CH-Karnchang

CH-Karnchang Plc (CK)

A magic investment strategy
Action and recommendation
- We raise our 2013 fair value on an adjusted BV basis to Bt30.75 from Bt30.00 to reflect our core profit revision following CK’s partial divestment of its stake in BMCL in 2Q13. In addition to the big gain from the sale, we expect CK will be able to realize an extra gain from the initial marked-to-market valuation of its remaining shares in BMCL, using the same method it applied to its divestment of TTW in 1Q13. Also, it will no longer need to take equity losses from BMCL and may use the cash from the transaction to repay debt, reducing its interest cost. As a result of this deal, we revise up our 2013-15 earnings by 40%, 37% and 23%. Given the solid upside potential of 27.6% from the latest closing price to our new fair value, we maintain our Outperform rating on the stock. CK remains our top pick in the sector.
Key investment points
- At least Bt3.1bn extra gain from BMCL share sale in 2Q13. On discussing this transaction with management, we were informed that CK sold the 7.97% holding in BMCL to a non-related party, Hicrete Products & Technology Co., Ltd, on 2 April 2013. The selling price was Bt1.15/share, CK’s stake in BMCL fell to 16.64% following the deal. Given the investment cost after realizing several years of net losses of Bt0.01/share, we expect CK will book a sizable gain of Bt1,086mn (Bt869mn after tax). Assuming the same accounting method is used as was applied to the TTW share sale in 1Q13, we expect CK will be able to report an initial marked-to-market valuation for its remaining stake in BMCL of at least Bt2,267mn (based on BMCL’s share price at the end of 2Q13 of Bt1.15, with every Bt0.05 incremental gain in BMCL’s share price providing an additional Bt100mn to CK’s bottom line). An excellent net profit thus can be expected again in 2Q13.
- 2013-15 earnings raised by 40%, 37% and 23%. In addition to the extra gain from the sales transaction and marked-to-market valuation after it recognizes BMCL as an available for sale investment instead of equity income, CK will no longer need to take an equity loss on BMCL, which we had expected at Bt212mn in the last nine months of 2013, Bt259mn in 2014 and Bt234mn in 2015. Also, CK should be able to use the cash received from the deal to pay down debt, reducing its interest cost. We thus revise up our 2013-2015 earnings forecasts by 40%, 37% and 23% (Fig 1). 2013 earnings will soar to as much as Bt12.1bn, up 20x YoY.
- Healthier balance sheet. Thanks to the partial divestment of BMCL, without any adjustment for the contribution from the construction business, we expect its 2013 net interest bearing D/E ratio will fall to 0.84x from our earlier estimates of 1.07x and 2.59x at the end of 2012 (Fig 2). Note that CK’s D/E ratio will fall below our forecast if the share prices of BECL, TTW and BMCL at the end of 2013 are higher than our forecasts of Bt39.75, Bt10.0 and Bt1.15. However, it will be higher than our forecast if CK makes a big new investment during the remainder of the year.
- 2013 fair value raised to Bt30.75. To reflect our earnings revision, we raise our 2013 fair value on an adjusted BV basis to Bt30.75 from Bt30.00. We have not incorporated unrealized gains from the marked-to-market valuation of CK’s investments in our projections, as the value of the investments had already been factored in (Fig 3). Given the attractive upside potential of 27.6% from the latest closing price to our new fair value plus more positive news ahead, we maintain our Outperform rating on the stock. CK remains our top pick in the contractor sector.
Price catalysts
- Excellent 1Q13-2Q13 earnings results, listing of CKP in 2Q13 and XD date on 7 May
- Contract signing of Purple Line @ 4 (Bt20.8bn)