Siam Cement

Siam Cement Plc (SCC) 
While we expect short-term earnings decline on poor 2Q12 results due to inventory losses and
write-offs arising from its fire-hit BSTE subsidiary, we project an earnings rebound in 2H12
and solid growth in 2013 as margins improve and volume grows.
Although we expect poor 2Q12 earnings due to large inventory losses, we believe SCC should remain profitable thanks to its solid cement and building material businesses. We see 2Q12 weakness being  temporary and expect a sharp earnings rebound in 2H12. We maintain our OUTPERFORM rating and DCF-based target price. 

What Happened
Our 2 Jun company visit supported our negative outlook on 2Q12 earnings as we expect large inventory losses as petrochemical product prices have plunged alongside the oil price. In the longer term, we believe SCC’s earnings are on track for solid recovery, driven by: 1) sharp margin rebound in the petrochemical unit on improved demand, and 2) rising margins for the cement, paper and building material businesses on lower costs for oil and coal and improved domestic market demand. SCC remains sanguine on its long-term growth plan given its secure foothold in Indonesia and its planned entry of the gas-based petrochemical business in Vietnam to counter the potential of US shale gas-based petrochemical competition.
What We Think
We remain confident of SCC’s near and long-term growth outlook. While we see near-term downside on poor 2Q12 results, which should already be priced in by the market, SCC’s medium- to long-term growth outlook remains promising. Key near-term catalysts are petrochemical margin improvement and stronger margins for cement and building materials on the back of infrastructure and flood reconstruction efforts in Thailand. In the long term, we see SCC being a key beneficiary of ASEAN Economic Community integration from 2015 as it already has a footprint in the Indonesian petrochemical, cement and building material markets.
What You Should Do
We recommend investors buy into any share price weakness post the 2Q12 result announcement, which is scheduled for 25 July. We believe 2Q12 will be the trough quarter and expect a eaningful earnings rebound in 2H12.