Ch Karnchang

Ch Karnchang Plc (CK)

Huge 2Q13F net profit. 2Q13 revenues are expected to reach Bt7.2bn,-12% QoQ,+68% YoY, with a gross margin of ~10.1%, and net margin of 3.7%. 2Q13 core operating profit is expected to be this year’s lowest. Net margin declined YoY from less profit share from TTW after divestment - but at the same time, BMCL also contributed a lower loss. Core profit is expected to be Bt268mn, -16% QoQ but back into the black from the red YoY. There was realized after tax gain of Bt869mn from selling 7.97% of its holdings in BMCL, and unrealized gain on fair value of investment of ~Bt2.3bn (however, this is under consideration by the auditor). 2Q13F net profit is Bt2.95bn, bringing net profit for 1H13 to almost Bt8bn (expect Bt588mn in operating profit in 1H13). We forecast 2013 net profit at Bt8.8bn, with Bt7.5bn from extra gain from divestment.
Higher revenue in 2H13. Revenue from construction in 3Q13 and 4Q13 is estimated at Bt8bn in each quarter, giving total construction revenue in 2013 of Bt30bn, in line with our forecast. CK has Bt300-400mn in capital gains before tax from selling down its holding in CKP to 31.8% from 38%. This will be included in equity sharing in 3Q13. The company expects DE ratio to be stable at 1.5x vs. 1.47x at end-1H13.
Total backlog of Bt144bn. CK is placing more emphasis on revenues from jobs within its group (BECL, BMCL, TTW, Xayaburi) at 40-50%, to buffer against the risk from political uncertainty. Its major jobs now include: 1) Xayaburi, in which it holds 30%, accounts for Bt76bn or 50% of its total backlog, and will cover seven years, from 2012 to 2019; 2) MRT Purple Line, contract 1, valued at Bt14bn, will finish in mid-2014;
3) MRT Blue Line, contracts 2 and 5, total value of Bt15bn; 4) MRT Green Line (Baring-Samutprakarn), contracts 1 and 2, valued at Bt15bn; 5) MRT Purple Line, contract 4, concession for supply of M&E system and O&E services, will run from ~2015 through 2018. CK is more heavily involved in public jobs than in private for the next few years, likely due to the large number of projects available and because of their advantage in terms of construction knowhow and reputation. 
Valuation and recommendation. We maintain BUY with a target price of Bt33. The industry outlook remains promising, despite possible clouds around the planned Bt2trn in projects. Many projects for the mass transit arena worth ~Bt470bn will be opened for bidding in FY2014 (starting October 2013). Our valuation for CK is based on sum-of-the-parts using DCF for CK’s own business and its investment in subsidiaries (BECL, BMCL, TTW, Xayaburi and CKP). Our fair value is estimated using DCF over seven years, assuming risk-free rate (RFR) of 4.5%, equity risk premium (ERP) at 8.4% beta of 1.5, and terminal growth of 3%.