We expect core earnings to recover to Bt5.9bn in 2Q23 from Bt4.6bn in 1Q23 on improvement in the chemical unit (higher sales volume and HDPE spread) and dividend income from its JV. We believe the decline in share price has priced in most of negatives, while near-term outlook is improving plus the opening of a new chemical plant in Vietnam in Sep 23. We maintain our OUTPERFORM rating with an end-2023 SOTP target price of Bt385.
Expect a 2Q23 net profit decline QoQ. We expect Siam Cement (SCC) to post net profit of Bt4.6bn in 2Q23, a large fall QoQ without the prior quarter’s huge one-time gain of Bt12.0bn (fair value adjustment of SCGJWD) plus an inventory loss of Bt1.3bn in 2Q23. However, stripping out the extraordinary items shows core earnings of Bt5.9bn, growing 30.0% QoQ but falling 41.7% YoY. The QoQ improvement in core earnings reflects: 1) better chemical spreads (high density polyethylene, HDPE, spread was US$443/ton in 2Q23 vs US$396/ton in 1Q23, offset by a slight decline in polypropylene, PP, spread, which was US$403 in 2Q23 vs US$407 in 1Q23); 2) an 8.9% QoQ increase in production volume after fully restarting its Rayong Olefins Complex (ROC) plant in the second week of Feb, improving olefins utilization rate to 85% in 2Q23 from 75-80% in 1Q23 after ROC’s operation turned economical (estimate polyolefin volume rose to 425,000 tons in 2Q23 from 390,000 tons in 1Q23); and 3) the semi-annual dividend income from Toyota & Kubota Thailand. We expect packaging earnings to improve 11% QoQ, backed by lower raw material (waste paper and plastic resins) cost and lower coal cost as well as improvement in the fibrous chain business from higher dissolving pulp and writing paper demand. CBM earnings are expected to decline QoQ on seasonality and the absence of a one-time gain from fair value adjustment of investment in SCG Logistics of Bt12bn which was booked in 1Q23.
Earnings outlook. We have a positive view on earnings outlook for the medium to long term on the new Long Son Petrochemical (LSP) plant (+40% capacity addition), which is scheduled to start up in Sep 2023.
Key risks are changes in purchasing power and higher costs from inflationary pressure, higher interest rate and exchange rate volatility as well as huge additional supply coming to the market.
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