Siam Cement

Siam Cement Plc (SCC)

Investment thesis: Although we believe SCC’s profit will have bottomed out in 2Q12, we would counsel long-term investors against rushing in; there should be a better entry price in 4Q12. The expected 3Q12 earnings improvement, to be fueled by seasonally fatter chemical spreads and some inventory gains, will constitute only a short-term surge, so short-term investors hunting absolute returns on a three-month horizon may profit. But over the next 6-9 months, we don’t think SCC will outperform the market, as its real earnings up-cycle won’t kick in until mid 2013. As such, we maintain our HOLD rating with a new YE12 target price of Bt350, down from Bt360.
Earnings at bottom: We expect a 2Q12 net profit of Bt4.1bn, down by 46% YoY and 32% QoQ. Weak chemical spreads, inventory losses of around Bt2bn and a loss from the BST plant shutdown are to blame. Our estimate is at the lower bound of the consensus range for the quarter of Bt4-5bn, but there might be further downside, as we have yet to include asset write-offs related to fire damage at the BST facility, as the damage value has not yet been publicly announced. However, we believe 2Q12 represents the nadir for the year and that the third-quarter will be much better, underpinned by seasonally fatter chemical spreads and, probably, some inventory gains.
Earnings up-cycle may not start till 2H13: After the 3Q12 seasonal rebound, we expect chemical spreads to soften again in 4Q12 and remain under pressure until mid 2013—the global economic slowdown remains a headwind to chemical demand growth, increasing the longevity of the prevailing oversupply situation. The start of the real up-cycle in chemical spreads (and SCC's earnings) looks set to be delayed to 2H13 from 1H13 (our previous assumption).
Earnings and target price cuts: We have reduced our FY12-13 earnings forecasts by 11% and 9%, respectively, in order to factor in the persisting chemical oversupply environment. Our YE12 target price, consequently, declines to Bt350 from Bt360. Our FY12-13 bottom-line projections are now 18% and 17%, respectively, below the Bloomberg consensus.