Siam Cement

Ready to rock

Siam Cement Plc (SCC)

Investment thesis

We reaffirm our thesis that now is a good time to take or increase positions in SCC. The firm is entering accelerated growth mode. All businesses, particularly, Chemicals, Cement and Building Materials, are ready to jump. The profit contraction story that played out during FY11-12 is banished for at least the next several years, we believe. SCC's valuation is undemanding—it currently trades at 1SD above its long-term mean PER. We think it deserves a higher multiple, as: 1) it is at the early stage of an earnings up-cycle and 2) its profitability will tend to be more sustainable than it was in the past, thanks to a higher proportion of HVA products in the sales mix. Our BUY rating stands with a YE13 target price of Bt520.

4Q12 earnings preview

We expect a net profit of Bt7.1bn for 4Q12, up by 122% YoY and 11% QoQ. Not only does it the first time since 1Q11 when the bottom-line grew both YoY and QoQ, but it should also prove to be SCC's starting point for an earnings super-cycle. Key operational improvements during 4Q12—which should also build growth momentum throughout this year—include a jump in domestic cement demand (up by about 20% YoY and 6% QoQ), a recovery in chemical spreads (particularly by-products) and the resumption of operations at the BST and Phoenix plants following fires that halted production in 2Q12 and 3Q12, respectively.

Series of bottom-line growth bursts by different business units

SCC's earnings outlook for this year represents a transformation from FY12. We expect strong YoY profit growth for the next four quarters, while QoQ expansion should manifest through to at least 3Q13. The drivers in 1Q13 will be chemical restocking and seasonally strong demand for cement and building materials. In 2Q13, dividend income—mainly Toyota—will play a major role boosting the bottom-line, given that Toyota's sales hit a new record last year. 3Q13 will be led by seasonally strong demand for chemicals and packaging paper.

Mid- to long-term outlook is promising

The coming chemical spread up-cycle should start in 2H13 and comprise SCC's main earnings driver over mid- to long-term. This uptrend is likely to last until 2016-17, at which point substantial new industry supply is slated to hit the market. During the last peak cycle, SCC’s Chemical EBITDA was Bt21bn. Since then, the firm's chemical production capacity has more than

doubled. So the scope for sales and earnings growth from the current base (FY12 Chemical EBITDA of Bt6bn) is much greater.

New investments

SCC's aggressive expansion in ASEAN, both through greenfield and M&As, should also facilitate long-term growth. In FY12, the firm announced acquisitions and greenfield projects with an investment value of Bt33.6bn in Thailand and Bt30.8bn in other Asean nations. This year, SCC is likely to spend Bt30-40bn, in line with its 5-year investment budget of Bt200bn.