Siam Cement

Siam Cement Plc (SCC) 

 

2Q15 net profit of Bt13.9bn (Bt11.6/sh), +63% YoY and +25% QoQ, 28% above our estimates and 20% above consensus, thanks to better margin than expected at the chemical unit. SCC added to the gains from wider chemical spreads and inventory gain of Bt970mn by converting a portion of the sales of its ethylene from low-margin HDPE to higher-margin products within the group and at associates. This raised the portion of its high-value added (HVA) chemical sales to 30% in 1H15 from 27% in 2014. The chemical unit shored up overall profit, making up for softening operations in other units, pulled down by lower local cement prices (-5% YoY), narrower paper price and cost gaps, and higher depreciation. Of 1H15 profit, 56% came from chemicals, 26% from cement and building materials, 7% from packaging and 11% from others. 1H15 DPS is Bt7.5, XD on 10 Aug. 

Company guidance  

Resilient chemical unit: The delays or cancellations of new supply of shale gas, CTO, and PDH will give a favorable chemical demand-supply outlook through 2018-19 that will help widen chemical spreads further, SCC believes. In 3Q15TD, PE/PP-naphtha spread remains strong at US$750-824/ton (+5-19% YoY and flat QoQ). For polyethylene, SCC expects more restocking demand as high season approaches and buyer inventories are low. Outlook for polypropylene may be eroded somewhat by additional supply amid weak demand from the automotive industry and for PVC from weak demand from the construction industry.  

Cement and building materials recovering: In 2015, SCC stands by its local cement demand growth target of 3% (vs. -2% in 1Q15 and +2% in 2Q15) and expects a smaller contraction in building materials demand than the -3% in 1H15. This implies better sales volume growth in 2H15. SCC sees signals of a recovery in the infrastructure segment (30% of the total) as the government speeds up budget spending and in the commercial segment (20% of total). Its new cement plant in Cambodia started up June and more supply will come from startup in Indonesia at end-3Q15. This will add 2.7mn tons (+11% to total capacity), but it will take several quarters before the new capacity can run full out.  

Transforming packaging: Weak local demand amid narrower paper price and cost gaps may continue for the near term. The new packaging capacity (+17% to total capacity), starting up in 4Q14, is now running at full capacity. The fibrous chain (20% of the unit’s earnings) will continue to be moved to more high-margin HVA products after completion of the investment from Nippon Paper in 2014.  

Maintain BUY with new PT of Bt630. We raise 2015 earnings by 11%, taking into account its strong 2Q15 results and wide chemical spreads in 3Q15TD. This gives a new SOPT PT of Bt630 (from Bt600). Our forecast is 10% above consensus, and we expect the market to make similar changes. We expect 3Q15 earnings to soften QoQ without seasonal dividend income and inventory gain but jump YoY on wider chemical spreads. We also like SCC for its benefits from: 1) low oil price on chemical spreads and cracker efficiency, as a naphtha-based player, as well as lower fuel and transportation costs for its non-chemical unit; 2) the depreciation of the THB/US$, as a net exporter. Every 1 THB/US$ weakness raises its earnings by Bt1bn or +2%.