Siam Cement

Siam Cement Plc (SCC)

Investment thesis
SCC’s 1Q13 numbers should confirm that its earnings up-cycle has started in earnest. This cycle might be a super-cycle for the firm, as its major business units—Chemicals, Cement and Building Materials—are likely to deliver robust growth for the next five years. Chemicals should enjoy spread expansion till 2017, at which point considerable new supply is slated to hit the market. Cement and Building Materials stand to benefit from government spending on infrastructure, 2013-17. We view SCC’s current valuation—an FY13 PER of 16.6x, 1SD above its long-term mean—as inexpensive, given that it is just at the early stage of an earnings super-cycle. Our BUY call stands.

Q1 2013 earnings preview and Q2 2013 outlook
We expect SCC, on April 24, to report a 1Q13 net profit of Bt7.4bn, up by 24% YoY and 7% QoQ driven by increased sales volumes and margins for the Chemical, Cement and Building Material businesses. For 2Q13, we anticipate that YoY and QoQ earnings growth will continue. Huge dividend income from Toyota should outweigh the impact of seasonally soft chemical spreads and lower QoQ demand for cement and building materials during the quarter.
Chemical recovery is building traction
Most chemical spreads improved in 1Q13. The HDPE-Naphtha spread fattened from US$449/tonne in 4Q12 to $520/tonne in 1Q13, while the PP-Naphtha spread fattened from $519/tonne to $570/tonne. Chemical sales volume is expected to have increased on a higher run rate at the ROC. Note that the ramping up of the utilization rate at the BST after its shutdown in 2Q-3Q12 increased the run rate at the ROC cracker from 85-90% in 4Q12 to 90-95% in 1Q13.
The best Cement performance yet
Domestic cement demand is likely to post growth of 10-12% YoY in 1Q13, driven by strong demand across all sectors (residential, commercial and infrastructure). This strong demand should have boosted the net ex-factory price by Bt25/tonne, both YoY and QoQ, to Bt1,850/tonne in 1Q13. Moreover, the 10% YoY decline in the cost of coal and a sales volume shift from export to domestic should materially expand cement margin further. However, on a consolidated basis, we expect Cement EBITDA margin to report a decline of 253 bps YoY to 21.8% for the quarter, due to the consolidation of a ready-mixed concrete business (a low margin operation) in Indonesia since 2Q12.
Paper growth from a low base; outlook remains subdued
The price and margin of packaging paper were flat both YoY and QoQ, but we expect a greater sales volume from a low base (a box plant was shut down in 1Q12 following flooding and PPPC was shut down in Oct-Nov 2012 after a fire). The price and margin of writing paper remained weak, due to diminishing demand with the emergence of cheap digital devices.