Siam Cement

Siam Cement Plc (SCC)

We reinitiate coverage of SCC with an Outperform rating due to renewed optimism in domestic cement consumption and further improvement in its chemical business’ profitability. Additionally, 2016 will be a golden year for SCC’s cement business due to its double-digit effective capacity growth and improvement in the domestic cement demand/supply balance. In our view, despite weaker olefins spreads, SCC’s chemical business will improve in 2015 due to better polymer-to-monomer spreads. Our 2015 target price is Bt579, based on 17.4x FY2015 PER (1.0x SD). 

 

Investment highlights 

 

- Thai cement industry is back on track: The Thai cement industry is expected to resume its organic growth at about 6%-7% in 2015. We believe that the industry has already passed the bottom with the government's planned investment in major infrastructure projects to significantly boost cement consumption. However, competition in the domestic market may intensify due to the start-up of TPIPL’s new cement plant (4m tons) in late 2014. Nevertheless, a price war is unlikely to break out again as tight production capacities should deter major producers from applying pricing strategies. Based on expected 6% volume growth, SCC’s cement selling price could decline by as much as Bt120/ton and it would still be able to maintain its EBITDA at the same level as 2014.  

 

- Golden year awaits in 2016: 2016 should be a golden year for SCC’s cement division with effective production capacity growth expected at 12.4% while new domestic supply has been much lower than projected. SCC is building four cement plants in Cambodia, Indonesia, Myanmar and Laos that are scheduled to start their commercial runs in 3Q15, 4Q15, 2Q16 and 3Q17, respectively. The cement segment contributes a relatively high margin to SCC (about 15% EBITDA margin). Meanwhile, we expect the domestic cement market will further improve as construction of previously approved infrastructure projects starts up, which will further boost cement consumption growth. Meanwhile, all the incremental supply of TPIPL will be totally consumed within two years (2015-16). 

 

- Plateau chemical performance: Although there is a doubt about the competitive advantage of its naphtha cracker as a result of the negative effects of sharply lower propylene and benzene margins, we expect SCC’s chemical business to grow due to: i) rising polymer-to-monomer spreads (Figure 3); and ii) benefits of its fully integrated polypropylene chain (Figure 4). As SCC holds only a 65% stake in MOC and ROC, but 100% of its derivatives production units, the rising polymer-to-monomer margin implies net improvement in profitability at similarly integrated spreads. Meanwhile, the decrease in the propylene margin due to pressure from LPG-based producers in China will have only a limited impact on an integrated producer like SCC, as: i) the overall polypropylene-naphtha margin should remain healthy despite a slight expected decline; and ii) SCC also imports cheap LPG feedstock from the U.S.     

 

Valuation     

 

- Higher valuations on the way: SCC trades at 15.1x PER (almost 3-yr average) and 3.0x PBV (1.25x S.D.). Based on the improving outlook for both its cement and chemical businesses, we aggressively assign a PER target of 17.4x PER (1.0x SD), which yields a target price at Bt579.