CH. Karnchang

CH. Karnchang Plc (CK)
 

Higher than estimate: CK reported a 1Q12 net profit of Bt108m for 1Q12, a reversal from losses of Bt457m in 1Q11 and Bt289m in 4Q11. The result was much better than our estimate of a loss of Bt232m, due to a stronger-than-expected top-line and a fatter gross margin than assumed.
Results highlights: Revenue rose by 90% YoY and 57% QoQ to Bt4.3bn with good progress on mass transit works (the Purple Line, the Blue Line and the Green Line). Gross margin was strong at 11.7%, despite dipping a bit QoQ. SG&A expenses were very well controlled at Bt297m, down by 2% YoY and 38% QoQ. Although interest expenses remained high during the quarter at Bt304m, interest income on loans to associates and JVs of Bt78m and equity income from TTW were more than enough to push the bottom-line into black ink
Net gearing remained stable QoQ at 2.7x, which was still below the debt covenant of 3.0x.
Outlook: CK’s operational turnaround looks to have manifested faster than we expected. Profit should be even stronger in 2Q12, driven by a rising construction revenue trend and dividend income from BECL.
What’s changed? We have upgraded our FY12 earnings forecast by 143% to Bt472m and raised our YE12 target price to Bt8.50 from Bt8.20.
Recommendation: We believe the recent sell-off of CK stock has priced in the further delay to construction of the Xayaburi project, while the market doesn’t yet seem to have taken the operational improvement onboard. We have, thus, upgraded our rating to BUY from HOLD. Note that although CK has already signed up for the Xayaburi project, we won’t include it in our model until we are confident that the job can proceed. For the moment, the proposed dam in Laos remains possible upside to our valuation.