Siam Cement

Siam Cement Plc (SCC) 

 

Investment thesis

We accompanied SCC’s management and IR team to meet investors in Germany, Switzerland and France last week. Most of the investors we met were from long-term funds, so discussions were mainly on the firm’s long-term strategies, expansion and business outlook. The information gathered during the non-deal roadshow (NDR) gave us a clearer picture of SCC’s long-term growth profile. In the short-to-medium term, Chemicals would be growth and cash generators, while the plan to expand its Cement-Building Materials (CBM) business in Asean would not only lengthen the growth story, but also create a sustainable earnings platform for the long term. We maintain our BUY rating with a YE16 target price of Bt650.

CBM slow in short term

Domestic cement demand is likely to be flattish in 3Q15 and 9M15. In our view, SCC’s cement demand growth target of 2-3% this year (implying growth of 8-10% in 4Q15) may be unachievable. Demand from the residential sector, which accounts for around 50% of country demand, remains weak and is unlikely to pick up strongly in 4Q15. Demand should pick up in 1Q16 but pricing will become a concern due to TPIPL’s new supply. Growth should be seen from 2H16 onwards on the back of Asean expansion.

More sustainable platform

SCC aims to grow its income stream from CBM business by allocating half of its Bt250bn CAPEX over the next five years to CBM. This strategic move should create a more sustainable earnings platform as CBM’s earnings are less cyclical than Chemicals’, while it should be an earnings cushion during a Chemicals downturn after 2020. In our view, SCC’s trading multiple should gradually increase in the long run.

Chemicals story remains promising

Even taking the Chinese slowdown into account, the PE-Naphtha spread should sustain fat at least until 2020 thanks to limited new supply and resilient demand for consumer staples. In the medium term, the PP chain should become another growth driver, thanks to recovery of demand for capital goods and tightening supply after 2017.

Earnings prospects for 3Q15 still good

We believe the street is overly concerned about the weaker-than-expected cement demand and inventory losses from sharp decline in Naphtha and Ethylene prices as the negative impact will be mitigated by Baht depreciation and fatter downstream (HDPE-Ethylene) spreads. The inventory losses should be around Bt2.5bn in 3Q15, while currency depreciation should increase net profit by around Bt500m for the quarter. We expect SCC to report 3Q15 net profit of Bt10.6bn, up 35% YoY but down 24% QoQ. The assumed YoY increase is due mainly to stronger Chemicals performance, while expected QoQ decline is due to inventory losses (versus gain in 2Q15) and absence of dividend income from Toyota.