Ch Karnchang
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2Q14F: Quarterly profit at new base of ~Bt350mn BUY
Ch Karnchang Plc (CK)
2Q14F expect core profit of Bt366mn: Revenue is estimated at Bt8.9bn, up 5.3% YoY
and 2.5%QoQ, with a 2Q14F core profit of Bt366mn, +17.6% YoY and +0.1%QoQ. The
growth is provided by greater construction income – enough to offset the far lower
dividend from BECL of Bt115mn (15.15% holding) than TTW’s Bt266mn in 1Q14. The loss
contributed by its investments (CKP, BMCL and Xayaburi) will shrink to Bt45mn from
the Bt75mn in 1Q14. Interest income will be cut by Bt100mn after BMCL transformed
its debt into equity. Gross margin is estimated at 11.4% with net margin of 4.1% (4.2%
in 1Q14). We believe the company has achieved a new quarterly earnings base of
Bt350mn (from Bt300mn).
Rapid progress of jobs. Revenue will be pushed up by Bt20bn Purple Line contract 4
(supply and installation of M&E system), which has now reached 20% completion from
only 2% at the end of 1Q14 (completion is scheduled for 1H16). We estimate this
project will generate ~Bt6.6bn per year or Bt1.6bn per quarter through completion.
This is replacing the completed Purple Line contract 1. Xayaburi remains a major
revenue contributor at an estimated Bt9-10bn per year or Bt2.4bn per quarter. CK
management says it has added Bt2bn backlog to Xayaburi onto the remaining Bt45bn.
Backlog high at Bt104bn from MRT and may get Blue Line M&E system. As of
the end of 1Q14, CK had a high Bt104bn in backlog. The largest items are the Bt45bn-
Bt47bn remaining in Xayaburi (through 2019), Bt20bn for Purple Line contract 4 (2016),
Bt6.5bn remaining on the Blue Line (2016), Bt10bn remaining on the Green Line (2017)
and Bt20bn remaining on the Si Rat expressway (2016). New contracts in 2014 include
Bangpa-in Cogeneration (SPP) Phase 2 with a value of Bt4.75bn and Nam Bak, a
hydroelectric power plant in Laos with a value of Bt17bn. This suggests at least Bt22bn
added to CK’s backlog in 2014. CK has a good chance of getting the M&E job from
BMCL, which is expected to be awarded the Bt100bn concession for the M&E system
and O&M services for the Blue Line extension (27km). BMCL will hire CK for the M&E
system, valued at ~Bt25bn (26 stations, compared to Bt20bn for the Purple Line’s 22
stations). This means CK has the largest proportion of backlog from the MRT of peers.
Buy with TP of Bt30. We believe CK will get Bt360bn of the Bt2.4trn planned
infrastructure projects, or an average of Bt46bn (between Bt30-65bn) per year for the
next eight years. We value CK via sum-of-the-parts, using 8-year DCF for its contractor
business. We allow Bt25 for its own construction revenue, minus Bt10, which works
out to Bt15, plus valuation for its investments of Bt15 (Bt5.5 for TTW, Bt3.5 for BECL,
Bt3.8 for BMCL and Bt2.2 for CKP). We note that if we use the market price for
subsidiaries, value of subsidiary holdings rises to Bt17.8 from Bt15, giving upside of
almost 10% more, lifting target price by Bt2-3 per share.
