Siam Cement

Siam Cement Plc (SCC) 

 

We reiterate our Outperform rating on SCC with a YE2016 target price of Bt535 based on expectations the company will report a new earnings high in 2Q16 and for its cheap valuation. Higher chemical spreads and dividend contributions from associate companies will be the key earnings drivers in 2Q16. Meanwhile, SCC is trading at an undemanding -1.0x S.D. for PER and -2.0x S.D. for PBV amid concern about softening contributions from its chemical business in 2H16 and higher competition in the domestic cement market from new supply. We, however, believe that chemical spreads will remain solid until 3Q16 due to planned and unplanned outages, while lower domestic cement prices in 1Q16 have taken into account the new supply, and an improvement in cement demand in 2H16 will likely stabilize the price going forward.  

 

Investment highlights 

- Record earnings in 2Q16 expected, up more than 10% both YoY and QoQ: We expect SCC’s earnings will reach a new high in 2Q16, rising 10-14% both YoY and QoQ to about Bt15bn. Key earnings drivers include 1) further improvement in chemical spreads by USD20/ton for HDPE and USD40/ton for PP, as well as, more than USD100/ton for butadiene (+Bt500mn), 2) the reversal of a Bt300mn inventory loss to a gain; and 3) higher dividend income from associates (+Bt600mn). The key uncertainty is the volume and price of cement due to the approaching low season and concern about new supply from TPIPL. However, based on historical data, we expect domestic cement demand will show a decline of only 5%-6% QoQ in the second quarter, while we found that the domestic cement price had recovered MoM for two consecutive months in April and May 2016, based on the monthly data provided by the Ministry of Commerce. 

- Domestic cement demand will gradually recover: We see domestic cement demand recovering gradually on the back of higher government budget disbursement in 2Q-3Q as usual (this portion accounts for 30% of the total market) and the rising value of residential project launches throughout the remainder of 2016 (50% of the total market). Our property analyst sees the value of residential project launches rising by about 40% each quarter. As such, we believe that domestic cement demand growth will improve significantly in 2H16 as 80% of the domestic cement market is improving.  

- Peak chemical spreads in 2Q16, but plateau to hold until 3Q16: Although we reiterate our view that the peak has already passed in the petrochemical industry, 2016 will be another good year for producers, particularly the olefins chain, as supply will remain tight until 3Q16. Shipments from the major olefins exporters — Japan, Korea, Singapore and China — have declined. The uncertain supply from Shell Bukom (a force majeure was declared in December 2015) has further tightened the market balance until August 2016. However, SCC has also announced a 40-day planned maintenance shutdown of ROC in 4Q16, implying an 8% drop in the cracker operating rate for the quarter. 

 

Valuation 

- SCC is trading at an undemanding -1.0x S.D. for PER and -2.0x S.D. for PBV.  

- Our YE2016 target price is maintained at Bt535, pegged at 13.5x FY2015 PER, the average for its 3-year historical trading range.