Ch Karnchang

CH. Karnchang Plc (CK)

Investment thesis: After reviewing CK's plan to restructure its investments over next two years, we are less concerned about cash call risk, as the gain and cash from the restructuring should keep its net gearing below the bond covenant ceiling of 3x. However, we view the stock lacks any near-term catalysts, as neither the Xayaburi nor the Green Line project is likely to be inked any time soon. With only 7% upside to our YE12 target price, we maintain our HOLD rating.
Series of profits from restructuring ahead: While we expect operational losses for at least the next few quarters (dragged into the red by high SG&A and interest expenses), the losses will be mitigated (or even pushed up into black ink in some periods) by a series of profits resulting from shareholding restructuring of CK’s investments in the power business. The firm plans to sell its 30% holdings in Nakhorn Ratchasima Solar (NRS) and Chiangrai Solar (CS) to CK Power (CKP) upon their respective CODs in 4Q11 and 2Q12. Then, CK will divest some of its stake in CKP upon IPO in late 2012 and divest its 53.4% holding in Bang Pa-in Cogeneration (BIC) to CKP upon COD in 3Q13. Assuming a 25% premium to the costs of the investments, CK would post divestment gains of Bt10m on NRS, Bt14m on CS and Bt150-180m on BIC.
Xayaburi project still on hold: Management is confident that CK will soon sign a civil works contract worth Bt76bn for the Xayaburi dam project, but declined to estimate the timeframe, as it will depend largely on a pending Mekong River Commission (MRC) decision. The resumption of the project will be a big catalyst for the firm—it will more than triple the size of its backlog.  However, we expect Xayaburi to be pushed back further, as there are some areas of non-compliance with MRC requirements, such as fish passage, sediment transport and aquatic ecology.
Potential delays to new projects: Besides the Xayaburi project, we are concerned about the delay to the signing of the Bt14bn Green Line (Bearing-Samutprakarn)—CK was the lowest bidder. The National Anti-Corruption Commission’s investigation into the permanent secretary of the Ministry of Transport may result in many projects overseen by the ministry being put on hold.