Khon Kaen Sugar Industry

Khon Kaen Sugar Industry Plc (KSL)

Above expectations: KSL posted a strong Q4 2011 (Aug-Oct) net profit of Bt406m, up 693% YoY but down 49% QoQ. Stripping out gains on investments in derivative instruments of Bt33m, 4Q11 core earnings would be Bt383m, up 642% YoY but down 51% QoQ. The result was somewhat above our forecast and the consensus, due mainly to higher-than-expected sugar sales volume and lower-than-modeled SG&A expenses. The firm also reported an impressive bottom-line of Bt1,890m for FY11, up from Bt159m in FY10, while its FY11 core profit was Bt1,902m, up 83% YoY.
Results highlights: The strong YoY earnings growth in 4Q11 was driven by: 1) higher sugar sales volume (up 101% YoY but down 51% QoQ to 169,364 tonnes), 2) a higher sugar sales price (up by 10% YoY and 11% QoQ to Bt21,715/t), 3) a shallower loss at KSL’s overseas sugar business, 4) higher electricity sales volume (up 32% YoY but down 26% QoQ to 32,961MW-hr) and 5) lower fixed costs per unit with economies-of-scale. Moreover, the SG&A/sales ratio declined to 6.1% from 8.3% in 4Q10. The weaker QoQ profit was due to seasonality.
Outlook: We expect earnings to soften QoQ in 1Q12 (Nov-Jan), as the first-quarter is normally low season for the sugar industry. Note that the 2011/12 cane harvest season started in Nov. However, KSL should report a strong YoY profit growth for the period, driven by substantially greater sugar, ethanol and electricity sales volume, enabled by capacity expansion and sustained high sugar sales prices.
What’s changed? We maintain our FY12 net profit forecast of Bt2,063m, up 9% YoY, led by increased sales volumes brought about by capacity expansion, as noted above. There is also scope for upside to our FY12 earnings projection, given that our sales volume assumptions are conservative compared to the firm’s targets.
Recommendation: We think KSL’s current share price has already priced in expectations of a QoQ drop in 1Q12 earnings (due to seasonality) and anticipation of weaker sugar prices next year. Furthermore, the firm will continue to post impressive YoY earnings growth into FY12, enabled by increased capacity, we anticipate. The stock currently trades at an FY12 PER of 10.3x—discounts to both the sugar producer peer average of 10.4x and to its long-term mean of 31x. The upcoming sugar industry high season in 2Q12 (Feb-Apr) will prompt a share price re-rating, we expect. BUY!