Lotte PPTA finds a magic touch in reliable hands

Nothing gives investors greater comfort than knowing that their company is in good hands. The financial result of Lotte PPTA released on Thursday has supported investors optimism about the firm currently prevailing in the market, ever since it was acquired by KP Chemicals, a subsidiary of LOTTE group, in September last year.
After a hat-trick of loss making financial periods, CY09 ended on a brighter note as the company posted commendable earrings of Rs3.3 billion - surpassing the consensus estimates by a good Rs500 million. Higher gross margins, increased contribution from other income and reduced financial charges spurred the firms profitability during the period.
Sales revenue soared by a reasonable 15 percent despite an 11 percent drop in PTA prices to $862/ton in CY09 from $968/ton a year ago. It was Lottes expertise in the PTA business, which reflected immediately on the companys performance as production was beefed up during the final quarter of CY09.
Although, the final sales numbers are yet to be known - a hint could be taken from the 3QCY09 result, when the sales volume had surged by a solid 58 percent.
The deciding factor, however, was that of PTA/PX margins, which unlike the previous three years remained favourable for the firm. Paraxylene (PX) prices averaged at $927/ton during CY09 - down by a massive 17 percent from $1115/ton a year ago.
Paraxylene is the major raw material procured by the company from various sources to produce PTA - which is a vital input for Pakistans textile and PET packaging industries. It is essential to note that PTA/PX margin is the single largest determinant of Lottes earnings - a fact which is validated by taking a cursory look at the firms gross margin and profitability relationship during the last five years.
A helping hand was provided by the contribution from other operating income, which increased threefolds during the period.
In addition to Rs261 million earned as interest income on surplus cash, the receipt of Rs178 million during 3QCY09 on account of an insurance claim related to a fire incident at the suppliers manufacturing facility, boosted Lottes non-core income.
The USD/PKR parity also swung in balance of the firm as it helped reduce the exchange losses by a mammoth Rs0.9 billion with a relatively stable exchange rate. The bottom line also got a relief as improved cash flows led to a sizeable reduction in the companys financial charges. The fact that Lotte repaid the final installment of the loan at the inception of the PTA project also helped the cause.
The company has already announced its intention to set up a 40-MW co-generation power plant at its manufacturing site - the commissioning of which is targeted by the end of 2011. The project is aimed at providing uninterrupted supply of electric power to the PTA plant, besides generating significant savings in production cost.
Going forward, a relatively strong PTA market and expectations of fresh global PCX capacities coming online in CY10, signal healthy gross margins for the company. However, changes in global fuel prices would continue to play a key role in determining its fortune as both the input and output are dependent on crude oil.

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LOTTE PPTA P&L

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Rs (mn)                CY09     CY08   % chg

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Sales                37,774   32,936     15%

Cost of sales        31,898   32,068     -1%

Gross profit          5,875      868    577%

Gross margins            16%       3%   490%

Other income            479      154    211%

Financial charges       307    1,027    -70%

PAT                   3,383   -1,760      NM

EPS (Rs)                  2       -1      NM

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