Siam Cement

Siam Cement Plc (SCC)

Investment thesis

3Q14 should be the bottom and we expect SCC’s earnings to grow QoQ for at least the next four quarters, led by improving Cement and Chemical businesses. With this profitability trend and attractive valuation (an FY15 PER of 12.7x, below its long-term average of 13x), we believe now is a good time to start loading the stock. Our BUY rating stands with a YE15 target price of Bt540.

3Q14 recap

SCC posted a 3Q14 net profit of Bt7.8bn, down by 20% YoY and 8% QoQ. The YoY decline was due to the absence of a non-recurring gain of Bt1.7bn and lower profits at the Cement-Materials and Paper businesses. Only Chemical posted YoY earnings growth, thanks to fatter spreads. The QoQ profit decline was because of the absence of dividend income from Toyota. The result was 10% above our estimate, due to a stronger-than-expected Chemical profit (the division booked a smaller inventory loss and higher equity income than we had assumed).

Chemical remains profit driver, despite bigger stock loss outlook

The cost of Naphtha fell much more steeply than chemical product prices in 3Q14, boosting spreads. Hence Chemical profit jumped by 40% YoY and 135% QoQ to Bt5.3bn. Inventory losses totaled only Bt130m, as Naphtha was stocked for only 10 days, while product prices fell only modestly. Although product prices are tending to decline further in 4Q14 following a lower Naphtha price, management expects stock losses of Bt500-700m, the effect of which should be outweighed by fatter QoQ spreads. As such, we expect the 4Q14 Chemical profit to rise QoQ.

SCC updated on the Long Son 1.4mt Petrochemical project in Vietnam. The firm expects to finalize the project costs next month and secure financing in 1Q15. Ground-breaking could start in FY15 and the complex is expected to start operating in early FY19.

Cement now at bottom; Building Materials near bottom

Domestic cement demand in 3Q14 fell 3% YoY, due to lower demand across all customer categories (R -2%, G -3%, C -4%). Despite weaker demand, the ex-factory price remained firm at Bt1,950/tonne, up 1% YoY but down 1% QoQ. SCC expects demand to be flat, 4Q14 through 1Q15, then to start rising in 2Q15 and accelerate in 2H15. Management believes demand growth in 2015 will be at least 5%. For building materials, demand looks set to slip further YoY in 4Q14; a recovery may manifest in 2H15.

Paper remains soft

Paper profit fell by 10% YoY and 19% QoQ to Bt715m in 3Q14, due mainly to maintenance shutdowns of various paper machines and utility units. Although maintenance has been completed and paper prices remain stable, we expect the Paper profit to remain soft in the short-term, due to a low utilization rate during the ramp-up period for a new packaging paper machine (350kt, 20% of total packaging paper capacity).