Siam Cement

Siam Cement Plc (SCC)

Investment thesis
At the post-results meeting yesterday, the only negative surprise was lower guidance for FY13 domestic cement demand growth, due to the recent flooding. We view that information as a hiccup. The firm’s long-term outlook remains solid, driven by a chemical spread up-cycle and business expansion across the region. We reaffirm our BUY call on SCC with a YE14 target price of Bt500.
3Q13 results
SCC reported a 3Q13 net profit of Bt9.8bn, up 53% YoY and flat QoQ. Stripping out an extra profit of Bt1.7bn (Bt1.5bn from a fair value adjustment for the investment in Siam Sanitary Ware & Fittings and Bt154m from a gain on sales of assets to Toto), core profit would be Bt8.1bn, up 26% YoY but down 18% QoQ. The stronger YoY number was due to stronger performances by the Chemicals and Cement/Building Material businesses, while the QoQ drop was mainly because of the absence of dividend income from SCC’s stake in Toyota and a weaker Paper performance. The firm announced a special DPS of Bt3 to celebrate its 100th anniversary (XD on Nov 11).
Chemicals continues to drive growth
Despite slimmer QoQ spreads, Chemical operating EBITDA still jumped 41% QoQ to Bt5.9bn, thanks to greater sales volume and an inventory gain of Bt800m (versus an inventory loss of Bt800m in 2Q13). In YoY terms, EBITDA shot up 103%, driven by fatter HDPE-Naphtha and PP-Naphtha margins. Management believes that olefins spreads will continue to expand for at least the next three years, as demand will increase faster than supply. The 4Q13 hiccup as a result of the MOC’s planned 45-day maintenance shutdown, thus, is behind us.
Lower cement demand guidance
Domestdemand guidanceic cement demand grew 5% YoY in 3Q13, pushing the ex-factory price up by Bt50/tonne to Bt1,900-1,950/tonne, the highest level since 3Q08. However, management has reduced its demand growth guidance to 5% for FY13 (from 6-8% three months ago), as the flooding in northeastern and eastern Thailand dampened demand by 3% YoY for the first three weeks of October. That suggests a 3% contraction in demand for 4Q13, which in our view may be too bearish—we expect demand for both cement and building materials to pick up strongly following the flooding. Hence, we assume flat demand growth in 4Q13 and 6% expansion for FY13.
Paper remains weak
Packaging Paper sales volume inched up by 3% both YoY and QoQ on demand recoveries among the F&B and consumer product industries. But Printing Paper continues to be impacted by weak demand for publication and commercial materials—sales volume declined by 9% YoY and 3% QoQ. Furthermore, margin squeeze started to manifest in both the Packaging Paper and Fibrous Chain categories in 3Q13; the problem is likely to persist into 4Q13.