trade, has launched a nationwide network of branches as well as a comprehensive online trading platform, enabling investors across Pakistan to take part in the capital markets.

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