Siam Cement

Siam Cement Plc (SCC)

Investment thesis: We still like SCC’s long-term story for its plan to build a sustainable business platform and expand across ASEAN. However, weak chemical spreads—which prompted us to cut our FY12 earnings forecast 19% and reduce our YE12 target price to Bt360 from Bt430—will continue to pressure its performance throughout this year. It is also too soon to play on the expected 2013 chemical up-cycle. We have, thus, downgraded our rating to HOLD from BUY.
Rebound from bottom, but still weak: We expect SCC to report a 1Q12 net profit of only Bt5.84bn, down 37% YoY but up 82% QoQ. Although the Cement and Building Materials businesses, which together comprise around 30% to the bottom-line, should report stronger performances on increased volume sales, that won’t be sufficient to offset the effect of weaker numbers at the Chemical (due to thinner spreads) and Paper (due to damages from flooding) businesses.
Soft earnings to persist for a few quarters: Slim chemical spreads should continue to drag on SCC’s performance through this year, even though some improvement is expected in late 3Q12, due to it being high season for buying. Under our base-case scenario, the spread up-cycle will kick in early next year—we expect growing demand to eat up all the surplus supply. However, there would be risk of a further delay to the start of the chemical up-cycle if the global economy were to fail to pick up as expected. In addition, delays to the launches of govt mega projects are likely to cause cement demand to rise only 5% in FY12, the lower bound of the 5-10% range guided for earlier this year.
Cut assumptions: Given weaker-than-expected spreads to date and little hope of spreads recovering strongly in 2H12 and 1H13, we have cut our spread assumptions for HDPE-Naphtha to US$402/tonne in FY12 (from $450/tonne) and $506/tonne in FY13 (from $550/tonne). We have also reduced our PP-Naphtha spread assumptions to $487/tonne in FY12 (from $550/t) and $606/tonne in FY13 (from $650/tonne). Moreover, we have cut our estimate of equity income from the PTA unit to a loss of Bt1bn for FY12-13 from a profit of Bt1bn. We also trimmed our domestic cement demand growth forecast to 5% from 7%. So, our FY12-13 profit estimates drop by 19% and 21%, respectively.