SCC

Siam City Cement Plc (SCC)

Q2 2012A net profit of Bt810mn. SCCC reported 2Q12A net profit of Bt810mn, -23% YoY and -37% QoQ. Stripping out extra loss on the allowance for reduction in investment value in Holcim Cement (Bangladesh) of Bt227mn and FX gain of Bt26mn, normalized profit was Bt1bn, -4% YoY and -21% QoQ. The results were far below our estimates and market consensus at Bt1.2bn, due to: 1) the unexpected extra loss; 2) the lower-than-expected gross margin and higher-than-expected SG&A expenses. SCCC also announced 1H12A DPS of Bt7, XD Aug 14.

Key highlights on Q2 2012A. Earnings YoY were pulled down by a lower gross margin  (-5ppts YoY) and increased SG&A expenses to sales (+2ppts YoY). This was caused by a lower price for bags of cement brought by high competition and an increase in energy (fuel and electricity) costs. These outweighed the benefits from the increase in domestic cement sales volume (+7% YoY, based on BoT data) and the lower corporate tax rate. The QoQ slippage was due to seasonally lower sales volume. 

Expect Q3 2012 earnings to rise YoY but fall QoQ. We expect 3Q12 earnings to rise YoY, backed by: 1) continued strong cement sales volume underwritten by the repair of flood damage and investment in a water management system; 2) better cement margin on a cement price rise from cost push factors. At the same time, we expect a seasonal fall in 2Q12 earnings from lower sales volume. Similar to most building materials players, seasonal factors mean 1Q12 was peak. 

Cut earnings. With its weak 2Q12 results, we cut its earnings by 12% to Bt3.9bn in 2012 and 8% to Bt4.7bn in 2013 as we factor in: 1) the extra loss on the allowance for reduction in investment value in Holcim Cement (Bangladesh) of Bt227mn in 2Q12;  2) a 2% fall in cement prices; and 3) an 8% increase in SG&A expenses. 

Downgraded to SELL. The cut in forecast leads us to downgrade the counter to SELL from BUY with a new mid-2013 PT of Bt330 (from Bt380), based on SOTP (12x EV/EBITDA for the cement unit and market price for LANNA). In the past two months, SCCC’s share price increased by 21%, outperforming the SET by 15%, on anticipation of strong 2Q12 results and 1H12 DPS. Looking ahead, we expect the share price outperformance relative to the SET to reverse due to: 1) its poor 2Q12 results; 2) less attractive earnings growth (+15% CAGR in 2012-13); 3) demanding valuation, trading at 19x 2012PE and 17x 2013PE.