Preview 4Q24: Weak quarter
We expect 4Q24 earnings to plunge 90% YoY and 80% QoQ on weaker overall packaging prices on intensified competition, more loss contribution from Fajar Paper, annual maintenance shutdown for the pulp dissolving plant and a weaker recycling business in Europe. We expect earnings to remain weak YoY in 1H25 due to continued weak demand, with YoY recovery expected in 2H25. We cut our 2024F by 19% and 2025F by 23% to reflect slower-than-expected demand and we downgrade our recommendation to Neutral from Outperform with a 2025 TP of Bt22 (from Bt38) based on 25X or -1SD of 3-year historical PE mean.
4Q24 profit expected to plunge YoY and QoQ. SCGP's 4Q24 net profit is expected to be slim at Bt113mn, plunging 90% YoY and 80% QoQ (4Q23: Bt1.2bn and 3Q24: Bt577mn). Behind this is: 1) lower overall packaging prices on intensified competition, particularly from increased domestic production in China (utilization rate up from 70% to 75%) accompanied by a small reduction in imports from ASEAN players, 2) more loss contribution from Fajar Paper - although its losses will narrow from a net loss of Bt740mn in 3Q24 to a net loss of Bt650mn in 4Q24F due to increased domestic sales and improved machine efficiency, the switch to full consolidation of Fajar Paper for SCGP resulted in a slight QoQ increase in the loss contribution, 3) the postponement of the annual maintenance shutdown of the pulp dissolving pulp plant from 3Q24 to 4Q24 led to a 10% drop in production volume and 4) increased losses in the recycling business due to slowing demand in Europe.
1H25 challenging, but recovery expected in 2H25. We expect SCGP’s core earnings to decline YoY in 1H25 due to continue weak overall packaging demand, but then recover YoY in 2H25 from the large-scale stimulus measures and SCGP's expectation that Fajar Paper will achieve breakeven by 2Q25, earlier than the previous end-2025 target (but we still assume breakeven in 4Q25). This includes debt restructuring for Fajar to reduce interest expenses, looking for strategic partnerships and expansion further into existing and new markets, as well as the expansion of downstream operations. SCGP aims to reduce expenses by ~Bt1bn in 2025 through its cost-saving program. On a QoQ basis, we expect 1Q25 core earnings to grow slightly QoQ on the boost to overall packaging demand from Thailand’s Easy E-Receipt program, but with a partial offset by the seasonal low for demand in Vietnam (Tet holiday) and Indonesia (Hari Raya).
Revisit our 2024-25 earnings forecasts. We have revised our core profit forecasts down by 19% in 2024 and 23% in 2025 to reflect the slower-than-expected packaging demand, cutting our gross margin assumption to 15.7% (from 16.0%) in 2024 and to 16.4% (from 17.0%) in 2025. We expect profit to remain low in 1H25 before recovering in 2H25.
Action & recommendation. We cut our 2025 TP to Bt22/share (from Bt38/share), based on -1SD of 3-year PE mean or 25x. We expect earnings to remain sluggish YoY in 1H25, so we downgrade our recommendation to Neutral from Outperform.
Key risks are a continued slow pace in China’s economy and geopolitical unrest raising coal cost. Key ESG risks are energy management, sustainability products, and high greenhouse gas emissions (E).
