Siam Cement Plc (SCC)
2Q16 net profit was Bt16.0bn (Bt13.4/sh), +16% YoY and +18% QoQ, 14% above our estimates and consensus, mainly on better-than-expected chemical equity income and paper earnings. It reported an extra loss of Bt140mn, with the revision of taxes using the Revenue Department’s calculations (rather than BoI’s) added Bt590mn to taxes, which was partially offset by FX and inventory gains of Bt450mn. Without these, 2Q16 core profit was Bt16.2bn, +23% YoY and +20% QoQ. The YoY rise was backed by a better chemical unit (more equity income, +35% YoY) and paper unit (higher volume and margin from ramping up new capacity in Thailand and Vietnam), that made up for the softer cement and building materials units (a 5% drop in local cement price and 3% fall in volume YoY, and higher depreciation). SCC announced 1H16 DPS of Bt8.5/share (34% of its 1H16 profit), XD on Aug 5.
Company guidance
- Chemical unit (68% of 1H16). In 3Q16TD, PE/PP-naphtha spreads were relatively stable YoY and QoQ at US$740/ton and US$702/ton. SCC expects chemical spreads to stay healthy in 3Q16, though naphtha price might rise and product prices might soften slightly post turnaround season. It anticipates a favorable demand/supply climate for the PE chain with lower new supply from China than expected due to PP chain running problem. SCC’s strategy is to focus on feedstock management - using more naphtha when prices are low - and more HVA products (54% of its chemical sales - including associates’ - in 1H16). Contribution from Chandra Asri (30% stake) is better, with greater capacity and efficiency after a 40% capacity debottlenecking in 4Q15 and it is running at 100% now. SCC plans a 40-day ROC cracker shutdown in 4Q16. It plans to delist TPC; the tender offer price will be announced on July 29.
- Cement and building materials unit (19% of 1H16). SCC has cut its targets for local cement demand growth to 1% in 2016 (vs. earlier target of 3-5% in 2016 and matching the actual 1% in 1H16), pricing in more government projects amid weak residential and commercial projects. Local cement price (-4% in 1H16) will continue pressured by competition. Local building materials demand growth is set to remain negative in 2016 (vs. -1% for housing products and -6% for ceramic tiles in 1H16). Production costs are not yet a concern, as it has locked in coal costs a year in advance. After starting up new cement plants in Cambodia and Indonesia (4Q15), its new cement plant in Myanmar (+7% to its capacity) will start up in Sep.
- Packaging unit (8% of 1H16). After opening in 4Q14, SCC’s new packaging line is now at 100% (+17% to capacity), boosting paper volume and margin for the rest of 2016.
Maintain BUY. We raised forecast 5% in 2016-17F with an increase in chemical equity income outpacing the 2% cut in local cement sales volume. Our 2016-17F forecasts are 8-15% above consensus, but we expect the market to also make upgrades. We like SCC for: 1) its robust 3Q16F earnings (up YoY on better chemical equity income and absence of one-time FX and inventory loss of Bt3.6bn recorded in 3Q15 but down QoQ from seasonality); 2) attractive valuation, trading at 12x 2016PE, below its 7-year PE of 14x. We maintain BUY with the earnings revision and roll-over to mid-2017 giving a new SOTP PT of Bt630 (from Bt600 at end-2016).
