Gunkul Engineering
BUY Leading player in Thailand's renewable power arena
Gunkul Engineering Plc (GUNKUL)
Initiate coverage with a BUY. We initiate coverage on GUNKUL with BUY rating and a 12-month target of Bt21 (25% upside potential), based on sum-of-parts valuation. We like the company for its strong earnings growth in the next three years, as solar power plants have started to generate cash flow. We are also positive on the earnings outlook for its power equipment supply and manufacturing segment given strong demand for electricity both in Thailand and its neighbors. GUNKUL will do well of the birth of the AEC in 2015 as a key supplier for the power generating industry in countries with high growth potential such as Myanmar and Laos.
Successful development of wind power project could be a near term catalyst.
It is a pioneer private developer in solar power projects, then branched out into developing wind power projects in Thailand, still in its infancy. It recently acquired a major stake (70%) in a wind power company, WED, to develop and operate a 60MW wind power project in the northeast and sell the power to EGAT and the PEA with a Bt3.5/KWh adder for 10 years. The success of this wind power project would be a good addition to its resume for future EPC projects both in Thailand and Myanmar.
Competitive edge for solar power projects.
We estimate that GUNKUL can deliver a core project CAGR of 68% p.a. during 2012-14F, backed primarily by its renewable power business, solar and wind. Earnings outlook for its conventional business (power equipment supply) and EPC contracting should remain strong due to higher demand for electricity and contractors to develop more solar projects.
Valuation & risks. Our 12-month TP of Bt21/share is based on the sum-of-the-parts method comprising DCF for the power generating business (Bt14/share) and P/E based target for power equipment business (Bt7/share). Key risks are delayed startup of its remaining solar power and wind power projects, lower than expected electricity generation by the solar power plant, weaker demand for power equipment and lack of new EPC projects.
