Siam Cement

Siam Cement Plc 

 

We reiterate our Outperform rating on SCC as the company is one of the gainers from lower energy costs and it is trading at an undemanding PER of 13.3x, which is 2SD below its three-year mean. We believe that the stock should be rerated to its average level due to a greater earnings contribution from its higher valuation businesses in 2016, i.e., cement & distribution, even though we lower our 2016E earnings by 8% to reflect a 5% decline in domestic cement price and a more conservative assumption of the ramp-up rate of the new cement plant in Indonesia. Our new YE2016 target price of Bt500 offers 11.1% upside to our TP.  

 

Investment highlights 

 

- Up to a 7% gain from lower energy costs. SCC benefits from lower energy costs, mainly from lower fuel prices and electricity costs for its production facilities as well as from all product delivery costs. Based on our lower natural gas price assumption from USD7.5/mmbtu to USD6.3/mmbtu and lower Ft by Bt0.1/unit in 2016, we estimate an energy cost saving of Bt1.5bn per year. However, if oil and coal prices remain at the current levels of USD35/bbl and USD53/ton, we expect an additional cost saving of Bt1.2bn.  

- Chemical product demand to remain resilient. Although we reiterate our view that the peak olefins cycle has already passed, we foresee a limited downside risk to our chemical spread forecasts and plant operating rates resulting from the potential higher demand and sales of SCC’s olefin products, as the lower chemical prices will encourage more consumption and the saving from lower oil expense of consumers will likely to be used for the consumer staple goods, which are produced from olefin chain products. Meanwhile, our weaker THB assumption of Bt37.4 (10% YoY depreciation) will partly offset the negative effect from weakening olefin spreads in terms of USD by 11-16% YoY in 2016.   

- Solid earnings expected in 4Q15. We expect 4Q15 earnings to come in flat at roughly Bt9.0bn as higher dividend income from subsidiaries and associates (+Bt1.3bn) and benefit from no forex hedging loss (+Bt1.1bn), as well as a lower inventory loss (+Bt1.2bn) and gain from divestment of TBSP (+Bt250mn) will be fully offset by a weaker chemical margin (-Bt2.9bn) and cement prices (-Bt200mn).  

- Reducing 2015/2016E earnings forecasts by 4%/8%. We lower our 2015 earnings forecast by 4% to Bt42.9bn and our 2016 forecast by 8% to Bt40.7bn. Our 2016 earnings downgrade reflects 1) our new chemical price and spread assumptions, 2) a 5% reduction in our cement price assumption to Bt1,800/ton, 3) a more conservative ramp-up rate for the new cement plant in Indonesia, which results in a loss of Bt2.0bn, and 4) lower other income by Bt1.2bn (2.3% of revenue). However, these negatives will be partly offset by the potential saving from lower energy costs by Bt1.5bn.   

 

Valuation 

 

- Following our 8% earnings downgrade for 2016, we lower our YE2016 target price by 8% from Bt547 to Bt500. We still adopt a mean historical PER band of 14.8x as our PER target.  

 

- SCC is currently trading at 13.3x PER FY2016 or 2.0SD below its three-year average.