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Published on March 26, 2008

The long-term potential of Siam Cement (SCC) remains solid, helped by its plan to build a joint-venture petrochemical complex in Vietnam costing US$3.5 billion to $4 billion (Bt110 billion to Bt126 billion).

However, at least 11 brokers are recommending "hold" on the stock of Thailand's largest cement conglomerate, because its outlook over the next year or two is bleak, due to a downturn in the petrochemical industry, rising energy costs and appreciation of the baht.

Tisco Securities, one of the brokers making a "hold" recommendation, said key risks for the group included tough competition in the domestic cement market, weaker petrochemical margins, a sharp rise in energy costs and further baht appreciation.

 "For every Bt1 the Thai currency strengthens against the US dollar, Siam Cement's earnings will decline Bt1 billion to Bt1.2 billion," the broker said.

Despite SCC's strategy of hedging coal costs and securing long-term supply contracts, its earnings in the near term will be pressured by higher energy costs, because coal prices next year will certainly rise above those this year, which the company has locked at $65 a tonne.

To reduce energy costs, SCC has spent Bt5.85 billion on waste-heat generators for the cement business, with a return on investment of about 20 per cent. It also plans to increase its product prices, particularly for cement and paper, to help offset its increased costs. However, this may take time, especially for cement, because the Commerce Ministry has yet to approve an increase in cement ex-factory prices, the broker said.

The broker reduced its 2008 and 2009 earnings forecasts for Siam Cement by 3 per cent and 1 per cent to Bt23.77 billion and Bt24.54 billion, respectively, after raising its assumption of coal costs next year from $65 a tonne to $95.

"We've also revised our average foreign-exchange-rate assumption, following our economist's latest forecast, from Bt33 to the dollar for both 2008 and 2009 to Bt31.50 and Bt33.50 to the dollar, respectively. As a result, we've cut our target price from Bt212 to Bt206 for local shares and from Bt223 to Bt216 for foreign shares," the broker said.

Despite the downgraded earnings estimates, the broker reiterated its hold rating for SCC due to its strong growth potential in long term.

A Vietnamese petrochemical complex, in which SCC and its associated firm, Thai Plastic and Chemicals, together own a 71-per-cent stake, will begin operating in two phases, in 2011 and 2013, and the project will then contribute to the company's earnings growth, the broker said.

The annual production of the large-scale petrochemical complex will include 1.65 million tonnes of olefins, 1.45 million tonnes of polyolefins, 280,000 tonnes of chloro alkalai, 330,000 tonnes of ethylene dichloride and 400,000 tonnes of vinyl chloride monomer.

Moreover, SCC is studying future business-expansion projects, including box plants in Vietnam and the Philippines, a cement plant in Indonesia and a clinker-grinding plant in Vietnam.

SCC expects its capital expenditure to reach Bt215.98 billion in the years from 2007-13, including for the Vietnamese petrochemical project.

Its main projects in the pipeline include a joint-venture high-density polyethylene plant in Iran with annual capacity of 300,000 tonnes, which will come on stream in the first half of next year; a box plant in Thailand with annual capacity of 60,000 tonnes; and a fibreboard plant in Thailand with a capacity of 17 million square metres per year. The last two projects will begin commercial operations in the third quarter.

These projects will not only contribute to SCC's future growth, but also help offset the downturn in the petrochemical industry, which is expected to hit a trough next year and in 2010, the broker said.

Finansa Securities said the Vietnamese petrochemical complex would take risks from higher construction costs, because it would be built as a green-field project.

Another risk is that Siam Cement cannot produce naphtha, which is the Vietnamese complex's main raw material, so it will have to buy it.

Kim Eng Securities (Thailand) said the new Vietnam complex would start next year but only on a small scale, with the larger portion coming in 2011 or 2012, supported by cash flow from current projects.

"This project will support Siam Cement's long-term growth prospects and is expected to generate earnings before interest, tax, depreciation and amortisation (EBITDA) to operating assets rate of at least 15 per cent, or between Bt16.5 billion and Bt18.9 billion, compared with a 2008 EBITDA of Bt42 billion," the broker said.

"This year's earnings will be rather disappointing, because they will be affected by many negative factors, and we expect a lower-than-normal dividend, reduced from Bt15 to Bt12."

Both Kim Eng Securities (Thailand) and Finansa Securities recommend "hold" for SCC shares.

Siam Cement's 2007 net profit rose at an annual rate of 3 per cent to Bt30.35 billion, thanks to about Bt4.5 billion in non-recurring gains from asset divestments.

Oranan Paweewun

The Nation