SCC Cement-Building Materials division facing near-term challenges

Siam Cement Co (SCC) is expected to report good fourth-quarter earnings, but its Cement-Building Materials' (CBM) division is expected to come under pressure from depreciation expenses related to Asean cement plants and weaker consumption in its home market of Thailand, Bualuang Securities writes.

The research house expects SCC to report a consolidated 4Q15 net profit of THB9.5bn, up eight per cent YoY and six per cent QoQ. The assumed YoY increase is due mainly to stronger Chemicals performance, which should more than offset the expected weaker operations in the CBM and Paper divisions, it notes.

CBM division performance
In the final three months of 2015, CBM is anticipated to have seen another "limp" quarter, according to recent coverage by Bualuang published in The Nation, Thailand. "Increasing cement usage from the government sector alone was unable to push overall domestic demand back to growth in 4Q15," the report notes.

Bualuang expects cement demand in Thailand to have fallen 0.5 per cent YoY in 4Q15 and FY15, slightly below SCC's guidance of flat for the year. The domestic price is expected to be maintained at around THB1850-1900/t during the quarter. However, the major drag to CBM earnings will not be the domestic cement business, but depreciation expenses from newly-opened cement plants in Cambodia and Indonesia, and weaker performance of its building material division following weak domestic consumption. As such, Bualuang expects the CBM segment's profit to fall 41 per cent YoY to THB1.5bn in 4Q15.

The CBM division's earnings are expected to remain under pressure from depreciation expenses at new Asean cement plants, plus the threat of new supply and weak demand for building materials at home.

Although Bualuang has revised down FY16 earnings by 12 per cent and cut its YE16 target price to THB575 (from THB630) to factor in a weaker outlook, "SCC's valuation remains attractive", it states.