SCC - Preview 3Q24: Net loss expected

We expect a 3Q24 net loss of Bt108mn due to a huge inventory loss. Core earnings are expected to plunge 83.3% YoY and 88.7% QoQ to Bt505mn in 3Q24 on a weak chemical business (low spread), poor cement & building material unit (delayed government disbursement and rainy season) and a weak packaging business. 4Q24 is expected to be the year’s lowest with higher depreciation and interest expenses after the startup of its LSP plant. Our 3-month recommendation is Neutral with a SOTP TP of Bt260.

3Q24 in the red at net, plunging +80% at core. We expect SCC to report a net loss of Bt108mn in 3Q24 on recognition of an estimated Bt613mn inventory loss in 3Q24 due to a decline in naphtha price and its build-up in naphtha feedstock to above normal levels in preparation for the ramp-up of its Lon Son Petrochemical (LSP) complex in Vietnam (startup scheduled for October). We expect core earnings of Bt505mn, plunging 83.3% YoY and 88.7% QoQ on: 1) poorer petrochemical performance on a QoQ cut in HDPE/PP spreads of 11.3% and 6.0% respectively, 2) a drop in cement and building material earnings from low season (rainy season) and less government spending on a delay in government disbursement, together with flood-caused brakes on demand in the north of Thailand as well as high household debt curtailing demand, and 3) weaker earnings at SCGP (72.12% stake) due to weak packaging demand in the region and higher raw material (recovered paper) cost.

4Q24 expected to be the year’s worst. We expect 4Q24 earnings to continue pressured by continued weak HDPE/PP spread due to oversupply and prolonged geopolitical issues. In addition, the LSP project will add to depreciation and interest expenses, which are expected to be ~Bt1.0bn per month starting from October 2024 with an initial utilization rate of 70%. The negatives are expected to be partially offset by slightly improved cement demand as the government has sped up disbursement, and potentially better SCGP earnings on better packaging demand and spread.

Action & recommendation. We maintain our 3-month tactical recommendation of Neutral with an SOTP target price of Bt260.0 in view of the continued weak chemical spreads pressuring the chemical business. Additionally, when the new LSP plant starts operating in October, cash flow is likely to be negative in the early stages of ramping up utilization (we expect 4Q24 earnings to be the year’s lowest). We expect consensus to revise forecasts to factor in the lower chemical spread.

Key risks are higher costs from inflationary pressure, higher interest rate and exchange rate volatility as well as oversupply in the cement and chemical businesses.