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Siam Cement

Less bullish on Chemicals, neutral on Paper and bearish on Cement

Siam Cement Plc (SCC)

Investment thesis

At the post-results meeting yesterday, we felt that management was bearish on Cement, less bullish on Chemicals and still neutral on Paper. We have cut our FY14 earnings forecast 5% to factor in weaker 1Q14 results and a lower domestic cement demand growth assumption of 0.5% (we earlier assumed 3%). Our YE14 target price dips to Bt490 from Bt500. However, we still believe SCC is a good value play. It trades at an FY14 PER of 13.2x, slightly above its long-term mean of 12.6x. BUY.

4Q13 recap

SCC reported 1Q14 net earnings of Bt8.4bn, down 4.7% YoY but up 2.2% QoQ. The weaker YoY number was due to lower profits by the Chemical and Paper businesses. Only Cement posted YoY earnings growth, thanks to greater volume and price. The QoQ increase was shared across all businesses, particularly Paper, which had a plant turnaround in 4Q13.

Chemicals' EBITDA stronger, but profit down

Chemical's EBITDA from operations jumped 65% YoY to Bt4.8bn, but its profit slipped 6% YoY to Bt2.48bn, due to an FX gain in 1Q13, a weaker PVC operation and lower olefins sales volume during the period—the MOC cracker took time to ramp up output after restarting from a maintenance shutdown on Dec 25, 2013. The reason for robust EBITDA growth in the face of a profit decline is that major EBITDA growth contributors are olefins crackers in which SCC holds about two-thirds of the shares, while its 100%-owned downstream olefin units and 91%-owned PVC operation delivered only flat and weaker performances, respectively.

Note that the expanded HDPE-Naphtha spread was mainly due to a fatter (upstream) Ethylene-Naphtha spread; the (downstream) HDPE-Ethylene spread was flat.

Bearish on cement demand in 2H14

Domestic cement demand grew 4% YoY in 1Q14, pushing up the ex-factory price by Bt25/tonne to a record of Bt1,950-2,000/tonne. However, management expressed bearishness over the 2H14 outlook. SCC expects domestic cement demand to decline, led by the consumption slowdown and the absence of any new state infrastructure projects. We expect the Cement business to resume strong growth mode in FY16, driven by additional capacity in Cambodia (0.9mt in 2Q15), Indonesia (1.8mt in 3Q15), Myanmar (1.8mt in 2Q16) and Laos (1.8mt in 2Q17).

Paper remains subdued

Packaging Paper sales volume rose 5% YoY in 4Q13 on higher demand from consumer product industries in ASEAN (except Thailand, where sales volume was flat). Demand remained soft for printing paper. The business is likely to deliver a flat profit, at best, during its transformation period over the next two years. After that, business growth should kick off, underpinned by new HVA paper products.

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