CH. Karnchang

Investment thesis

In the absence of divestment gains, CK's short-term profit outlook may not look very exciting, as no new big-ticket contracts were added during 4Q13-3Q14, due to political turmoil. Old projects have been completed, while newly-signed jobs will progress only slowly during the early stages of construction. However, we don't think CK will underperform the market! Many big-ticket projects are lining up for tender and historical data show that its share price correlates more closely to the bidding outlook than to short-term expectations for earnings. Our BUY rating stands with a YE15 target price of Bt38.

3Q14 to be the best quarter of the year

We expect CK to report a 3Q14 net profit of Bt1.26bn, up by 35% YoY and 305% QoQ. Stripping out a before-tax gain of Bt1bn from selling 1,025m shares in BMCL for Bt1.65/share, expected core profit would post a decline 6% YoY but a rise of 48% QoQ. The YoY slippage is mainly due to lower interest income as a result of debt restructuring at BMCL. Construction profit would have been flat YoY—lower construction revenue should have been fully offset by a fatter GM. The expected QoQ core profit jump is due to higher dividend income (Bt330m in 3Q14 versus Bt115m in 2Q14). 

Growth to come from new projects to be added, 4Q14-1H15

After booking 3Q14 revenue, the backlog should stand at Bt98bn (including a recently-signed Bt4.3bn Bang Pa-In SPP project and a to-be-signed Bt2.9bn project for TTW). This backlog would make for flat YoY revenue in FY15, so growth will depend on how many other projects CK signs in 4Q14 and 1H15. The big-ticket projects for which tender processes should be finished by mid 2015 include the Bt26.5bn MRT Dark Green Line and the Bt26bn Double-track Railway (Jira-KhonKaen). MRT is expected to sign contracts with the winners of the four packages of the MRT Dark Green Line in 1Q15; the tender for the Double-track Railway should open soon.

More projects from companies under its umbrella

Besides state mega projects, CK should secure contracts from firms under its umbrella. BMCL is likely to be awarded the contract to operate the Blue Line extension and it will almost certainly offer the M&E work worth about Bt20bn to CK. The Nam Bak hydroelectric power project (Bt17bn) in Laos would be another big job to be added to CK’s backlog in 2H15.

Scope for upside from margin expansion

Management guides for flat gross margin, but we expect some upside to GM next year, thanks to declines in the prices of steel and fuel. Also, cement prices are likely to come under pressure in 2015 after new TPIPL capacity starts operating in 1H15.