Siam Cement

Siam Cement Plc (SCC) 

 

Investment thesis

We believe the market is overly concerned about SCC’s earnings outlook. Upcoming 4Q15 earnings should still be good. For FY16, although we have revised down FY16 earnings by 12% and cut our YE16 target price to Bt575 (from Bt630) to factor in weaker outlook, SCC’s valuation remains attractive. It currently trades at a PER of 11x FY16, -0.6SD below its long-term average of 13x. However, given that we expect SCC to experience soft earnings in 1H16. Our strategy, thus, is to wait until mid-2016 before taking a position or increasing one’s holdings of the stock.

Preview for 4Q15

We expect SCC to report a 4Q15 net profit of Bt9.5bn, up 8% YoY and 6% QoQ. The assumed YoY increase is due mainly to stronger Chemicals performance, which should more than offset the expected weaker CBM and Paper operations. The expected QoQ increase would come from dividend income from investments and shallower inventory losses. We expect SCC to pay a final dividend of Bt7.5/share for 2H15 operation.

Chemicals continue to compel 4Q15 profit

The HDPE-Naphtha spread averaged US$710/t in 4Q15, down from $774/t in 3Q15 and $801/t in 4Q14, while PP-Naphtha averaged $554/t in 4Q15, down from $672/t in 3Q15 and $818/t in 4Q14. Although HDPE and PP spreads declined both YoY and QoQ and there was a full-quarter shutdown of the Chandra Asri plant in Indonesia (in which it holds a major interest), the expected shallower inventory losses (Bt900m in 4Q15 versus Bt2.96bn in 4Q14) and lower conversion costs following cheaper energy prices should still push Chemicals profit up to grow by 70% YoY to Bt6bn in 4Q15.

Another limp quarter for CBM

Increasing cement usage from the government sector alone was unable to push overall domestic demand back to growth in 4Q15. We expect domestic cement demand to fall 0.5% YoY in 4Q15 and FY15, slightly below the firm’s guidance of flat for the year. The domestic price is expected to be maintained at around Bt1,850-1,900/tonne during the quarter. However, the major drag to CBM earnings will not be the domestic cement business, but depreciation expenses from newly opened cement plants in Cambodia and Indonesia and weaker performance of its building material division following weak domestic consumption. We expect CBM profit to fall 41% YoY to Bt1.5bn in 4Q15.

Earnings for 1H16 to be soft

The HDPE-Naphtha spread seems to have peaked, while the PP-Naphtha spread should be softer than last year’s size due to the flood of new supply. CBM’s earnings will remain under pressure from depreciation expenses at the new cement plants, threat of new supply and weak demand for building materials.