SCC’s pain of chemical downturn likely to derail its planned listing of petrochem unit as analysts tag shares with ‘sell’ rating

Siam Cement Plc (SCC), the bellwether of the industrial sector for Thailand, is likely to delay its planned initial public offering (IPO) for its petrochemical sector amid downturn in the chemical sector that has pushed the shares of SCC to trade at lows not seen since the Covid-19 induced panic selling seen in March 2020.

Shares of SCC have dropped more than 8% in the 1-month and more than 11% in the past 6-months, the downward trend of the share price is unlikely over yet as countries such as China that account for nearly 20% of the overall global demand for chemical products continues to remain shut to the outside world and global economy starts to slowdown.

“Despite a share price correction of 11% during the past six months, we still see a risk in its earnings and share price. We expect further earnings downgrades by the Street and uncertainty on the recovery,” Jiraporn Linmaneechote, analyst at Phatra Securities said.

She was not the only analyst to lower the projection for profitability of SCC as most analysts have come out to lower their projections for SCC as the petrochemical segment accounts for nearly 40% of the overall earnings before interest, tax, depreciation, and amortization (EBITDA) in 2021.

Wattana Punyawattanakul, analyst at TISCO securities says that the downcycle in the petrochemical sector would likely push the EBITDA for the petrochemical sector down to about 33% or below this year.

He added that he too thinks that the planned IPO of SCC’s petrochemical unit would likely be delayed to at least 2nd half of 2023 when the petrochemical margins are more stable.

“Margin for naphtha-based crackers remains under significant pressure, global recession risks are looming, and China, representing about 20% of global demands is strictly adhering to its zero-Covid policy, volume rationalisation is thus inevitable, even at SCC,” Wattana said.

He added that SCC has cut its production by about 15% (vs. the 20-25% cuts of the broader industry) and thus polyolefins volumes should be flat quarter-on-quarter in Q3 2022 – even with the completion of scheduled turnaround.

He further said that the full-scale start-up of the Vietnam based US$ 5 billion Long Son Petrochemical Complex, is expected in H1 2023, is unlikely to be enough to provide earnings uplift.

Jiraporn of Phatra says that while her house remained cautious about the olefin sector, driven mainly by supply additions from new plant startups and feedstock headwind, the continued lockdowns in China and high inflation rates pose more risk for demand.

“We see chemical demand at risk from a potential global recession. We have a bearish view on the PP outlook (40% of Siam Cement or SCC’s polyolefin capacity) on new supply capacity in H2 2022 which should bring down the global run rate to 81% in 2024 from 86% in 2021,” she said.

Adding that the integrated spreads have come down to the breakeven level of US$ 400/tonne and that HDPE-naphtha spreads softened to US$ 387/tonne quarter-to-date (US$ 363/tonne latest) and PP-naphtha spreads also dropped to US$ 368/tonne quarter-to-date (US$ 383/tonne latest). This implies weak chemical operations in 2nd half. She has cut the polyolefin’s expected utilization rate to 84% this year from 88% projected earlier.

Jiraporn has an ‘underperform’ rating on the shares of SCC with price target at 326 Baht/share, while TISCO’s Wattana has a ‘Sell’ rating on the shares with 12-month target price of 312 Baht/share.

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