Siam Cement

Siam Cement Plc (SCC)

Investment thesis
We are now more bearish on SCC’s 2H14 earnings outlook after taking onboard management guidance at the post-results meeting yesterday. Chemicals won’t grow as we previously expected, while Paper will see a hiccup caused by a maintenance shutdown. We have cut our FY14 earnings forecast 12% to Bt32bn, reduced our YE14 target price to Bt466 from Bt490 and downgraded our rating from BUY to HOLD. We believe a good time to re-enter SCC would be in late 4Q14, just before all businesses resume strong growth mode in 1Q15.
2Q14 recap
SCC reported a 2Q14 net profit of Bt8.5bn, down 14% YoY but up 2% QoQ. The weaker YoY number was due to lower profits at the Chemical and Paper businesses. Only Cement posted YoY earnings growth, thanks to higher prices. SCC’s QoQ bottom-line increase was due to dividend income from Toyota, which fully offset the effect of weaker performances across all the conglomerate’s businesses.
Chemicals unlikely to see growth in 3Q14
Although the olefins chain delivered a stronger performance, driven by greater volume and spreads, slimmer PVC margin and weaker equity income from associates (mainly BD and PTA) squeezed Chemical’s profit by 14% YoY and 9% QoQ to Bt2.3bn in 2Q14. Furthermore, Chemical earnings won’t improve in 3Q14 (as we had previously expected), even though the latter part of the third-quarter is normally high season for the olefins chain. The maintenance shutdowns of a PTT gas separation plant and a PTTGC unit will force SCC to import LPG and Ethylene at spot prices. As such, effective spreads look set to be slim.
Cement to bottom out in 3Q14
Domestic cement demand in 2Q14 was flat YoY, while the ex-factory price was maintained at Bt1,950-2,000/tonne, implying a 5% YoY increase. SCC expects demand to slip around 3% YoY in 3Q14, as existing major construction projects are being completed but ground-breaking is yet to start on new projects. Demand should recover in 4Q14 with growth of 0-1% YoY (5-6% QoQ). For building materials, demand looks set to continue declining YoY in 2H14; a recovery is expected in 1Q15.
Paper under pressure from weaker margins and shutdown
Paper profit fell 14% YoY to Bt887m in 2Q14, due to lower paper prices and heavier depreciation expenses. The price of writing paper will tend to decline further in 3Q14 because of seasonality, while packaging paper’s margin is expected to be squeezed as a result of higher waste paper prices. Moreover, a plant maintenance shutdown and turnarounds of utility units present a major headwind to the 3Q14 profit of the Paper division.