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Siam Cement

Bottomed out in 4Q13; all go from here

Siam Cement Plc (SCC)

Investment thesis

SCC is our favorite long-term play. We believe the stock will outperform the SET over the next 12 months. After a maintenance shutdown, which would have caused profit to bottom out in 4Q13, the firm is set to enjoy the olefins spread up-cycle and should deliver a 3-year core earnings CAGR of 20%, FY14-16. Moreover, the current share price is attractive. SCC trades at an FY14 PER of 12.2x, below its historical mean of 12.8x. We believe the stock should trade at above its average valuation, as its forward profit growth profile is stronger than its 3-year mean of 6.7% (FY10-13). BUY!

4Q13 preview

On January 30, we expect SCC to report a 4Q13 net profit of Bt6.5bn, down by 6% YoY and 34% QoQ. The weaker anticipated YoY and QoQ performance is attributable to a Chemical profit decline caused by the planned 45-day plant turnaround of the MOC and lower numbers for the Paper business. But our new 4Q13 profit expectation is higher our estimate three months ago, thanks to stronger-than-assumed Chemical spreads and dividend income from non-core investments, particularly Toyota. Dividend income from Toyota is likely to be sustained at about the level posted for 2Q13, as the fall in domestic car sales was offset by greater exports (we previously expected Toyota's dividend to decline).

Chemicals will drive earnings growth this year; scope for upside

HDPE and PP spreads over Naphtha were US$600/tonne and $605/tonne, respectively, in 4Q13, up from $568/tonne and $597/tonne in 3Q13 even though the late fourth-quarter is normally a period of de-stocking. These good spreads reaffirm our bullish view of the outlook for olefins spreads this year. If spreads could be sustained during the next period of soft demand in 2Q14, actual FY14 spreads would be fatter than our current assumptions of $600/tonne for HDPE-Naptha and $615/tonne for PP-Naphtha.

Cement and Building Materials to deliver slow growth

Domestic cement demand should have been flat or up only slightly YoY in 4Q13, due to the high base set by last year and weak demand caused by flooding in the Eastern and Northeastern regions (which dampened demand by 3% YoY in the first three weeks of October). This year, we expect 5% growth in domestic cement demand and a flat price. With regard to Building Materials, business will remain weak, we believe, given the consumption slowdown and a sharp decline in sales of ceramic roof tiles because galvanized steel roofing has increased in popularity.

Weakening Paper business

The Fibrous Chain will remain weak, due to the ongoing fall in demand for printing and writing (P&W) paper. Moreover, production lines are expected to periodically shut down, as some machinery will be changed or upgraded in order to switch from P&W production to the manufacture of high value-added products.




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