CH. Karnchang

CH. Karnchang Plc (CK) 

 

Investment thesis

CK remains our top BUY in the construction sector. The company has the clearest visibility to secure new contracts. Apart from the fact that it is one of only few contractors that have a high potential to win upcoming bidding for government megaprojects, it should also secure construction works with a total value of more than Bt42bn from firms under its umbrella within the next six months. Once the backlog starts to rebuild, we believe CK will be re-rated. Based on its historical record, CK traded at 2SD above its long-term average PBV when its backlog was on an upward trend. At +2SD, CK’s share price would be Bt33.90 at YE15.

Big-ticket bidding under way

Management believes that the bidding on big-ticket government projects under the new cabinet will come out faster than before. The invitations for bids on projects to build two lines of double-track railway (Chachoengsao-Kaeng Khoi worth Bt10bn and Jira-Khon Kaen worth Bt22bn) should open in September and e-auctions are expected to take place in November. The next projects, for which invitation letters will be released in Oct-Nov, will be the Motorway (Pattaya-Map Ta Phut) worth Bt14.2bn, Suvarnabhumi airport Phase II (Bt43bn) and the MRT Orange Line (Bt91bn). Note that the project value mentioned is for construction work only. 

To add Bt20bn to backlog this year

CK expects a success rate of 25-30% on the projects mentioned. However, these projects are unlikely to be added to the backlog until early 2016, given that it takes around 2-3 months from bidding invitation to bid submission and another 2-3 months for state agencies to review the tenders and announce the winners. Despite that, CK is still confident that it will achieve the target to sign Bt20bn this year even though it has signed new contracts of only Bt3.6bn YTD. The firm expects to sign Nam Bak hydropower project deal in Laos worth Bt17bn by YE15, while the work to supply rolling stock for the MRT Blue Line extension valued at more than Bt25bn should be signed in late FY15 or early FY16.

Robust core profit growth despite small top-line expansion

Given the scarcity of new projects signed in the past two years, CK’s backlog has depleted from its peak of Bt119bn at the end of 3Q13 to Bt81bn at the end of 2Q15. However, revenue in the short-to-medium term should still hold up well. The current backlog is expected to generate revenue of Bt35bn in FY15 (up 6%) and Bt34bn in FY16. Assuming Bt17bn adding to the backlog in 4Q15 and another Bt40bn in FY16, CK’s revenue should grow 3% in FY16. This growth may look small but we expect core profit to rise 26% in FY16 on the back of lower interest expenses, following debt repayment and the refinancing of long-term loans with cheaper debentures. CK has room to repay debt as it has no major investments in the short-to-medium term after divesting Xayaburi to CKP.