Siam Cement’s (SCC) 3Q07 earnings are expected to be supported by high petrochemical spreads, which reached near peak levels compared to the previous year, due to tight supply caused by a shutdown by the Formosa Petrochemical Taiwan olefins plant. The PE - naphtha spread in 3Q07 is estimated to reach $690-700/tonne (+14%qoq, -5%yoy). The PP - naphtha spread is expected to reach $690-700/tonne (+13%qoq, -7%yoy). Cement demand is expected to slip 5-10% in 3Q07 due to low demand from the government sector and a general decline in the residential housing market and commercial sectors. The paper business is expected to be hurt by high raw material (waste paper and fibre pulp) costs while poor domestic demand should keep selling prices soft or stable.
3Q07 preliminary normalised profit forecast is maintained at Bt6,500-7,000mn, up from the previous quarter’s Bt6,367mn, but down from last year’s 8,396mn. This earnings level base is disappointing when compared to SCC’s quarterly profits over the last three years averaging in at Bt8.2bn. Including the gain from its remaining 5% divestment of Aromatics (Thailand) (ATC) - an after-tax gain of around Bt1,800mn - SCC should post a net profit of Bt8,300-8,800mn, stable qoq but up 9-15%yoy.
New global capacity in petrochemicals is expected to be around 5-6mn tonnes. Therefore, the PE - naphtha spread is expected to be maintained at $550-600/tonne, matching forecast for 2H07. Cement and paper are expected to recover due to a better economic outlook from later this year on the back of year-end elections. 2008 normalised earnings are expected to increase 15% y-o-y to Bt31,928mn (EPS Bt26.61).
SCC’s fair value is estimated at Bt300, based on a 2008 PER of 11-12x, which matches the PER of the market. Although SCC plans to invest about Bt90bn over the next 4-5 years, the company is expected to continue generating a cash flow of about Bt40-45bn per year. This will enable SCC to maintain its annual dividend of Bt15/share or a yield of 6.1%. Accordingly, a BUY is recommended.