Siam Cement

Siam Cement Plc (SCC)

2Q13A net profit of Bt9.9bn. SCC reported 2Q13A net profit of Bt9.9bn, +132% YoY and +13% QoQ. The results are 18% above our estimates and 14% above consensus due to: 1) higher-than-expected dividend income from Toyota Thailand; 2) better-than-expected earnings from chemical units (wide spreads and minimal inventory loss of Bt800mn); 3) flood insurance claims of ~Bt400mn. Earnings from the cement and building materials units were strong and the paper unit was stable and in line.
3Q13 company guidance. In 3Q13, SCC will record an extra gain of Bt1.5bn from the revaluation of its previous investment value to fair value after the purchase of shares in Siam Sanitary Ware and Siam Sanitary Fittings from Toto Group. In 3Q13, SCC expects its domestic cement sales volume to grow by 7-8% YoY (vs. +9-10% YoY in 1H13) and local cement price to be firm at Bt1,875/ton (flat QoQ but +4% YoY). Contribution from the recent Vietnam ceramic acquisition, Prime Group (first recorded in 2Q13), will be better, as it has improved production efficiency and raised utilization rate from 60% in April to 100% in July 2013. SCC is positive on 3Q13 chemical outlook, as third quarter is normally buying season: its advance orders for the next 1-2 months are strong, and PE/PP spreads tend to be steady. In July 2013, PE-naphtha and PP-naphtha spreads were US$572/ton (+34% YoY but -2% QoQ) and US$604/ton (14% YoY but -2% QoQ). For the paper unit, demand may soften from slower economic growth, but volume is set to recover YoY from the pulp plant shutdown in 3Q12.
We expect 3Q13F net profit to jump YoY, mainly off a low base from the explosion at BST in May 2012 and fire at Phoenix in July 2012. On a QoQ basis, we expect 3Q13F to decline slightly, as the absence of seasonal dividend income will be partly offset by extra gain from the revaluation of investment and stronger chemical unit.
Raise earnings. We raise earnings by 7% to Bt35bn in 2013 and 3% to Bt40bn in 2014. Behind this is: 1) Bt1.5bn extra gain from revaluation of investment in 3Q13; 2) wider chemical spreads; 3) a slight cut of cement and paper sales volume; 4) a change in FX assumption to Bt30.5/US$ from Bt30/US$.
Maintain BUY. After fine-tuning earnings and rolling over PT, we raise our SOTP PT to Bt575 at mid-2014 from Bt550 at end-2013. SCC is our top buy in the construction materials sector based on: 1) its 1H13A DPS of Bt5.5 (XD on Aug 9); 2) outstanding 3Q13F earnings, topping the sector (jump YoY but minimal drop QoQ); 3) attractive valuation, trading at 16x 2013 PE and 14x 2014 PE vs. 3-year EPS growth of 26% from higher volume at the non-chemical units, wider spread at the chemical unit from more favorable D&S, and inorganic growth from its new investments in ASEAN.