Khon Kaen Sugar Industry

Khon Kaen Sugar Industry Plc (KSL)
 

EARNINGS RESULTS Below expectations: KSL posted a 2Q12 (Feb-April) net profit of Bt667m, up by 21% YoY and 60% QoQ. Stripping out gains from derivative instruments of Bt120m, 2Q12 core earnings would be Bt583m, down 1% YoY but up 40% QoQ. The result was below both our forecast and the street, due to lower-than-expected sugar sales volume because of bottlenecks to the delivery of sugar from operations in Laos and Cambodia and a higher-than-expected cost of sales.
Results highlights: The key factors behind the YoY core profit slippage were: 1) increased cane costs, 2) higher plantation costs in Laos and Cambodia, 3) a lower sugar sales price (down 3% YoY to Bt19,265/t) and 4) a weaker  ethanol sales price (down 11% YoY to Bt20.73/ liter). Note that sales volumes rose of sugar (up 51% YoY to 228kt), ethanol (up 206% YoY to 23.5m liters), and electricity (up 38% to 74,964MWhr), enabled by capacity expansion (the Bo Ploy project).
The key drivers of the QoQ core profit growth were: 1) greater sales volumes of sugar (up 40% QoQ) and ethanol (up 14% QoQ) and 2) a lower SG&A/sales ratio (to 9.1% from 15.9% in 1Q12), even though the sugar price dipped 3% QoQ and ethanol price slipped 6%.
Outlook: We expect both YoY and QoQ core earnings growth in 3Q12, driven by cane harvest high season coupled with greater sugar, ethanol and electricity sales volumes, enabled by capacity expansion and a normalized cost of sales. The expected sales volume rise should outweigh the effect of a softer QoQ sugar sales price.
What’s changed? 1H12 net profit represents 49% of our FY12 earnings forecast of Bt2,215m (up 17% YoY), which we maintain unchanged.  
Recommendation: We think anticipation of earnings growth will prompt a share price re-rating. The market appears to have already priced in expectations of weaker sugar prices this year. Despite the softer sugar price environment, KSL will sustain impressive YoY profit growth through FY12, enabled by increased capacity. There would be scope for upside to its earnings profile, should sales volumes or sales prices exceed our model, capacity expand further and/or ethanol products be upgraded. The stock currently trades at a forward PBV/ROE of 0.07x—a discount to the sugar producer peer average of 0.16x.   Key Ratios & Statistics