Siam Cement

Siam Cement Plc (SCC) 

Investment thesis
SCC’s profitability is building momentum. 2Q13 earnings should be much better than the consensus forecast just a couple of months ago, thanks to fatter-than-expected chemical spreads during the quarter. 3Q13 looks set to be even stronger, led by chemical high season and ongoing demand growth for cement and building materials. The current valuation is attractive. SCC trades at PERs of 15.7x for FY13 and 13.1x for FY14, slightly above its historical average (up 0.1SD). We believe the stock deserves a premium to its long-term mean, as it is at the start of a profit up-cycle. Our BUY rating stands with a YE13 target price of Bt520.
2Q13 preview
On July 31, we expect SCC to report 2Q13 net earnings of Bt8.7bn, up by 104% YoY and flat QoQ. The stronger expected YoY number is attributable to better performances across all business units, particularly Chemicals, which will post a turnaround from a 2Q12 loss on fatter spreads. In QoQ terms, dividend income from Toyota should fully offset the effect of seasonally weaker Cement, Building Materials and Paper operations.
Cement demand remains strong, despite delays to govt projects
Domestic cement demand is expected to post growth of 10% YoY for 2Q13 and momentum should be sustained throughout the year, supported by ongoing public and private sector projects (SCC anticipates that demand next year will rise by 5-10%, even in the absence of water management projects worth Bt350bn and infrastructure projects planned under the Bt2.2trn borrowing bill). The ex-factory cement price remained flat at Bt1,800-1,850/tonne during the quarter, but we expect a fatter EBITDA margin, due to a sales volume shift from export to domestic business.
Chemical prices rising
Although 2Q13 was low season, polyolefins prices dipped only slightly, while the cost of Naphtha fell much more steeply. As such, mean HDPE-Naphtha and PP-Naphtha spreads rose to US$585/tonne (up by 22% YoY and 12% QoQ) and $617/tonne (up 14% YoY and 6% QoQ), respectively, in the quarter. We do expect an inventory loss of Bt0.5-1.0bn, due to declines in both product and feedstock prices, but the Chemical unit should still report a stronger QoQ profit. 3Q13 will be even better, we believe, led by fatter spreads, greater sales volumes and inventory gains.
Paper remains in subdued mode
The profit of the Paper unit should post a QoQ drop on seasonality and we expect only a flat YoY performance—the effect of a better packaging paper operation (greater sales volume at stable prices) would have been offset by a poorer fibrous chain performance (due to lower prices and weaker demand for writing paper). We expect the Paper business to resume growth mode in FY14 on a 21% addition to packaging paper capacity and the transformation of the fibrous chain by using pulp to make new value-added products, rather than just printing paper.