Khon Kaen Sugar Industry

Khon Kaen Sugar Industry Plc (KSL)

Investment thesis: The key takeaways from the analyst meeting yesterday reaffirmed our optimistic view of KSL’s earnings profile. We think the market has already priced in anticipation of weaker sugar prices this year. Moreover, 1Q12 earnings could pitch a positive surprise. The firm will sustain impressive YoY profit growth into FY12, enabled by increased capacity. There is also scope for upside to KSL’s earnings profile, driven by higher-than-expected sales volume and sales prices, further capacity expansion and/or ethanol product upgrades. The stock currently trades at a forward PBV/ROE of 0.1x—consistent with the sugar producer peer average.
Strong YoY profit growth in 1Q12: We expect KSL to post impressive YoY earnings growth for 1Q12 (Nov-Jan), led by substantially greater sugar, ethanol and electricity sales volumes, enabled by capacity expansion and sustained high sugar sales prices. Sugar sales volume should post a 55% YoY jump to 130kt. We now expect the 1Q12 profit to be better than we previously envisaged, as higher QoQ sugar sales volume should offset the effect of slightly lower sales prices. Moreover, ethanol sales volume will triple QoQ.
Earnings expansion to sustain momentum in FY12: The key earnings drivers will be: 1) a 14% increase in sugar and molasses sales volumes to 740kt (1% lower than KSL’s previous guidance, due to cold weather in Oct), 2) a tripling of ethanol sales volume, 3) a 39% rise in electricity sales volume and 4) a fatter ethanol business gross margin, due to a lower raw material costs. Moreover, the GM of the sugar business is expected to remain high (above 30%), as the sugar sales price is projected to soften only slightly this year (from $0.29/lb in 2011). Sales volume growth in FY12 will be enabled by expansion at the Bo Ploy project (Phase II). Given the good earnings prospects, management said KSL’s future investment plans won’t make a cash call necessary.
Low global inventory levels to support sugar price this year: The global sugar spot price softened recently to $0.23/lb on expectations of substantially heavier sugar output in many countries. F.O. Lichts, a global argri-biz consultant, estimates a global sugar surplus of 10.2mt for 2011/12. But the stock-to-use ratio is projected to remain low at around 30%, far short of the normal level of 50%. The downside risk to sugar prices appears limited, as the production cost in Brazil—the world’s lowest-cost global producer—is $0.22/lb. Heavy US imports of ethanol should also support the global sugar price.