Siam Cement

Siam Cement Plc (SCC) 

 

Investment thesis

Although SCC’s short-term outlook is subdued, due to weak CBM earnings, we believe share price downside is limited by SCC’s cheap valuation and attractive dividend yield. The stock currently trades at an FY16 PER of only 10.4x (-0.8SD), its cheapest since 2009, while the dividend yield is good at 4.2% for FY16. We believe the current share price is a suitable entry point for long-term investors. But for short-term traders, we recommend waiting until 2Q16, just ahead of the expected resumption of strong earnings growth in 2H16.

4Q15 results recap

SCC posted a 4Q15 net profit of Bt11.5bn, up by 29% YoY and 27% QoQ. The result was 20% higher than our estimate and 17% above the street, as the firm posted an inventory gain of Bt330m (mainly due to a higher Ethylene price); we had modeled for an inventory loss of Bt900m. Core profit was Bt10.1bn, down by 12% YoY and 20% QoQ. The YoY decline was mainly due to a lower CBM profit and reduced investment income, while the QoQ drop was led by Chemicals and CBM.

CBM earnings to remain soft through 1H16

Domestic cement sales inched up 2% YoY in 4Q15, driven by govt purchases, which rose 12% YoY. Commercial demand was flat, while residential sector demand dipped 4% YoY. This year, SCC expects cement demand to rise 3-5%, concentrated in 2H16 (assuming that residential sector demand picks up in 2H16). However, our major concern is price. Management said that competition has intensified since late 4Q15, forcing the price down Bt50/tonne QoQ to a range of BtBt1,800-1,850/tonne in 4Q15. We expect the cement price to fall further in 1H16 as TPIPL’s output rises. Coupled with weak demand for building materials and heavier depreciation expenses at new cement plants in Indonesia and Cambodia, we anticipate that 1H16 will be a very weak period for the CBM business.

Decelerating Chemicals growth, but still strong

Chemicals still delivered profit expansion of 113% YoY and 10% QoQ to Bt7.5bn in 4Q15, even though HDPE and PP spreads declined both YoY and QoQ and there was a full-quarter shutdown for de-bottlenecking at the Chandra Asri plant in Indonesia. Note that after stripping out inventory gains/losses, core profit increased 11% YoY to Bt7.2bn, thanks to lower conversion costs. This year, the PP chain performance looks set to weaken, due to a flood of new supply entering the regional market, while the PE spread may have already peaked. But we still expect Chemicals earnings to sustain growth, thanks to smaller inventory losses (probably gains) and greater output at the Chandra Asri Plant.