The Siam Cement Public Company, Thailand’s biggest industrial group, has been one of the top issuers in Thailand’s local currency bond market, having issued Bt90 billion ($2.11 billion) of bonds since the beginning of 1999. The proceeds of these bond issues have primarily been used to refinance Siam Cement’s overseas borrowings as part of an on-going restructuring process – made necessary by the Asian economic crisis.

The first Bt75 billion of bonds issued since the start of last year was used purely to refinance the company’s foreign debts, which going into the Asian economic crisis were in the region of $5 billion - $4.2 billion of which was in US dollars. The baht’s subsequent drop in value to Bt40 to the US dollar from Bt25 wiped out around Bt60 billion of Siam Cement shareholders’ equity, leading to speculation in 1998 that even this company, the bluest of Thai blue-chips, might fail. Hence, the company has been eager to reduce its unhedged foreign currency exposure and bring overseas borrowings into line with net export revenues.

Aviruth Wongbuddhapitak, vice president in charge of corporate finance and administration at Siam Cement, says this natural hedge will have been achieved by year-end when foreign borrowings are expected to total around $700 million, or Bt28 billion of the company’s Bt170 billion total debt. 

Having largely addressed the company’s currency exposure, Wongbuddhapitak has more recently been focusing on Siam Cement’s interest costs. A Bt15 billion two-year bond issue last month was used to refinance both US dollar and baht borrowings of a similar maturity. The loans refinanced had interest costs approaching 10% a year, while the new bond, which carries a 5.75% coupon, costs less than 6% all in. “Including the fees (pre-payment fees etc) you could have a saving of about Bt270 billion on this transaction alone,” says the finance chief. 

The latest bond does, however, signal an end to Siam Cement’s refinancing activities.  “Most of the bank debt left with us is long term. In order to prepay that and to match the maturity you have to issue a long term bond, but in Thailand long term bonds are not popular. There is less of a market for this paper and you have to pay a premium to access this demand so there are no savings,” Wongbuddhapitak says. Existing debt repayment obligations pretty much tie up available cashflows for the next five years, which for Thai investors is the long term.

In addition, the company has to avoid turning the screws on its creditor banks too much. “We have to keep some relationships going with our bankers; during the crisis they helped us and now is the time we have to maintain those relationships and to reciprocate what they have done for us in the past. Right now they are in a poor position; they have money but they cannot lend,” he says. “We may need the banks again in the future if we need to expand more when the economy recovers.”

For now, the company has little need for additional financing as its three core operating units have ample capacity to meet the needs of the still depressed Thai economy. Siam Cement’s petrochemicals and paper and pulp production facilities are running at full capacity, with a third to a half of output being exported, while its cement works are running at around 65% of capacity and just over a third of this is being sold abroad.

“There is no need for funds because there is no need for capacity expansion,” he adds. The need for more funds will, however, arise before the company finds itself solely serving the domestic market. “In the future we may have to maintain a certain amount of export business. We have learned our lesson about the risks of focusing on the domestic market and ignoring the export market. When the crisis hit, we had to turn to the export market and it took time to do this,” says the finance chief.

Operating cashflows are sufficient to meet the company’s investment requirements and repay some Bt15 billion of borrowings a year. In part, that is why Siam Cement has been able to avoid firesales of the non-core businesses it is selling as part of its restructuring. Some analysts have, however, been critical of the slow pace of the planned disposals. “We are committed to this kind of restructuring and reform but tell me how to get buyers. If investment banks bring me buyers (with sensible offers) we will pay them some fees,” says Wongbuddhapitak. “What foreign investors are looking for are distressed assets … Our businesses are not that type; they are on-going businesses.” 

Earlier this year, Siam Cement appointed Salomon Smith Barney to sell certain printing and writing paper subsidiaries to the public via an initial public offering (IPO). The market was prepared to value the businesses at a meagre 3.5 times EBITDA (earnings before interest, tax, depreciation and amortisation), against which Siam Cement as a whole was at the time commanding a valuation of 6.5 times. “We have a duty to create value for the company, not destroy it. If we sell assets cheap does that mean we are creating value,” says Wongbuddhapitak.

The finance chief adds that the company has since the start of 1999 deconsolidated Bt40 billion of non-core assets and expects to raise another Bt30 billion via disposals by the end of next year. 

If the Thai stockmarket improves sufficiently, Siam Cement’s need to proceed with disposals could become even less pressing as a new share offering is likely. Twice in the last year the company has scrapped plans to sell 40 million new shares – in September last year citing weak investor demand and in January saying there was no longer any need for a fund-raising given the group’s improving finances. The company had been hoping to get the shares away at Bt860 to Bt900 apiece, with some reports suggesting a figure in excess of Bt1,000 was being targeted. Of late, Siam Cement’s shares have been trading at around Bt260 – Bt280.

Jiraporn Bumrungchatudom, analyst at BNP Paribas Peregrine, says: “If the share price gets above Bt800, Siam Cement will probably look at the possibility of a share sale again.” “I would say fair value for the shares is Bt600 to Bt700 in the next 12

months,” she adds. In part, the share price weakness at the moment reflects muted expectations for demand growth in the Thai cement market as well as concerns high oil prices will hit the company’s bottom line. 

For the six months ended June, Siam Cement reported a net profit of Bt1.42 billion on revenues of Bt70.48 billion, compared with a profit of Bt2.22 billion on turnover of Bt54.28 billion for the same period last year. Interestingly, cement was the smallest contributor among the three core business divisions in terms of both earnings and sales, having achieved a net profit of Bt611 million on sales of Bt11.59 billion. The petrochemicals division achieved a net profit of  Bt1.23 billion on sales of Bt19.24 billion and the paper and pulp operations a net profit of Bt1.64 billion on sales of Bt13.17 billion.

Despite the reduced importance of its cement operations, Siam Cement is unlikely to be changing its name any time soon. The name was given to the company when it was established in a Royal Decree issued by King Rama VI in 1913. “It’s a sensitive issue … We have discussed a lot about whether or not we should still use the name but I don’t think anyone will dare to make any proposal for a change; maybe the next generation will but not this generation,” says Wongbuddhapitak.

Were a name change proposal ever tabled, there might be the objections raised by the company’s largest shareholder, the Crown Property Bureau, which is the investment arm of the Thai royal family.