Siam Cement

What's new: SCG Chemicals, a wholly-owned subsidiary of SCC, has entered into separate share purchase agreements to acquire a 23% stake in PT Chandra Asri Petrochemical Tbk (CAP) from Temasek and another 7% holding in CAP from Barito. The total investment value is IDR3.76trn (Bt13.5bn), or IDR4,088 per share. After the transaction is completed, SCC will hold 30% of CAP, but Barito will remain the controlling shareholder.

CAP, listed on Jakarta Stock Exchange, is a big integrated petrochemical complex in Indonesia. It currently has annual production capacity of 600K tonnes of Ethylene, 320K tonnes of Polyethylene, 320K tonnes of PE, 480K tonnes PP and 340K tonnes of styrene monomer.

Comment: SCC bought CAP at an EV/tonne of only $776, while it sold PTTCH at an EV/tonne of $1,311 late last year. Note that PTTCH currently trades at an EV/tonne of $1,158. SCC reaffirmed that the investment value still meets its hurdle rate of 15%.

We view this investment as a substantial progression in SCC's regional Chemical expansion. Given Indonesia's strong economy, we expect CAP to be a very good growth generator, both from fattening spreads for existing capacity and from future capacity additions.

Moreover, the investment should relieve concerns as to whether the firm will achieve its target of using up all its cash surplus within two years. YTD, SCC has already spent more than Bt20bn on acquisitions and business expansion.

Action: We view the acquisition as positive. Our SCC YE12 target price stands at Bt480.