Siam Cement

Siam Cement Plc (SCC)

We see an opportunity to accumulate after a 13% dip in SCC’s share price, underperforming SET by 2% over the past 12 months, yet it is looking at another record high for earnings this year on the back of the upturn in the petrochemical cycle. In fact, the strong chemicals unit has led profit to beat estimates for four quarters in a row. Earnings momentum will cruise into 1Q14F on wider spread, seasonality, and no maintenance shutdown. At this level, valuation is compelling, trading at 12x 2014PE against 3-year core EPS growth of 15%. BUY with SOTP PT at Bt540.
1Q14F momentum continues strong. SCC’s profit has improved markedly and beat consensus estimates for four consecutive quarters, largely on outperformance at its chemical unit. We expect this positive momentum to continue through 1Q14F with even higher profit, growing YoY from widened chemical spreads (+8-18% YoY for PE/PP-naphtha spreads in 1Q14TD) and QoQ on seasonally higher sales volume for all business units plus the absence of last quarter’s 45-day maintenance shutdown of MOC.
3-year earnings growth at 15% through to 2016. This will be brought by wider chemical spreads, higher non-chemical volume and inorganic growth from new investments in ASEAN. At the chemical unit, the recent widening in spreads is just the beginning. SCC expects the chemical upcycle to continue through 2017, fuelled by favorable global demand growth of 4% p.a., outpacing the 2-3% p.a. supply growth. We expect its non-chemical units to post moderate sales volume growth with inorganic contribution from the startup of its greenfield and M&A investments. Of the Bt115bn investment announced in 2011-13, Bt77bn (67%) goes to non-chemical units, with operations to start up gradually until 2016. Over the next three years, we expect chemical earnings to grow more rapidly than non-chemical, raising the contribution from the chemical unit to 44% in 2016 from 31% in 2013.
Compelling valuation. SCC’s share price has fallen 13%, underperforming the SET by 2% over the past 12 months. At this level, its risk-reward picture becomes attractive. Valuation-wise, SCC is trading at 12x 2014 PE against EPS growth of 15% in 2014-16. With a 3-year earnings growth of 15%, beating its historical 10-year growth of 12%, we believe trading at a premium to its historical 10-year PE of 11x is justified.
Maintain BUY with 12-month sum-of-the-parts TP of Bt540. Our SOTP PT consists of 8.5x EV/EBITDA for the chemical unit, 10.0x EV/EBITDA for the paper unit, 12.0x EV/EBITDA for the cement and building material units, and 2.8x BV for its associated and related companies. We see the fall in share price as offering a good buying opportunity, backed by upcoming good 1Q14F earnings (late April 2014), robust LT earnings growth and compelling valuation.