Siam Cement

Siam Cement Plc (SCC) 

Investment thesis

The street has become concerned that inventory losses caused by sharp drops in the prices of Naphtha and olefins may squeeze SCC’s 4Q14 bottom-line. But we believe posted earnings will be acceptable, given the firm’s policy of keeping low inventory levels and because fat spreads will have mitigated the impact of stock losses. In our view, the bottom has already passed and the forward profit outlook is good, driven by an olefins spread up-cycle and demand recoveries for cement and building materials. As such, now is a great time to take positions in SCC, we believe. Our BUY call stands with a YE15 target price of Bt540.

4Q14 earnings of Bt7.5bn anticipated

On January 28, we expect SCC to report a 4Q14 net profit of Bt7.5bn, down by 6% YoY and 4% QoQ. The assumed YoY decline is due to inventory losses at the Chemical business (versus a gain in 4Q13), lower dividend income from Toyota and the absence of a divestment gain. The assumed QoQ drop is mainly due to inventory losses.

Inventory policy and fat spreads mitigate effect of inventory losses

The Chemical performance will prove better than the market assumes. We expect an inventory loss of only Bt2.5bn, as SCC effectively halved its inventory levels to only about 1.5 weeks. Moreover, the firm gained substantially from fatter chemical spreads when the price of Naphtha fell much more steeply than the prices of downstream products. The spreads of HDPE-Naphtha and PP-Naphtha averaged US$790/t and $810/t, respectively, in 4Q14, up from $691/t and $716/t in 3Q14. 

Importantly, the spread expansion was driven by downstream spreads (HDPE-Ethylene and PP-Propylene), so SCC—a downstream-oriented producer—should see amplified benefits. Note that it has 100% stakes in downstream units but holds only two-thirds in upstream units.

Low oil prices to extend olefins up-cycle to YE17

Low crude prices may push back US shale gas output, which could cause the CODs of new gas-fed olefins production plants in America to be delayed. As such, the olefins up-cycle should extend into at least YE17, given that global demand for olefins is expected to grow by 4-5% annually, 2015-17, while supply may rise by 3-4% per year.

Cement demand to resume rising in 2Q15, building materials in 2H15

Domestic demand is expected to post a dip of 1-2% YoY for 4Q14, while the cement price should be sustained at Bt1,950/t. SCC guides that demand will be flat in 1Q15, then start rising in 2Q15 and accelerate in 2H15, which would make for demand growth of 4-6% in FY15. We expect demand for building materials to lag cement demand by 3-6 months, so growth should resume in 2H15. With regard to the cement price, SCC believes that it could be sustained, despite the market entry of new supply from TPIPL, as TPIPL is likely to export much of its new production.