Khon Kaen Sugar Industry

Investment thesis

Delayed shipments of sugar, due to sluggish demand, will squeeze KSL’s 3Q14 sugar numbers. But diminished expectations for 3Q14 earnings are now behind us. An improved demand-supply balance with lower Brazilian output will presage a sugar price rebound in 2015, we believe. We have upgraded our call from TRADING BUY to BUY, premised on a strong FY15 earnings growth profile and a cheap valuation—KSL trades at an FY15 PER of 10.8x, far below its long-term mean of 15.8x and the regional peer average of 14.9x. We have rolled over our investment horizon to end-Oct 2015 and arrived at a new target price of Bt18.60. 

3Q14 profit revised down; lower expectation for sugar sales volume 

The firm may not achieve its 3Q14 (May-July) sugar sales volume target of 275kt (our assumption is now 210kt), due to delayed shipments of sugar. Our model indicates a net profit of Bt429m for 3Q14, down by 32% YoY and QoQ. The expected YoY earnings dive is due to: 1) a 21% YoY plunge in sugar sales volume to 210kt and 2) higher SG&A expenses. A QoQ profit decline is expected for the following reasons: 1) sugar deliveries were delayed to 4Q14 and 2) higher QoQ interest and tax expenses. 

Subdued sugar price in short-term; price to rebound in 2015

The global sugar price was 15.8 cents/lb on September 3, down 7% YTD. Selling flows among traders amid sluggish sugar demand (global postponements to sugar deliveries in recent months indicate weak short-term demand) and greater-than-expected supply from Brazil squeezed the sugar price. UNICA (Brazilian Sugarcane Industry Association) reported 325m tonnes of cumulative 2014 sugarcane production from the south-central region of Brazil through to August 16—up 2.8% YoY. But UNICA revised down its 2015 production forecast to from 580mt to 546mt (against 597mt in 2014), due to the unfavorable weather conditions. 

The 2015 world supply surplus is now projected to be 1.3mt, far below the 4.0mt surplus posted for 2014, according to the latest update of the International Sugar Organization (ISO). We see the prevailing subdued sugar price trend as a relatively short-term phenomenon and expect the global sugar market to achieve balance or go into deficit in 2015. We also anticipate a sugar price rebound to the 18-20 cents/lb range in 2015 against a mean price of 17 cents/lb this year. 

Strong FY15 profit growth profile

A global sugar price uptrend in 2015 and KSL’s greater sugarcane volume will make for good FY15 earnings for its sugar unit. At its ethanol unit, there is scope for upside from increasing ethanol sales price and expanding sales volume (demand for E10 and E20 could rise in tandem with lower pump prices). Capacity expansion of KSL’s power generating units would enable greater electricity sales in FY15.