Siam Cement

Chemical divestment boosted 3Q11 earnings

·         3Q11 earnings of Bt7.4bn (EPS Bt6.15), in line with expectations, thanks to one-time divestment gain from chemical business 

·         HDPE spreads improved q-o-q, but softened y-o-y 

·         Maintain BUY, Bt420 TP. Near-term catalysts from surging demand for cement and building materials post flooding

Comment on Results

3Q11 highlights. SCC reported earnings of Bt7.4bn, down 2% q-o-q but up 13% y-o-y, including one-time gain from divesting some holding in chemical business. SCC did not disclose the gain, but we estimate it to be Bt1.2bn based on the divestment of a 1.7% stake of its holdings in PTT Chemical (2.7% balance). Lower q-o-q earnings were attributed to higher energy cost in cement business, and lower dividend from its investments. 9M11 earnings were at Bt24.1bn, up 16% y-o-y, representing 67% of our full-year forecast.

Chemical spreads remain weak. Spreads of HDPE and PP (SCC’s 2 key products) were relatively soft at US$445/ton for HDPE and US$650/ton for PP. For HDPE, this was up by US$47/ton from of 2Q11, but still at a low level. PP spread was affected by lackluster demand due to a weak global economy. Chemical contributed 44% to 9M11 earnings.

Surging demand for cement and building materials post flooding. Thailand is experiencing widespread flood across central part of Thailand and Bangkok. Damage is difficult to quantify but is quite severe. We believe that demand for reconstruction of housing and roads should surge once the flood recedes. SCC is the largest producer of cement (40% market share) and also building materials, contributing 25% and 6% respectively to 9M11 earnings.

Recommendation

BUY with Bt420 TP. SCC offers long-term value with rising free CF and yields. The stock is also more defensive than other cyclical names.