Siam Cement (SCC) is expected to report a disappointing 4Q07 normailised earnings of just Bt5,009mn (EPS Bt4.17), down 11% qoq but stable yoy. These poor results will be due to the weakness in all business areas; petrochemicals, cement, building materials and paper. This is mainly caused by higher raw material costs, higher naphtha costs in petrochemicals and higher pulp and waste paper prices in the paper business. In addition, all SCC businesses have been hurt by higher energy prices and the strength of the baht.
With 2008 earnings, we expect to see a slight improvement from last year mainly driven by cement from increasing cement prices by Bt220/tonne, with stable domestic cement demand. The petrochemical sector is expected to be slightly down from last year with naphtha spreads slightly down to $550-600/t from an average last year of $650/t.
The profit level of Bt25,000 - Bt26,000 mn, although disappointing, when adding back the non-cash expenses; such as depreciation of Bt12,000 - 13,000 mn per year and cash dividends from investments in associates of around Bt5,000-6,000m (compared with Bt7,074mn in 2006) is not all that bad. SCC will generate a cash flow of around Bt42,000 - 45,000m.
Based on new lower earnings forecast and a 2008 PER of 12x inline with the market PE, fair value has been revised down to Bt260 from Bt300. SCC will continue dividends of Bt15 per year or a yield of 6.6%. A recommendation is maintained to BUY. However in the shorter term, the market may be disappointed by weak SCC earnings.
