Gunkul Engineering

Gunkul Engineering Plc (GUNKUL)

Strong revenue and profit growth expected for 2014F; EPC is key
Business with Myanmar should return to normal soon
Target price is cut to Bt18/share on stock dividend; BUY maintained

TP cut to Bt18/share to reflect stock dividend. We expect strong earnings growth
in 2014F, driven by the EPC (Equipment Procurement and Construction) business and
the return of its trading business in Myanmar. While earnings from renewable power
have stabilized since all solar power plants are on line, GUNKUL is developing wind
power plants. This will increase its equity-based capacity sharply; it will also gain more
revenue from EPC. We have cut our sum-of the-parts TP to Bt18 from Bt24 to reflect
the stock dividend on 2013 operations and maintain our BUY.
Revenue target of Bt3bn in 2014F, up 47% YoY driven by construction (EPC) that was
delayed from 2013. Based on backlog, EPC could generate 46% of total revenue in 2014F
to ~Bt1.4bn, comprising a part of BCP’s solar power plant phase 3, electricity system
installation for TPIPL’s cement plant#4 and installation of solar rooftops. The company
estimates its conventional business, equipment trading, could generate Bt1.5bn,
comprising Bt970mn from the domestic market and Bt480mn from foreign markets.
Equipment trading to Myanmar returning to life this year after the Myanmar
government decided to settle in international currencies (US dollar and euro), instead
of local. GUNKUL has secured Bt480mn business so far this year. Note that GUNKUL’s
trading business overseas, mainly Myanmar, accounted for >20% of total sales before
the Myanmar government changed its payment policy. This slashed its foreign sales in
2013 to only Bt12mn from Bt640mn in 2012 on the greater FX risk and greater difficulty
in obtaining trading finance from banks. Gross margin on this business is an attractive
24-25% vs. 16-17% for local sales.
Startup of two wind power projects in 4Q15. Completing its solar power plants in
2013, GUNKUL is turning to wind power projects with a combined capacity of 120MW.
The first (60MW), in which it holds 70%, is scheduled to start up in 4Q15 after required
licenses are secured. The record for wind speed is favorable at 5.7-5.8 meters/second.
The company is identifying the most suitable and efficient wind turbine and rotor
technology for Thailand’s wind speed, after which it will proceed with financing. The
construction of the recently acquired second project (60MW, 100% interest), will follow
and operations start in 4Q16. These projects will boost GUNKUL’s effective capacity to
129MW by 2016 from 27MW currently.
Gas engine power plant in Myanmar revenue to begin in 2014F when the
change in shareholding structure is completed. The first 25MW gas engine power plant
commenced operations in 3Q13 and the other one will come on line by the end of this
year. The Myanmar government has agreed to pay US$0.034/KWh for plant availability
under a take-or-pay agreement. These power plants could give it an annual profit of
Bt50-60mn, providing some offset for the lower income from equipment sales to
Myanmar.