FocusBetter chemical spreads to aid Thai SCG H2 earnings – analysts

26 April 2012 08:27  [Source: ICIS news]

Siam CementBy Nurluqman Suratman

SINGAPORE (ICIS)--Thailand’s Siam Cement Group (SCG) will likely see better earnings in the second half of the year after a first-quarter slump, on expectations of better petrochemical margins, analysts said on Thursday.

Despite the general weakness in the global economy, demand for petrochemicals is expected to remain resilient and should help buoy up product prices going forward, said Nat Panassutrakorn, an analyst with KGI Securities in Bangkok.

In the first quarter, significantly weaker petrochemical spreads weighed on the SCG’s earnings, causing its chemicals business’ earnings before interest, tax, depreciation and amortisation (EBITDA) to slump by 82% year on year to Thai baht (Bt) Bt894m ($28.9m).

The industrial conglomerate reported a 35% year-on-year fall in March-quarter net profit to Bt5.97bn, with overall earnings before interest, tax, depreciation and amortisation (EBITDA) declining by 24% to Bt10.3bn despite an 11% growth in sales to Bt102.9bn.

Petrochemicals accounted for 21% of SCG’s profit in the first quarter.

“[First-quarter] earnings fell … as chemical margins fell to their lowest as a result of excess global supply and slower demand. Equity income also fell substantially to Bt344m (vs Bt3.0bn in 1Q11) due to weaker margins at its PTA [purified terephthalic acid] business,” said Naphat Chantaraserekul, an analyst at brokerage DBS Vickers Securities.

PTA spreads averaged $120/tonne (€91/tonne) in the March quarter of 2012, sharply lower than the $350/tonne average in the same period last year, he said.

SCG said on Wednesday that the average naphtha prices increased by $132/tonne quarter-on-quarter and by $105/tonne year on year to $1,021/tonne in the January-March period, pulled up by higher crude oil price.

Ethylene prices also increased due to rising feedstock prices and concern about the availability of the olefin from the Middle East amid heightened tensions between the West and Iran.

In the first quarter, the average ethylene price stood at $1,251/tonne, up $190/tonne quarter on quarter, and up $12/tonne year on year. Propylene’s average price at $1,281/ton, decreased $1/tonne quarter on quarter and down $98/tonne year on year, according to SCG.

“[SCG’s] chemical business should recover in the second quarter of 2012 with improving spreads for most products. But recovery will be mild due to still weak macroeconomic conditions in Europe and China,” said Chantaraserekul of DBS Vickers.

The eurozone debt crisis, as well as China’s slowing economy, continues to weigh heavily on market sentiment.

SCG, which is Thailand’s biggest conglomerate, has operations in cement, petrochemicals, paper and building materials.

The company's cement business is also expected perform strongly in the second half of the year, with a host of commercial, residential and infrastructure projects under construction in Thailand, according to the analysts.

SCG’s cement sales in the March quarter grew 5% year on year to 7.6m tonnes, driven by Thailand’s reconstruction projects after massive floods devastated the country’s industrial estates late last year, Chantaraserekul said.

The firm’s cement business contributed 39% to the firm’s overall profit in the first quarter.

For the full year of 2012, SCG’s net profit is expected to grow to around Bt31bn, from the Bt27.3bn last year, analysts said.

“Siam Cement will benefit from Thailand’s improving economic conditions, as 59% of its first-quarter earnings were derived from the construction and related sectors,” DBS’ Chantaraserekul said.

“Weak chemical spreads will cap upside in the near term, but SCC offers a long-term value proposition” he added.

Beyond 2012, Panassutrakorn of KGI said that demand for petrochemicals, particularly from the automotive sector, should pick up and lead margins out of a trough.

SCG’s focus on growing its high value-added (HVA) product offerings, should help boost earnings going forward, analysts said.

The company hopes to increase the share of HVA products to half of group sales by 2015, from 34% currently, they said.

Its move into the southeast-Asian market, where there is strong demand for its core businesses such as plastics, could also help drive its long-term earnings growth, they said.

“SCC is still pursuing mergers and acquistion in ASEAN markets. It plans to spend up to Bt40bn in 2012 and it has Bt45bn cash on hand,” Chantaraserekul of DBS said.

HVA products' margins are 5-10% higher than normal products, and they are spread across all of SCG’s product segments, according to Chantaraserekul.

($1 = Bt30.9; $1 = €0.76)

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections

By: Nurluqman Suratman

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