Siam Cement

Siam Cement Plc (SCC)  

 

- 1Q16 net profit was Bt13.6bn (Bt11.4/sh), +23% YoY and +19% QoQ, 16-20% above our estimates and consensus, with the beat lying in better equity income from its chemical unit than expected at Bt2.9bn (+97% YoY), higher local cement demand growth than expected at 5%, and non-recurring items of Bt280mn (FX gain and insurance claims, outpacing the chemical inventory loss). The YoY growth was backed by a better chemical unit (gain on weak THB/US$, wider spread, and higher equity income) and paper unit (more volume and better margin), that made up for the softer cement and building materials units (a slight drop in local cement price and higher depreciation). The QoQ growth reflects a seasonal rise in sales volume. Of 1Q16 profit, 67% was from chemicals, 24% from cement and building materials, 9% from packaging. 

 

Company guidance  

 

- Chemical unit. In April, olefins sales volume was strengthened by higher product prices in tandem with high oil price, and chemical spreads were robust. PE-naphtha was US$819/ton (+1% YoY and +8% QoQ) from cracker turnaround season and favorable demand and supply, PP-naphtha was US$741/ton (-6% YoY but +26% QoQ), from technical and economic run problem of new supply from China, PVC-EDC/ethylene was US$330/ton (+17% YoY and +9% QoQ) from solid demand. Its chemical associates are doing better, with wider PTA and BD spreads and more contribution from Chandra Asri, which is ramping up utilization after 40% capacity debottlenecking in 4Q15. SCC gave its maintenance shutdown plan: a 23-day VCM plant shutdown (TPC) in 2Q16 and 40-day ROC cracker shutdown in 4Q16.  

 

- Cement and building materials unit. SCC maintains its targets for local cement demand growth of 3-5% in 2016 (vs. +5% in 1Q16), largely due to more activity in the government sector (30% of total) with muted commercial (20%) and residential sectors (50%). Additional supply is pressuring local cement prices in 2016 (-3% in 1Q16). Local building materials demand growth is set to remain negative in 2016 (vs. flat YoY for housing products YoY and -5% YoY for ceramic tiles in 1Q16). After starting up new cement plants in Cambodia (3Q15) and Indonesia (4Q15), in 3Q16 its new cement plant in Myanmar (+1.8mn tons, +7% to its capacity) will start up. 

 

- Packaging unit: SCC expects demand to drop seasonally QoQ in the local market and be unchanged in the regional market. Product prices will be stable, with raw material cost (short fiber pulp) trending down, widening the price and cost gap.  Maintain BUY. We expect 2Q16F to be stable QoQ (better chemical unit offsetting the seasonal drop in cement and building materials and paper volume) and YoY (better chemical and paper units outpacing the drop in cement and building materials unit). We have raised our forecast by 5% to Bt50bn in 2016F and Bt54bn in 2017F. Changes:  1) raise chemical equity income by 25%; 2) raise PP spread 9% to US$620/ton; 3) raise rise in local cement demand by 1% to 3% in 2016-17F; 4) include 4Q16 ROC cracker shutdown. We maintain BUY with the revision giving a new end-2016 SOTP PT of Bt600 (from Bt580). We like SCC for the promise of a strong 2Q16F and LT robust earnings from chemical upcycle and more improvement in local and regional cement demand.