Siam Cement

Siam Cement Plc (SCC)
 

What's news? On Saturday, a massive fire broke out at a Toluene tank of Bangkok Synthetics Co Ltd (BST; SCC has a 26% stake in the firm and sells chemicals to it). The cause of the fire is currently under investigation, so at this stage neither BST nor SCC can comment on the event or offer guidance as to how long the plant will be closed.
Note that BST produces Butadiene (140K tonnes), Butene-1 (35K tonnes), MTBE (55K tonnes), C4-Raffinate (40K tonnes) and C4-LPG (55K tonnes).
Impact on SCC: Insurance should cover all the damage, but not business interruption. As such, the impact on SCC will be twin-pronged—an equity loss from BST during the shutdown period and disruption of demand for C4 and Toluene.
SCC booked profit-sharing from BST of around Bt2.1bn in FY11 and Bt300m in 1Q12. If BST’s plant were not shutdown, equity income from BST would be expected at Bt1.1bn in FY12 (down YoY due to a lower synthetic rubber price). We roughly estimate an equity loss of around Bt70m per month during the closure. As such, if the plant were shuttered for six months, equity income would be cut by Bt1bn (4% of SCC's FY12E profit).
ROC (an SCC Naphtha cracker) normally feeds BST with 240K tonnes of C4 and 80K tonnes of Toluene annually. For the period that the BST is closed, SCC will have to sell this output on the spot market, implying a much lower margin. With regard to MOC (another SCC cracker) the impact is limited, as it can adjust its feedstock mix to use more gas (less Naphtha) in order to produce less C4 and Toluene.
We will revise our earnings model after we receive more guidance from management.
Action: Although the event won’t have a substantial impact on SCC's earnings, we expect it to generate negative sentiment toward the stock in the short-term. However, should the share price drop, we wouldn’t recommend increasing positions. Prevailing slim chemical spreads are likely to continue to pressure SCC’s earnings for the foreseeable future, so we do not expect the stock to outperform the SET in short- to medium-term. We maintain our HOLD rating with a YE12 target price of Bt360.