Siam Cement

Siam Cement Plc (SCC)
What’s new?
SCC has signed an MOU with Nippon Paper Industries (NPI) to form a JV to collaboratively enhance the competitiveness of its Paper Fibrous Chain. NPI will hold a 30% stake in SCC’s Fibrous Chain through a capital increase. The transaction is expected to be concluded in 2Q14, subject to terms and conditions to be agreed upon in the JV.
Note that SCC and NPI also have a 45:55 JV to produce Machine-Glazed Paper with a capacity of 43k tonnes per year. The plant is expected to commence operating in mid FY14.
A good move by SCC
The partnership with NPI should bring SCC’s fibrous chain forward. Recall that the chain faces difficulties because of diminishing demand for printing and writing (P&W) paper with the emergence of cheap digital reading devices. As such, SCC has decided to use pulp not only to make P&W paper, but also for high-value applications, such as Dissolving Grade Pulp (raw material for textile rayon, melamine, food chemicals, cosmetics and pharmaceuticals) and Machine-Glazed Paper (raw material for a wide range of applications—food wrap paper, medical packaging, laminated floors, furniture veneers and image transfers on textiles).
However, if SCC had undertaken the development and marketing of these high-value applications by itself, progress may have been slow. The JV with NPI should accelerate the process, given that NPI is a major Japanese manufacturer of paper products with leading-edge technology and has an established distribution network across Asia.
Minimal impact now, but good potential over the long run
The impact on SCC's earnings will be only minimal in the short- to medium-term, given that Fibrous chain contributed only 4% to its top-line and EBITDA in 1H13. Once the capital increase has been completed and NPI is an equity partner in the Fibrous chain operation, the dilution will reduce SCC's earnings by about 1%, but over the mid- to long-term the synergistic benefits from enhanced production efficiency, the development of new products and the integration of marketing and sales networks should outweigh the effect of the dilution.
Maintain BUY
We like SCC because it continually works to build a more sustainable growth platform. Although the Fibrous Chain division currently faces difficulties, management is in the process of transforming it from a sunset industry into a value-added growth business. Moreover, the current valuation looks attractive. The firm currently trades at PERs of only 13.7x for FY13 and 12.4x for FY14, versus a long-term average of 12.8x. We maintain our BUY rating with a YE13 target price of Bt500.