Siam Cement

Siam Cement Plc (SCC)

2Q12A net profit of Bt4.3bn. SCC reported 2Q12A net profit of Bt4.3bn, -42% YoY and -28% QoQ, pulled down primarily by losses at its chemical unit (inventory loss of ~Bt2bn and the Bt600mn negative impact from the closure of BST plant after the May 5 fire). Profits were weak, but lined up with SCBS and market estimates. 1H12A earnings accounted for 41% of our 2012F forecast, and we maintain our estimates. It announced a 1H12A DPS of Bt4.5 (XD Aug 6 and payment Aug 23).
Guides to better 2H12 – as do we. SCC says 2H12 earnings will improve HoH, and we agree. Backing this is: 1) continued strong demand at non-chemical units; 2) better operations at its chemical unit from wider spreads (albeit in the trough) after passing an abnormally low period in 1Q12 and possible inventory gains in 3Q12 (vs. losses of Bt2bn in 2Q12). Key highlights.
- Cement. In 3Q12, SCC expects local sales volume to grow 8-10% YoY off strong commercial and infrastructure demand amid improved residential demand. Export sales volume is set to drop YoY but be stable QoQ as higher competition in Bangladesh and Sri Lanka outpaces stronger demand in Myanmar. Cement price is expected to pick up in response to: 1) firm demand; 2) higher fuel and labor costs.
- Building materials. Though 3Q is historically the low season, SCC expects earnings to grow further, backed by: 1) strong demand in the provinces and govt. stimulus packages in Thailand; 2) inorganic growth from the purchase of KIA (ceramics in Indonesia) in June 2011 and Mariwasa (ceramics in the Philippines) in March 2012.
- Paper. The Nava Nakorn plant, hit by floods in 4Q11, resumed limited operations in 2Q12 with full operations expected in 4Q12. Paper selling prices will tend to be flat in tandem with stable wastepaper/pulp costs from weak regional demand.
- Chemical. With the uptrend in crude and naphtha price on renewed concerns over Middle East geopolitics, SCC views a stock gain in 3Q12 as possible (vs. 2Q12 stock loss of Bt2bn). While weak PE/PP demand, notably in China, may prolong the recovery of margin in 2H12, the trough of PE/PP spreads was passed in 1Q12. (Figure 6)
Maintain BUY. We maintain BUY on the counter with a mid-2013 SOTP PT of Bt400. SCC share price has underperformed the SET by 13% YTD, hit by unforeseen factors in 1H12 – the explosion at BST and inventory losses. At this level, we believe the weak 2Q12 and earnings downgrades by the street are priced in. We like SCC for: 1) 1H12A DPS of Bt4.5; 2) better earnings HoH in 2H12F (vs. earnings drop HoH for other construction material players from seasonality); 3) attractive valuation (trading at 11x 13PE) against the sector’s best LT earnings growth (27% in 2012-14F).