SCC – 3Q24: Report net profit from extra gain

3Q24 results miss consensus but beat INVX. SCC reported a net profit of Bt721mn in 3Q24, slightly below market expectations but better than our forecast of a Bt108mn net loss, primarily on an unexpected extra gain of Bt2.18bn from unwinding an interest rate swap (IRS) position related to the LSP project. Other extra items included Bt1.30bn in inventory loss and NRV adjustment and ~Bt100mn expenses related to the VCM unit fire at TPC. Excluding extra items, shows a core loss of Bt60mn in 3Q24, far below our forecast of Bt505mn profit. Core operations continued to battle: 1) a weak petrochemical performance both QoQ and YoY due to a decline in HDPE spread to US$323/ton and PP spread to US$315/ton in 3Q24; 2) weaker cement and building materials performance due to seasonal factors, delayed government spending, low demand during floods in northern Thailand and high household debt; and 3) weaker performance of SCG Packaging (72.12% owned) due to weak regional packaging paper demand and higher recycled paper costs.

4Q24 outlook. We expect 4Q24 to be the year’s low on continued weakness in HDPE/PP spreads amid oversupply and geopolitical issues. HDPE spread in Oct is at US$297/ton, down from US$323/ton in 3Q24. Additionally, the LSP project will incur higher depreciation and interest expenses, now estimated at ~Bt0.9-1.0bn per month starting from October 2024, which is less than the previous estimate of Bt1.0bn per month due to the effect of unwinding of the IRS position which reduced LSP's debt level and interest expense. In 4Q24, SCC plans to restructure LSP's debt by taking out shareholder loans, where interest is lower. This is expected to reduce LSP's depreciation and interest expenses to Bt800-900mn per month starting early next year. Other businesses are expected to show some signs of recovery, such as slightly improved cement demand due to accelerated government spending and an expected improvement in SCGP's profitability due to higher packaging paper demand and spreads.

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 to be 2024’s low).

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.