Siam Cement

 

3Q12A net profit of Bt6.4bn, below expectations. SCC reported a 3Q12 net profit of Bt6.4bn, -13% YoY but +50% QoQ, 10% below SCBS and 6% below consensus. This was brought by lower-than-expected inventory gains and equity income from the chemical unit. Some of the slack was taken up by the better earnings from the cement unit than expected (volume-driven, +16% YoY domestically). Profits from the building materials unit were strong, meeting estimates, with organic and inorganic growth from acquisitions. Earnings from the paper unit were weak, but as expected, with Bt200mn contribution lost because of the fire at Phoenix Pulp and Paper.

Positive guidance for 4Q12. In 4Q12, SCC expects strong volume at the cement and building materials units with production from chemical and paper units back up with operations resuming at the two plants hit by an explosion (BST) and fire (Phoenix Pulp and Paper). SCC expects 4Q12 local cement sales volume to grow over 10% YoY off strong infrastructure, residential property and commercial demand, while export sales volume is set to be flat YoY but -14% QoQ with higher competition in Bangladesh offsetting stronger demand in Myanmar. Cement price should be at least stable or even pick up slightly from less competition. For building materials, despite the seasonal drop QoQ, volume is set to grow YoY backed by: 1) strong demand in the provinces and government stimulus packages; 2) inorganic growth from the purchase of KIA (ceramics in Indonesia) in June 2011 and Mariwasa (ceramics in the Philippines) in March 2012. A fire at Phoenix’s control room in July 2012 closed a pulp line, but this is set to resume operations in late Oct 2012 with full operations at the end of 2012. After the explosion in May 2012, BST also resumed operations in Oct 2012. Chemical margin is expected to stabilize in the down cycle.

LT positive from sizeable new investments. SCC announced new investment of Bt23.2bn (Table 3) in Indonesia, Cambodia and Thailand. In Indonesia it will build a new 1.8mn ton cement plant (Bt11bn, majority stake, mid-2015 startup), with expansions in Cambodia: a 0.9mn ton cement expansion (Bt5.5bn, mid-2015 startup) and in Thailand: a 0.4mn ton packaging paper expansion (Bt6.7bn, 2014 startup). These investments are a LT positive: 1) potential high cement demand in Indonesia and Cambodia (2012 market size at 54mn tons and 2.9mn tons with growth of 5-10% per year, according to SCC); 2) potential strong packaging paper demand in ASEAN (notably in the manufacturing and food-related sectors); 3) business synergy for the Indonesian greenfield cement plant, with 50% captive cement demand from its ready-mix concrete unit (BORAL) and employing the distribution network provided by its Indonesian distribution unit (KOKOH). With its minimum targeted ROI of 15%, contribution from these investments will be above Bt3bn (7% of its 2016EPS). 

Maintain BUY. We maintain BUY with new SOTP PT of Bt430 (from Bt400), from rolling over PT to end-2013 from mid-2013 despite trimming its earnings (-4%) to reflect lower-than-expected 3Q12 earnings. We still like SCC for: 1) its better earnings in 4Q12F, up QoQ from full reopening of BST/Phoenix in 4Q12 plus the seasonal high dividend income, notably from Toyota, and up YoY from last year’s low base on floods; 2) strong two-year earnings growth at 29% (above sector average at 25%).