Siam Cement

Siam Cement Plc (SCC) 

 

Investment highlights 

- Stronger-than-expected 3Q15 earnings…: SCC announced a 3Q15 net profit of Bt9.0bn (EPS: Bt7.5), down 35% QoQ but up 15% YoY. This exceeded our earnings estimate by 8%, mainly due to: 1) better-than-expected olefins sales volume and margin (+Bt2.3bn); and 2) a stronger-than-expected contribution from its paper division by Bt400mn. However, the benefits were partly offset by greater-than-expected inventory loss and an unexpected FX hedging contract loss, each worth Bt1.0bn.  

- ...with further improvement on the way: Looking toward 4Q15, SCC’s management expects an improvement in net profits on a QoQ basis due to the absence of any further inventory losses or FX hedging contract losses, as well as record dividend income from associated companies. However, the performance of its chemical business will likely soften — along with the PE & PP spreads — by 6%-12%. Meanwhile, cement business earnings should decline slightly QoQ in tandem with domestic cement demand growth and a surge in depreciation from the start-up of its new cement plants. Given this 4Q15 outlook and the fact that 9m15 earnings account for 76% of our full-year estimate, we maintain our FY2015 earnings forecast. 

- Domestic cement demand growth for 2015-16 revised down: SCC’s management has toned down its view on the outlook for domestic cement demand. It claims actual demand growth for the first nine months of 2015 suggests near-zero growth for 2015, down from an initial estimate of 3%. Management believes domestic cement demand growth will bounce back to 3%-4% in 2016, but such estimates are down from an average of 7%-8% in 2010-2013. While this lower growth assumption will negatively affect our domestic cement sales forecast by 0.9m tons, our earnings forecast will be hurt by only Bt530mn.  

- Still bullish on chemicals, despite softening in the short term: Management has reiterated its bullish view on SCC’s olefins business, as accumulated new supply growth is only 3%-4%, which implies solid olefins spreads until the middle of 2018. Management said it was not worried about China’s economic growth slowdown, noting that actual demand for petrochemical products remained firm. However, the propylene price and spread will likely remain under pressure from an increase in supply from PDH and other on-purpose facilities owing to cheap feedstock, such as propane, methanol and coal.   

Valuation 

- We apply a more conservative PER target of 14.8x (average) from 15.6x (0.5x S.D.) to reflect the assumed below-average domestic cement demand growth (but offset by the contribution from the expansion of its Asian cement operation). Our new target price is thus set at Bt547.   

- SCC is trading at 12.7x PER, the lower-bound of the past three years.