Khon Kaen Sugar Industry

Khon Kaen Sugar Industry Plc (KSL)

In line: KSL posted a 3Q12 (May-July) net profit of Bt840m, up by 6% YoY and 26% QoQ. As there weren’t any extra items, 3Q12 core earnings also came to Bt840m, up by 6% YoY and 44% QoQ. The result was in line with our forecast and the consensus.
Results highlights: The key drivers of the core earnings growth were: 1) greater sales volumes of sugar (up by 16% YoY and 23% QoQ), ethanol (up 152% YoY and flat QoQ), and electricity (up 39% YoY but down 17% QoQ), 2) a higher electricity sales price (up by 19% YoY and 9% QoQ to Bt3,340/MW-hr), 3) a lower QoQ SG&A/sales ratio (to 8.5% from 9.1% in 2Q12) and 4) a lower effective tax rate (to 20.5% from 27.6% in 3Q11 and 26.2% in 2Q12). Note that the mean sugar price dipped by 2% YoY and 1% QoQ to Bt19,165/tonne and the ethanol price slipped by 16% YoY and 5% QoQ to Bt19.63/liter. The YoY sales volume growth was enabled by capacity expansion (the Bo Ploy project), while the QoQ increase in sales volume was due to high season.
Outlook: We expect 4Q12 core earnings to be flat YoY, as the expected sales volume rise should offset the effect of softer sales prices. But KSL’s core profit will probably fall QOQ, due to lower sales volume—the fourth-quarter is low season for sugar sales and KSL’s ethanol and power plants are slated for one-month maintenance shutdowns.
What’s changed? Our FY12 net profit forecast rises by 4% to Bt2,307m (up 22% YoY) to fine-tune for 3Q12 earnings.
Recommendation: The good 3Q12 profit is already priced in, we believe, and expectations of a QoQ bottom-line contraction in 4Q12 will probably cap the share price performance. Furthermore, even though sales volume expansion will outweigh the effect of weaker sugar prices next year, KSL’s FY13 profit growth profile of only 2% looks unattractive compared to projected SET earnings growth of 16% YoY. While there is no obvious near-term stock price catalyst, we think downside risk to the share price is limited. KSL currently trades at an FY13 PER of 10.2x, a 26% discount to the sugar producer average of 13.7x.
We have downgraded our rating from BUY to HOLD, rolled over our investment horizon to YE13 and arrived at a new DCF target price of Bt14.50 (we have increased our WACC assumption from 9% to 10% to reflect greater downside risk to sugar prices, due to rising global supply).