Siam City Cement (SCCC) is expected to announce very weak 4Q07 earnings of just Bt575mn (EPS Bt2.5), down 22% QoQ and 11% YoY. These rather poor earnings will be due to negative growth in cement demand, higher energy costs and higher expenditures for the early retirement programme.
Thai cement demand is expected to fall by 2% YoY in 4Q07 compared to a 6% YoY fall in 3Q07. This decrease is attributed to lower demand from the government sector and a general decline in residential housing and commercial sectors. In addition, cement exports are expected to be hurt by the strong baht and high freight rates. We see the increase in cement price by Bt200/tonne (12%) has still not had much of a positive affect in the fourth quarter on cement revenue. On the cost side, SCCC continues to be hurt by higher energy costs that affect both production and transportation costs.
As exports are being hurt severely by rising logistics costs and a high baht, it has become a burden for SCCC to maintain high exports. SCCC announced they would lower the export target this year to 4Mt from 6.1Mt and would shut down two inefficient plants (2.25 mn tonnes of cement clinker) Capacity then will be 10.05Mt clinker. Domestic sales are expected to be maintained around 7.5-8Mt. Although lower export sales will affect sales by around 6% to Bt21,527m, the higher cement price will compensate for the higher costs. The shutdown of the two plants will boost profit per unit. Therefore, the net profit this year will improve by 10% to Bt3,731m (EPS Bt16.22)
Although 2008 earnings will rise from 2007, they will still be lower than 2006. 2008 year sales and earnings forecast have been revised down by 18% and 13%, respectively, as cement demand was flat in 2007 and is forecast to grow by 10% from mega projects delayed to this year. The SCCC fair value has been revised down to Bt260 from Bt290 based on a 2008 PER of 15x. SCCC is expected to maintain a dividend of Bt14 per share (yield 5.3%), which still looks attractive when compared with bank rates. A BUY is recommended for as dividend play. However, in the short term, the share price is expected to be pressured by poor 4Q07 earnings.