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CK Power

Price surge stretched valuation



CK Power Plc (CK) 
Investment thesis 
CKP’s share price rose 23% over the past two months, which we believe reflects an earnings turnaround in 2016. However, with no intact capacity growth, we think a further share price appreciation is highly unlikely. Despite the start-up of BIC 2 in 2017, we downplay its substantial profit contribution. Heavy CAPEX during 2016-19 will likely limit dividend payout ability while the current valuation is expensive with PBV/ROE of 0.38x versus peers’ average of 0.16x. As such, we downgraded our rating to SELL; and cut the DCF target price to Bt2.20. EGCO remains our top pick. 
Earnings to normalize in 2016 and flatten in 2017 
The impressive earnings growth of 25% YoY in 2016 is driven by 2015 low base from unplanned outage events. Loan refinancing on NN2 will be the only key wild card this year. Based on our experience, we feel the impact of rate reduction to its bottom-line will be marginal. Looking into 2017, we preserve our conservative projection with a flat earnings growth outlook. While BIC2 will become operational in June, the utilization rate will gradually rise with a capacity full-run earliest in 4Q17—while depreciation & interest expenses are expected to arrive since inception of COD in June 2017.
Ballooning XPCL CAPEX prompts a value deletion… 
Environmental concerns about the XPCL prompted major changes in the plant design, urging for further Bt1.5bn equity injection. CKP cited that the Laotian government may offer packages to help sustain the project’s IRR. Based on our stress test, incremental costs will likely outweigh the effect of those incentives—we anticipate project’s IRR to squeezed by 90 bps, cutting value accretion by Bt0.10/share. 
…forward dividend yield is still relatively uncompelling … 
With expected Bt11bn CAPEX during 2016-19, we believe CKP will need to raise further debt to fuel investment costs– spiking D/E ratio to double in 4 years. Our model assumes stagnant dividend payments around Bt0.02/share, or 1% yield, relatively low compared to other conventional counters. Besides, we expect to eye CKP’s peers, such as EGCO and GPSC, raising their yield over 4% this year. 
… and near-term capacity upside seemed to be limited 
Today, CKP only has two projects in the pipeline (BIC 2 and XPCL), while Nam Bak 1 project has been scrapped due to cost issues, as expected. However, CKP cited a sizeable hydropower project, but declined to provide details until 2H16. We believe it is a greenfield scheme, and as such, we expect the COD to come no earlier than 2020. Moreover, the possible cost overrun arising from environmental issues and construction, as we have seen in XPCL, makes us believe that it is too premature for market to price it in.

Published : March 25, 2016

By : Bualuang Securities