Khon Kaen Sugar Industry

Khon Kaen Sugar Industry Plc

Investment thesis
We expect a sugar price recovery to clearly start manifesting by about mid-year, driven by an improved demand-supply balance in tandem with lower Brazilian output. We are now less optimistic about KSL’s FY13/14 sugar business—it is likely to post a weaker performance than previously envisaged, as we now expect the Cambodia and Laos operations to post deeper losses instead of breaking even. Diminished expectations for the sugar business may cap the share price in the near-term.
However, we still forecast strong core profit growth of 41% YoY in FY13/14, driven by the ethanol and power units, which should support the share price. The stock currently trades at an FY13/14 PER of 12.6x, a 13% discount to the sugar producer average of 14.1x.
Strong QoQ earnings growth expected for 1Q13/14
Our model indicates a net and core profit of Bt309m for 1Q13/14 (Nov 2013-Jan 2014), up 204% QoQ but down 18% YoY. The drivers of the expected QoQ earnings jump are: 1) greater ethanol and electricity sales volumes (ethanol up 36% QoQ to 30m liters; electricity up 34% QoQ to 80,000MW-hr), 2) lower interest expenses and 3) the absence of significant extra expenses to be booked (in 4Q12/13 KSL booked unusually high extra expenses of Bt120m). The assumed YoY profit fall is due to: 1) lower sugar prices and sales volume and 2) lower ethanol sales volume.
Power and ethanol units to remain FY13/14 profit drivers
Electricity sales volume is anticipated to rise 13% YoY to 340,000 MW-hr, enabled by capacity expansion from a new power plant (up 25% to 50MW). Furthermore, the ethanol price is projected to rise 11% YoY to Bt25/liter. There would be scope for upside to our ethanol sales volume forecast of 105m liters if KSL were to increase production further. Our sensitivity analysis suggests that for each additional 5m liters of output above our current assumption, earnings would exceed our FY13/14 forecast by 0.8% (see Figure 2).
Weak sugar performance this year (but up YoY)
Although the Namphong sugar mill’s COD has been rescheduled to 2015 (due to slow construction), we still expect KSL to deliver YoY sugar sales volume growth this year, driven by a higher yield and the absence of mechanical problems. However, the mean sugar price in FY13/14 is forecast to decline slightly YoY, due to a supply surplus. Given weak sugar sales prices in Europe this year, we expect the units in Laos and Cambodia to post deeper YoY losses (we previously assumed they would break even). So, we have cut our net profit forecast by 11% to Bt1,992m and our October 31 target price from Bt15.50 to Bt14.70. Our HOLD rating stands.