Ch Karnchang

Ch Karnchang Plc (CK)

9M13A recap. 9Q13 net profit was Bt7.3bn or Bt4.34/share, a huge jump YoY, with a rise in sales of 59% YoY to Bt25bn. Stripping out the ~Bt6.13bn extra gain from divestment and changing accounting method gives a core profit of Bt1.12bn, a strong rise YoY. Even without a repeat of the large dividend income of Bt297mn in 3Q13, CK will show high core profit of Bt350mn-Bt400mn in 4Q13.
Backlog update. CK has backlog on hand of Bt119bn as of 3Q13, excluding Bt22bn in projects awaiting contract signing in 2014. These include Bangpa-In Cogen Phase 2 valued at Bt4.7bn and the Nam Bak project valued at ~Bt17bn. This backlog will underwrite CK’s revenues for at least four years with average revenue recognition of at least Bt33bn per year. Major backlog is the Bt53bn Xayaburi hydropower project, the Bt21bn Si Rat (Sector B+) Expressway and the Bt20bn M&E system for the MRT Purple Line, contract 4. Revenue growth in 2014 is expected to speed up as the Si Rat project is progressing rapidly.
BMCL recapitalization. BMCL is undergoing a capital call, initially planned as a combination of rights offering and private placement; however, this has been changed and the 8.55bn new shares will be offered entirely as rights at a price of Bt1. The allocation ratio is set at 1.3977 existing shares to 1 new share. CK will not pay out cash to take its rights, but will instead use the Bt4.2bn BMCL owes it to get its share. The sticking point is the MRTA, which holds 25% in BMCL. It must decide whether or not to pay Bt5.1bn to take its rights between December 9-16, but as a government entity, this is not necessarily straightforward. If it does not take its stake, CK may. Taking untaken rights shares could, we estimate, lift CK’s holding in BMCL to 25% from the 16.64% it holds now. CK intends to hold BMCL for the long term because although BMCL will continue to report losses of ~Bt800mn per annum in 2013-2015, after the commercial startup of the Purple Line it will be hugely profitable at more than Bt1bn annually from 2016 onwards.
Buy at TP of Bt30. We maintain BUY with a target price of Bt30 using sum-of-the-parts valuation of CK and its subsidiaries. Although the current political morass does raise concerns - including the chance the Bt2trn infrastructure bill may suffer delays – the picture for contractors overall remains promising. The MRTA has indicated that mass transit projects worth Bt226-470bn will open for bidding in FY2014 whether or not the Bt2trn bill is begun.