Siam Cement

Siam Cement Plc (SCC)

2Q14 net profit of Bt8.5bn, -14% YoY but +2% QoQ, in line with our expectations
but 4% below consensus. The YoY fall comes from a weaker chemical unit (narrower
PVC and associate spreads), paper unit (higher interest expenses), and holding unit
(lower dividend and equity income). These overwhelmed the slight rise in the cement
and building materials unit brought by better prices and inorganic earnings from Prime
Group (acquired in 2Q13) and its sanitaryware business (raised stake in 3Q13). The rise
QoQ reflects seasonal dividend income from its holding unit that more than offset the
lower sales volume from other units. SCC announced 1H14F DPS at Bt5.5, XD on 7 Aug
and payment on 28 Aug 2014.
3Q14 guidance. Cement and building materials unit: SCC expects local cement
demand to slip 3% YoY (vs. +2% YoY in 1H14 and flat YoY in July 2014) and building
materials demand to continue to drop (vs. -7% YoY in 1H14) without the startup of
new projects. A positive sign in local demand is expected in 4Q14F at the earliest as the
government begins disbursement and sentiment improves. In 2015F it expects cement
demand growth of at least 5%. Product selling prices should continue high, +4% YoY for
both local cement prices (gradual price hike since 2Q13) and ceramic tiles (raised
product mix to medium-to-high market) in 1H14. Chemical unit: It expects PE/PPnaphtha
spreads to be healthy (+10% YoY and +3% QoQ in 3Q14TD), supported by a
favorable demand/supply climate, but spreads for PVC-EDC/ethylene (-23% YoY and +9%
QoQ in 3Q14TD) and associates will continue weak. Polyolefins sales volume and raw
material costs may be affected by PTT group’s 30-day plant shutdown that will force it
to source some feedstock elsewhere. PVC sales volume will return to normal (up QoQ)
after the TPC maintenance shutdown in 2Q14. Paper unit: Contribution will be lower
because of a maintenance shutdown in 3Q14. It will be starting up new packaging
capacity (+17% to capacity) in 4Q14. Holding unit (auto and agricultural companies):
Contribution may be weakened by the economic slowdown in 2014, with a return to
normal expected in 2015.
Maintain BUY with a new mid-15 SOTP PT of Bt520 (from Bt525). We trimmed
earnings by 4% in 2014F and 2% in 2015F; the largest change was a reduction in
earnings expected from its holding unit. We expect 3Q14 to be this year’s bottom,
down QoQ on the absence of seasonal dividend income and YoY on the impact of
maintenance shutdowns related to chemical and paper units. Our 2014 earnings are
10% below the street. The slow earnings recovery and potential earnings downgrade
may exert ST pressure on share price. However, we still like SCC for the longer term,
with earnings growth of 18% in 2015-16F underwritten by wider chemical spreads,
higher non-chemical volume and inorganic growth from new investments in ASEAN.