Siam Cement

Investment thesis

SCC’s share price has declined by 4% and underperformed the SET by 5% since our rating downgrade to HOLD on July 31. We believe the share price underperformance has already factored in the expected weak 3Q14 profit. As such, now should be a good time to reload SCC ahead of robust earnings growth in FY15-16, driven by improving domestic cement demand, new cement capacity, an olefins spread up-cycle and a turnaround at the Paper business after its transformation. 

The valuation is also attractive! SCC currently trades at an FY15 PER of 12.3x, below its long-term average of 13.1x. We have rolled over our investment horizon to YE15 and raised our target price to Bt540 from Bt466. Hence, our rating rises from HOLD to BUY.

3Q14 preview

On October 29, we expect SCC to report a 3Q14 net profit of Bt7.1bn, down by 27% YoY and 16% QoQ. The assumed YoY dive is due to weaker performances across all major business units, while the QoQ drop is mainly because of the absence of dividend income from Toyota in the quarter.

Improved Chemical performance QoQ

Chemical profit should improve 18% QoQ on fatter spreads. The HDPE and PP spreads over Naphtha were US$685/t and $710/t, respectively, in 3Q14, up from $618/t and $633/t in 2Q14. The spreads of other products, such as PVC, Benzene Toluene, BD, PTA and MMA also fattened QoQ.  However, in YoY terms, although most spreads (except HDPE-Ethylene) were also fatter, we expect the profit to post a 30% dive, due to a stock loss of around Bt400m versus a stock gain of Bt800m in 3Q13.

Cement and building materials fell

Domestic cement demand dipped around 3% YoY in 3Q14, as no new infrastructure projects broke ground during 9M14, while many old projects were completed. The weaker demand probably squeezed the ex-factory price by Bt25-50/tonne QoQ to Bt1925-1950/t in 3Q14, which would be flat YoY. Sales of building materials in Thailand may have declined 8% YoY in 3Q14, due to weak consumption, particularly upcountry. As such, although ASEAN operations (14% of division sales) should have grown 13% YoY, we expect a Cement-Building Materials division’s profit of Bt3.3bn, down by 35% YoY and 5% QoQ. Excluding a non-recurring gain of Bt1.65bn in 3Q13, the division’s core profit fall would be 12% YoY.

Maintenance hurts Paper profit

The prices of packaging paper, writing paper and their raw materials were relatively unchanged YoY and QoQ. The sales volume of both packaging paper and writing paper should be posted flat YoY. We expect that margin declined in tandem with a maintenance shutdown at a paper plant and the turnarounds of utility units. As such, the division is likely to deliver a profit drop of 5% YoY and 16% QoQ to Bt749m for 3Q14.