Siam Cement

Siam Cement Plc (SCC) 

3Q15 net profit was Bt9bn (Bt7.5/sh), +15% YoY but -35% QoQ, 5% below SCBS and consensus. Behind the miss: 1) higher interest expenses than anticipated on a FX loss (one-time unwinding of hedging of Bt1.5bn); 2) lower local cement sales volume (-1% YoY) and building materials (-8-9% YoY). The YoY growth reflected a better chemical unit (wider spreads) that made up for the weaker cement and building materials (lower volume) and paper (narrower price and cost gap and higher depreciation) units. The QoQ drop was due to a poorer performance at all units - chemical (inventory loss of Bt2.2bn in 3Q15), cement and building materials and paper (seasonality) - and the absence of seasonal dividend income. Of 9M15 profit, 61% came from chemicals, 25% from cement and building materials, 7% from packaging and 7% from others.  

New CEO. SCC’s board appointed Mr. Roongrote Rangiyopash as President and CEO of SCC to replace Mr. Kan Trakulhoon, who is retiring, effective January 1, 2016. 

Company guidance  

 Chemical unit - resilient: Delays or cancellations of new ethylene supply will give a favorable demand-supply outlook through mid-2018 that will help widen PE-naphtha spreads further. The startup of new propylene supply from China in 2015-16F might affect PP-naphtha spreads, but the impact on SCC should be moderate given its focus on HVA products. PVC spreads will be healthy thanks to a drop in EDC/ethylene costs. Sales volume will be firm: PE/PP and PVC volume grew 6-7% YoY in 9M15 and SCC does not see any signs of a slowdown yet.  

 Cement and building materials - recovering slowly: The government sector is doing better (30% of total), the commercial segment is coming back slowly (20% of total) and the residential property segment is quiet (50% of total). In response, SCC cut its local cement demand growth target to 0% in 2015F (vs. -0.5% in 9M15) and +3-4% in 2016F. Local building materials demand growth will remain negative in 2015F but is hoped to be better in 2016F. It will have new cement sales volume from the commercial startup of new plants in Cambodia (Sep-2015) and Indonesia (late-2015). This will add 2.7mn tons (+11% of total capacity). 

 Packaging unit - relatively unchanged: Demand will be stable with possible continuation of narrower paper price and cost gaps.   

Earnings revision. We changed some assumptions and this trimmed 2015 earnings by 4% and 2016 by 1%: 1) cut local cement demand growth to 0% in 2015F and 3% in 2016F; 2) cut PP-naphtha spread to US$680/ton in 2015-16F, equivalent to spread in 2015TD; 3) put in a one-time FX loss of Bt1.5bn in 3Q15; 4) put in a gain on a change in our FX assumption to Bt34/US$ in 2015F and Bt35/US$ in 2016F (from Bt33/US$). Post revision, its 9M15 accounted for 76% of full-year forecast, in line with the past 5 years.  

Maintain BUY. Our SOPT PT is unchanged at Bt630, with the roll to mid-2016 offsetting the revision. The share price correction has priced in its weak 3Q15. We expect better earnings in 4Q15F (seasonal dividend income, no chemical inventory or FX losses) and in the LT (chemical upcycle, better cement sales in Thailand and sales from its new overseas plants in 2015-17F).