Investments In Petrochemicals And Low-Carbon Products Will Improve Competitiveness

Key Takeaways

• Debt restructuring and asset divestment strategies aim to reduce costs and improve financial stability, potentially enhancing net margins and earnings.
  
• Investment in the petrochemicals sector and low-carbon products targets operational efficiency and long-term revenue growth in key regional markets.
  
• Weak demand in key markets and environmental challenges strain Siam Cement's margins and profitability, necessitating divestments and cost-cutting for financial stability.

Catalysts

Operates in the cement and building materials, chemicals, and packaging businesses in Thailand and internationally.

• SCG is planning to restructure its debt profile by reducing U.S. dollar loans and streamlining working capital, targeting a THB 10 billion reduction by early next year, which could enhance net margins by reducing interest expenses.
  
• The company is aiming for asset divestment to control debt levels, ensuring financial stability, which could positively impact net margins and enhance earnings.
  
• Investment in the ethane project at Long Son Petrochemicals (LSP) aims to improve cost competitiveness, potentially increasing operational efficiency and enhancing EBITDA in the medium to long term.
  
• SCG is focusing on cost-cutting measures by targeting THB 5 billion in savings next year through closing non-profitable operations and reducing SG&A, which is expected to enhance net margins.
  
• Development of low-carbon cement products in response to growing regional demand in Thailand, Vietnam, and Indonesia, which can enhance revenue growth and improve long-term competitiveness.

Siam Cement Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Siam Cement's revenue will grow by 7.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.1% today to 4.8% in 3 years time.
• Analysts expect earnings to reach THB 30.4 billion (and earnings per share of THB 26.17) by about December 2027, up from THB 5.7 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as THB 12.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.6x on those 2027 earnings, down from 36.3x today. This future PE is lower than the current PE for the TH Basic Materials industry at 26.1x.
• Analysts expect the number of shares outstanding to decline by 1.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.39%, as per the Simply Wall St company report.

Siam Cement Future Earnings Per Share Growth

Risks

• Weak demand in China significantly impacts the chemical business, leading to losses and inventory issues, which may decrease revenue and profitability if the demand does not recover soon.
  
• Chemical spread has been lower than industry cash costs, and this low margin scenario remains challenging, affecting EBITDA and profit margins in the short to medium term.
  
• The company is undergoing asset divestments and increased cost-cutting measures to maintain financial stability, indicating existing financial pressures that can further impact net margins if not managed effectively.
  
• Environmental factors such as floods have negatively impacted the Cement-Building Materials segment, decreasing sales revenues and potentially affecting future earnings if severe weather patterns continue.
  
• The sluggish demand for packaging due to soft regional demand may lead to further declines in sales revenue and profit margins, given the competitive pressures and rising raw material costs.

Valuation

• The analysts have a consensus price target of THB 226.2 for Siam Cement based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of THB 320.0, and the most bearish reporting a price target of just THB 150.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be THB 628.3 billion, earnings will come to THB 30.4 billion, and it would be trading on a PE ratio of 12.6x, assuming you use a discount rate of 13.4%.
• Given the current share price of THB 173.0, the analyst's price target of THB 226.2 is 23.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.