Soft chem margins, inventory losses weigh on Thai SCG earnings

SINGAPORE (ICIS)–Thailand-based conglomerate Siam Cement Group (SCG) is expected grapple with softening chemical margins and inventory losses in the near term, but still looks set to post record profit this year, analysts said.

Profit in 2015 will get a lift from its petrochemicals business on the back of strong demand in southeast Asia, they said.

The segment posted Thai baht (Bt) 26.1bn ($727m) in earnings before interest, tax, depreciation and amortisation (EBITDA), accounting for 39% of SCG’s total earnings in 2014.

For the whole of 2015, Thailand-based brokerage Krungsri Securities expects SCG to post an overall net profit of Bt42.9bn, which represents about a 28% increase from the previous year.

In the first half of this year, the conglomerate’s net profit jumped 48% year on year to Bt25bn, with EBITDA up 34% at Bt43.7bn.

SCG is one of Thailand’s largest conglomerates, with three diversified core businesses in cement and building materials, chemicals, and packaging.

“The chemicals business is likely to remain a key earning driver in 2015, driven by a higher polyethylene (PE) spread, while cement and building materials’ operating EBITDA growth will remain in the low single digits due to a slow recovery of domestic construction activities,” Fitch Ratings said in a note.

SCG Chemicals’ EBITDA in the first half of 2015 more than doubled to Bt21.3bn from the previous corresponding period.

A recent deterioration in margins for high density polyethylene (HDPE) and polypropylene (PP) will hit the company’s earnings, according to Krungsri Securities analyst Naphat Chantaraserekul.

“We have seen HDPE and PP margins softening in the past two months following growing market concerns over China’s economic slowdown,” he said.

China, which is the world’s second-biggest economy, is a net importer of PE and PP and a major polymer market for Thailand.

HDPE spreads over naphtha fell to $709/tonne last week from an average of $812/tonne in the second quarter of this year, while PP spreads have come down to $585/tonne from $785/tonne over the same period, according to Chantaraserekul.

“Much of these falls are from the slowdown of China’s economy, causing product prices to fall faster than the feedstock naphtha. We see this as a short-term impact rather than a fundamental change, and we therefore maintain a positive HDPE outlook up to 2018,” he said.

“For PP, we expect a margin correction to be more substantial as 50% of PP’s application goes into capital goods, which is more volatile than HDPE’s application in consumer goods,” Chantaraserekul said.

In the third quarter, SCG will likely book some Bt1.2bn-1.5bn in inventory losses because of declining crude prices, he said. (Please see table below)

Every $10/bbl change in crude oil price affects SCG’s earnings by Bt700m-1bn, he said.

Meanwhile, European credit ratings firm Fitch said that it expects SCG’s capital expenditure (capex) to remain high at around Bt50bn-60bn per year in 2015-16.

“This will be used mainly to expand overseas, particularly in south-east Asia, via greenfield projects and acquisitions,” Chantaraserekul said.

Over the period of 2015-2019, SCG’s capex and investments are expected to be around Bt200-250bn, the company said in its latest financial report.

The company could not be immediately reached for comment.

KGI Securities, in a report following SCG’s recent presentation to equities analysts, noted that the Thai conglomerate’s management “believes earnings will remain strong in the second half of 2015, driven by strong chemical spreads and an anticipated pick-up in local consumption in cement and building materials and packaging units”.

For SCG, the chemical industry in on an “upcycle” that should peak in 2017 and continue into 2020.

“As a result, its ongoing investment in ASEAN particularly in cement and building materials, through its greenfield and mergers and acquisitions, could ensure that earnings to continue to grow,” KGI said.

Focus article by Nurluqman Suratman

($1 = Bt35.9)

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