Siam Cement

Siam Cement Plc (SCC)
 

Investment thesis: We have cut our FY11 earnings forecast by 10.6% to factor in diminished expectations for the 4Q11 performance and trimmed our FY12 projection by 6.7%, as we don’t expect the post-flooding surge in demand for cement and building materials to be sufficient to fully offset the effect of the next chemical up-cycle being delayed. As such, our YE12 target price declines to Bt430 from Bt450. However, SCC’s valuation remains attractive—an FY12 PER of 12x versus a 3-year CAGR of 25.4%.
Weak 4Q11 is behind us: On Jan 25, we expect the firm to report 4Q11 earnings of only Bt3.06bn, down by 82% YoY and 59% QoQ. The weakness is attributable to: 1) squeezed chemical spreads, 2) the impact of the flooding on demand for cement, chemicals and paper, 3) asset write-offs for flood damage and 4) expenses tied to reduced deferred tax assets, due to the lower corporate tax rate this year. But the poor 4Q11 profit is behind us—it was mostly caused by non-recurring items. SCC’s long-term fundamentals remain concrete.
Chemicals will gradually recover, but slower than earlier expected: Chemical spreads have troughed—below $400/tonne for both HDPE and PP. Spreads should soon inch up on restocking, but may not recover strongly in 2012, as the global slowdown will push back the start of the up-cycle to early 2013 from 2H12.
Strong post-flooding demand: Management guided that demand for cement in 2012 is expected to increase by 5-10%, while sales of building materials should grow even faster, thanks to post-flooding rebuilding demand. This guidance is nearly double what we previously expected. As such, Cement and Building Materials should be the dual growth drivers this year. Cement and Building Materials currently contribute around 24% and 6%, respectively, to net profit. SCC expects Building Materials sales to exceed Cement sales within 5-10 years, thanks to its greater scope for growth—launches of new products, acquisitions and expansion in ASEAN.
Paper will normalize in 2Q12: Fallout from the flooding on the Paper business will persist into 1Q12, as many clients’ factories won’t resume operating until about late 1Q12. But the impact on sales volume will be only modest—SCC has switched production to export (but export margin is slimmer than domestic sales margin).