Ch.Karnchang

Ch.Karnchang Plc (CK) 

 

The overall message from CK’s analyst meeting last Friday was Neutral for our view. Management said it had no worries about the company’s performance this year although it seemed to have some concerns about delays in government project tendering. However, the company still expects to see some progress in 2H15 as government investment should be a key engine to drive the economy over the rest of the year. We believe that CK, as a first-tier contractor, will be among the prime beneficiaries of this. We maintain our Outperform rating on CK with a target price of Bt34.40. 

Investment highlights 

- Confirms revenue target of at least Bt32.0bn in 2015. The company reaffirmed its revenue target of at least Bt32.0bn, flat from last year, thanks to its solid backlog. At end-1Q15, CK’s backlog stood at Bt86.9bn, or 2.7 times its 2015 revenue target. However, that was down 7.7% from Bt93.6bn at end-2014 due to the small number of new projects signed during the period. However, CK has 2 new contracts due to be signed in 2Q15, including a Bt1.2bn medical building (phase 2) at the Mea Fah Luang University and a Bt1.1bn electric-cable relocation project from the MEA. 

- Gross margin improvement expected in 2Q15. Management guided that CK’s gross margin should bottom out in 1Q15 due to the contribution from the nearly completed projects like the MRT Purple Line Contract 1, which contributed low-margin earnings in 1Q15. Since that project will be completed in 2Q15, we expect to see gross margin pick up from 2Q15 and we forecast full-year gross margin at 10%.   

- Amalgamation of its subsidiaries is on track. CK as the mother company of BECL and BMCL has bought about 100m shares from BMCL’s shareholders who dissent the amalgamation and none from BECL’s shareholders who are dissent to the deal and already sold them to the stock market in 1Q15 for a Bt37mn gain. Based on CK’s current portions in BMCL (25.19%) and BECL (17.17%), we expect it will hold about 28% stake in MergeCo, the amalgamated entity. CK’s management said that the process of amalgamation of BECL and BMCL is on track and should be completed as planned in August.  

- Expects to realize about Bt1.6bn gain from sale of Xayaburi shares in 2Q15. CK has reported to the SET that it will sell its 30% stake in Xayaburi to CKP, allowing CK to book a gain from this transaction of about Bt1.6bn before tax. The proceeds from this sale will be used to pay back bank loans in order to improve its gearing and lower interest expense. 

- Some delays in government project tendering. Based on the latest updated information, the bidding schedule for many government projects seems to be slightly delayed by 1-2 months from the previous plan that saw it all happening in 1H15 (Figure 1). However, CK still hopes that these projects will finally be put up for bidding by the end of this year. The soonest project to be opened for bidding in June will be a drainage tunnel from Nong Bon Reservoir with a value of Bt5.9bn.  

Valuation 

- Maintain Outperform call. We maintain our Outperform call on CK with a fair price of Bt34.40 based on a SOTP valuation. The current price is trading at 2.2x of 2015PBV in-line with its long term historical mean of 2.3x, while the outlook of construction business remain positive despite slightly delay.