Siam Cement

Siam Cement Plc (SCC)

Investment thesis
At the post-results meeting yesterday, we sensed that management was very bullish on Chemicals, neutral on Paper and concerned about Cement. This year is set to be a challenging one for SCC’s domestic businesses (~65% of sales), as political turmoil and weak consumption present major headwinds. Nevertheless, we still expect the firm to deliver core EPS growth of 17% in FY14, while the current FY14 PER of 11.8x (versus a historical mean of 12.8x) is attractive. Our BUY call stands with a YE14 target price of Bt500.
4Q13 recap
SCC reported a 4Q13 net profit of Bt8.2bn, up 19% YoY but down 16% QoQ. The stronger YoY number was due to better performances by the Chemicals and Cement/Building Material businesses, while the QoQ drop was due to seasonality and the MOC’s 45-day plant turnaround. Management announced a final DPS of Bt7 for 2H13, bringing the total to Bt15.50 for FY13 (XD on April 1).
Bullish on Chemicals
The firm is confident that the chemical cycle is strengthening. QTD, polyolefins spreads have fattened above 4Q13 levels and management expects margins to rise further after Chinese New Year, as it will be cracker maintenance season across Asia in March, which will make for a softer Naphtha price and reduced olefins supply across the region. These strong spreads should be sustained through low season in 2Q14. An uptrend is likely to be sustained to at least 2017.
Uncertain cement outlook
Domestic cement demand grew by 6% YoY in 4Q13 and by 7% for FY13, pushing the ex-factory price up by Bt25/tonne to a record of Bt1,950/tonne. The domestic price is expected to rise further, driven by cost-push factors tied to a weakening baht (mainly coal). Demand growth this year, however, looks cloudy, due to the political chaos. SCC has yet to set a demand growth target for FY14, save to say that demand rose 2% YoY for the first three weeks of January. We have cut our FY14 domestic demand growth assumption to 3% from 5%.
Paper in subdued growth mode
Packaging Paper sales volume rose 6% YoY in 4Q13 on higher demand from the F&B and consumer product industries. But domestic demand tends to slow when consumer spending weakens or there is political unrest. Regional demand (especially Indonesia and Vietnam) is good.
Printing Paper sales volume declined 7% YoY in 4Q13, due to competition from importers and weak demand for publication and commercial materials. We expect printing paper sales to fall further this year, as SCC’s production lines are expected to periodically shut down. Some machinery will be changed or upgraded in order to switch from printing paper production to the manufacture of high value-added products.