Gunkul Engineering

Gunkul Engineering Plc (GUNKUL)

Still BUY but TP cut to Bt24/share. Despite the weak 2Q13, management remains confident that it will achieve its 2013 revenue target, with the weaker than expected equipment sales to Myanmar offset by more contribution from its EPC (engineering procurement and contracting) activities. The key drivers for this arena are EPC for BCP’s solar farms and the solar rooftop and electricity system for TPIPL’s new cement plant. It has decided to put off the startup of its wind power project for a year in order to use newer technology that will provide a better return on investment. We have cut our TP from Bt27 to Bt24 based on sum-of-the parts valuation but there is still an attractive upside of 56%, hence our BUY rating is maintained.

Wind power project update. Management says the wind power project (60MW) is progressing on schedule, with the most time-consuming task, i.e. the construction of the transmission system, already started. However, it has decided to put off the startup of the first unit until 1Q15, a delay of one year, so that it can use new technology for wind turbines now being developed. It is selecting the most efficient and economic technology for the wind turbine and rotor in order to ensure better return on investment. GUNKUL plans to increase the installed capacity of the wind power project by 90MW.

More upside from solar rooftop projects. GUNKUL will also participate in the newly launched solar rooftop program for a total capacity of 200MW, divided equally between the household and industrial sectors. GUNKUL is likely to be involved via both EPC and direct investment in the projects. It has decided to co-invest with both listed and non-listed companies to submit at least 60MW capacity of solar rooftop projects for the industrial portion. Management believes that the government will expand the target capacity for solar rooftop if there is abundant demand. It expects revenue from EPC of solar rooftop could be as high as Bt60mn/MW with net margin of 10%.

Gas engine power plant in Myanmar moving as planned. GUNKUL has jointly invested with a local partner in Myanmar to build two 25MW gas engine power plants. Management reports that one gas engine power plant (25MW) began operations in 3Q13. However, since by Myanmar law foreigners cannot invest in a local company, unless the law is amended GUNKUL is unable to book profit generated by these power plants. It has hired international financial consultants to advise about the holding structure for this business in Myanmar, with conclusion expected in 2014. Management expects these power plants could give it an annual profit of Bt50-60mn for full-year operations, providing some offset for the lower income from equipment sales to Myanmar.