CH. Karnchang

CH. Karnchang Plc (CK)
Investment thesis: CK’s earnings visibility is now much clearer than at any time during the past five years. Its core operation is improving on rising construction income, while occasional divestment gains should boost the bottom-line during the next two years. But the market hasn’t yet recognized and rewarded the change. CK’s share price has dropped 10.6% and under-performed the SET by 20.5% YTD. The stock currently trades at YE12 PBV of 1.7x, 0.3SD below its long-term mean of Bt2.0x. We think CK deserves to trade a premium to its long-term mean, as its outlook is much better than it has been for five years. Our BUY rating stands with a YE12 target price of Bt8.50.
Dam in Laos: The firm believes construction of the Bt76bn run-off-river hydropower project in Xayaburi will proceed without any further interruption. CK is confident that it can allay any environmental concerns, as the project meets international environmental standards. Management expects to book revenue of Bt4bn from the project this year and GM should be at least 10%. Although we are concerned about the risk of cost overruns, as the project will take eight years to build and the firm can’t lock in the prices of materials for a period that long, we wouldn’t expect adjustments for cost overruns for at least a couple of years.
Profit turnaround: The backlog at end-March stood at Bt110bn and the firm expects to soon sign two new projects—the Si Rat expressway (Bt22.5bn) and phase II of an SPP (Bt5bn). This record backlog should enable construction income to grow strongly for the next few years, offsetting the effect of high SG&A and interest expenses and turn the core operation around from red ink into black for the first time in five years.
Series of gains from divestments ahead: Gains from the following sales would boost CK’s bottom-line and reduce its net gearing to a more comfortable level: 1) divestments of three solar firms to CK Power before listing CK Power late this year, 2) selling some shares in CK Power upon IPO and 3) selling a 53.4% holding in Bangpa-In Cogeneration (120MW SPP) after commissioning in June 2013. Note that CK’s net gearing was 2.7x at end-March (slightly below its debt covenant of 3.0x). The firm targets reducing it to below 2.0x. We have yet to factor these gains into our model.