Siam Cement

Siam Cement Plc (SCC) 
  
SCC’s acquisition of Global, a small retailer of building materials, will not only strengthen its building materials and distribution businesses but also equip it for growth opportunities from ASEAN market expansion. We are positive on this move as we believe Global’s proven successful business model could strategically fill SCC’s retail distribution gap. We maintain our Outperform call and DCF-based target price of THB410 (WACC of 9%). 

What Happened

SCC, via its distribution arm, has announced the THB10bn acquisition of retail company Siam
Global House (Global) comprising 1) 224m new shares at THB14 apiece, 2) a partial tender offer
(PTO), also at THB14/share, for a minimum of 391m and maximum of 457m shares,and 3) 48m-56m warrants at THB9.3/warrant. SCC intends to hold at least 30% but not more than 33.6% of Global, giving it some control over Global. Global will hold an EGM to approve this transaction on 1 Oct.SCC expects to complete it by the end of Oct.

What We Think

We are positive on this acquisition as Global's distribution channel could strengthen SCC's building
materials business given that Global's outlets focus on the retail market while SCC’s 400 Home Mart shops focus on the wholesale market. Global currently has 16 branches and aims to expand to 20 branches by end-2013. Its stores are mostly located in northeast Thailand and are, therefore,
poised to capture growth in the provincial market, driven by higher farm incomes.

Although the acquisition price works out to a hefty CY13 P/E of 25x and leads to only 1% earnings accretion,we believe that synergies from business integration will outweigh the cost. Furthermore, it should improve SCC’s earnings sustainability during a petrochemical industry downcycle.

What You Should Do

Buy for long-term growth. SCC is one of the stocks that are best positioned to capture 1) growth in the domestic demand for cement, building materials and paper through its extensive 400+ SCC Home Mart shops and Global stores, and 2) the recovery of petrochemical earnings due to the absence of inventory loss.

Acquiring stake in retailer: SCC has entered into a share subscription agreement worth a combined THB10bn to acquire a stake in Global through:
- 224m new shares (THB1.0 par value) at THB14/share
- partial tender offer (PTO) for at least 391.1m shares but no more than 457.4m shares, also at    

  THB14/share
- unexercised warrants subject to minimum of 47.6m warrants and maximum of 55.6m warrants.  T

These warrants are priced at THB9.2/warrant and have a conversion ratio of one warrant for 1.2 common shares with an exercise price of THB6.25/shr. This implies a share price of THB14 for one common share.If the acquisition is successfully implemented, SCC will own at least 30% but not more than 33.5% of Global.

Why buy Global?

We are positive on this acquisition as we believe that it could address SCC’s weakness in the retailing of building materials given Global’s warehouse store format. As there has been talk of such a move in the market for the past four weeks, this news is not entirely surprising to the market.

Expanding client base: Unlike SCC’s current retail stores called SCG Home
Mart, which focus primarily on the wholesale market (contractors and residential project builders), Global is a leader in the retail business with its warehouse store format that offers a wide range of products including building materials and decorative products, appliances and equipment for construction, maintenance as well as housing/building/landscape decorations. Growth of the
retail segment has been strong due to changing consumer behaviour.

Long-term strategic business partner: Unlike most of SCC’s previous acquisitions where SCC acquired majority stakes, SCC aims to be a sustainable strategic partner for Global which will retain its existing management team. Over time, we expect Global to improve its efficiency by streamlining inventory costs, enhancing product management and improving its marketing strategy.

Further strengthening AEC position:

Armed with its own successful wholesale-focused shop style and Global’s retail-focused warehouse-style shops,SCC will, we believe, have a very strong marketing and distribution business model. This, coupled with SCC’s wide range of building materials and cement products, should position it to capture the growth potential in the ASEAN market after the integration of the markets through the ASEAN Economic Community (AEC).

Earnings impact

We believe the acquisition price of THB14/shr is attractive at 25x CY13 P/E compared to the industry average of 28x. We also believe that synergies from business integration will outweigh the cost. We estimate only 1% FY13 earnings accretion for SCC based on a 30% stake in Global. However, we take a longer-term view as the earnings and EBITDA from the building materials and
distribution segments have been more sustainable than the cyclical petrochemical business. The addition of these segments should help improve SCC’s earnings sustainability during a petrochemical industry downcycle.
We think that SCC’s strong and proven management team will enhance Global's business through its strong capabilities in distribution and products.