4Q02 bottom line up on extraordinary gain, but operating performance disappointing

Siam City Cement (SCCC) reported 4Q02 earnings yesterday week of Bt833.4mn (EPS of Bt3.33), up 29% qoq and 209% yoy. However, if excluding the extraordinary items, SCCC posted normalised profit of Bt509.8mn, down 21% qoq. This was due to sales declining 10.5% qoq while interest expense rose 142%.

We expect to see a further improvement in SCCC’s earnings this year due to strong domestic demand for cement, which is allowing producers to switch back to the more profitable local market. SCCC’s management expects total domestic demand will grow by around 5-15% this year to 24-26 mn tonnes, driven by strong demand in the residential housing sector. In our forecast model, we assume SCCC’s domestic cement sales will grow by 15% and export sales by around 3% while average sales prices improve slightly from the previous year. Overall 2003 sales are projected to grow by 9.5% to Bt18,440mn. Based on this assumption, we believe that SCCC can make Bt2,764mn (EPS of Bt11.06) in 2003, 6.3% higher than last year.

Most of the good news is already factored into SCCC’s share price. At the current price of Bt232, SCCC is trading on a 2003 PER of 20.98x, EV/EBITDA of 10.54x and P/BV of 3.3x. Since the stock is trading slightly above our fair value estimate of Bt220, we are downgrading our recommendation to “TAKE PROFIT.”

SCCC's income statement (Mn Bt)

• SCCC announced 4Q02 sales of Bt3,921mn, down 10.5% qoq. The cement business saw a 12.4% decline in its sales to Bt2,985mn, while its concrete business shrank by 15% to Bt273mn. SCCC’s performance was in line with the market since Thailand’s total cement demand in the quarter decreased 7.3% qoq to 5.1 million tonnes and total cement exports dropped 29.5% qoq to 3.3 million tonnes. One of the main reasons for the drop in domestic demand in the quarter was the prolonged rainy season.

• SCCC’s gross margins improved slightly to 32.6% in 4Q02 from 30.5% in 3Q02 while the gross margin in 4Q01 stood at only 23.1% due to a price war at the end of 2001.

• SCCC’s selling and administration expenses fell to Bt278mn, down 26.8% qoq and 44.5% yoy, due to the company’s cost-cutting measures. Since Hol-Cim took over SCCC, the SG&A per sales has fallen from 16.6% of sales in 1998 to only 7.1% in 4Q02.

• 4Q02 interest expenses jumped 142.7% qoq and 121.6% yoy to Bt277.4mn due to the redemption of Bt5,000mn worth of debentures. This resulted in SCCC’s total debt falling to only Bt1,671mn in 4Q02 from Bt6,487mn at the end of 2001. Net gearing is currently only 0.04x.

• SCCC posted an extraordinary gain of Bt323.6mn in 4Q02 due to the company selling its shares in Diamond Roofing Tiles Company Limited ("DRT") for Bt1,000mn to Myriad Materials Company Limited. The investment in Diamond Roofing as valued on SCCC’s books at Bt599mn using the equity method at the end of September.