Ch Karnchang

Ch Karnchang Plc (CK)

2013F revenues and core profit upped. CK management has reset its 2013 revenue target to more than Bt28bn from the previous target of Bt25-28bn. In response, we have accelerated revenue recognition from Xayaburi in Laos and some projects in Thailand and this raises 2013F revenue by 17% to Bt30bn. Gross margin and net margin in 2013 are expected to be stable at 10.5% and 4.4% respectively. We also upgrade 2013 core profit by 115% to Bt1.32bn from Bt612mn to reflect some change in the recording of gain from sale of investment for tax purposes.
Expect net profit with extra gain at Bt8.8bn in 2013. We forecast core profit of Bt1.32bn in 2013, with extra gain from divestment of investment of Bt7.5bn: Bt4.8bn from the sale of TTW in 1Q13 that reduced its holding to 11% and Bt2.7bn from the 2Q13 sale of a portion of its holding in BMCL (leaving it with 16.64%). The consolidated income statement is expected to contain three types of gain after tax:
1) gain on sale of investment in two companies, 2) Gain on fair value of investment and 3) Gain on changes in value of available-for-sale investment, included in “other comprehensive income”. All three will be included in taxable income.
Core profit and various ratios in 1Q13 improved. Removing the huge extra gain from divestment in 1Q13 reveals core profit after tax (20% deduction) of Bt320mn, impressive compared to previous quarters. Construction revenue in 1Q13 was Bt8.0bn, Bt3.1bn from operations in Thailand, Bt3.7bn from Lao projects and the remaining from joint venture businesses. P/BV shrank to 2.70x in 1Q13 from 5.16x in 4Q12 and net debt to equity reduced to 1.16x from 2.82x. The divestment of CK brought in cash that was used to pay down debt and supply expenditure needs. The company also plans to issue Bt3.0-4.0bn in bonds in June 2013. 
New potential for backlog. Current backlog is Bt140bn, down slightly from the beginning of the year upon some completed jobs. However, bidding for MRT Green Line (Morchit-Sapanmai) is expected to open in July 2013 and Pink Line in August 2013. The Bt2trn investment project bill is expected to be passed into an Act in June 2013 and this bill holds good potential for CK. It continues to expect to get Bt160bn as its share of the Bt2trn.
Valuation and recommendation. We still BUY with a target price of Bt38/share. We use sum-of-the-parts valuation: 41% from CK alone using DCF method (WACC 10%, market return 11.5%, 7-year growth of 3%) plus 59% from its investment in BECL, BMCL, TTW, Xayaburi and CK Power.