Khon Kaen Sugar Industry

Below estimates 

KSL posted a 3Q14 (May-July 2014) net profit of Bt358m, down by 42% YoY and 43% QoQ. Stripping out a Bt14m gain for the quarter from derivative instruments, core earnings would be Bt344m, down by 40% YoY and 44% QoQ. The reported net profit was 16% below our estimate and 30% short of the consensus, due to lower-than-expected sugar sales volume and price and higher-than-modeled interest and tax expenses. 

Results highlights

The earnings contraction was due to: 1) a 25% YoY sugar sales volume dive (but up 42% QoQ) to 199kt, 2) a lower average sugar sales price (down by 6% YoY and QoQ to Bt15,900/t), 3) a lower ethanol sales price (down 1% QoQ [but up 7% YoY] to Bt25.70/liter), 4) greater cost of sales and service (up 45% QoQ [but down 27% YoY]), due to higher costs for the ethanol and power units, 5) lower other income (down by 75% QoQ and 85% YoY), 6) a higher QoQ effective tax rate of 12.7% (flat YoY)—up from 2.5% in 2Q14—and 7) an SG&A/sales ratio rise to 11.5% from 8.8% in 3Q13.

Outlook

The delayed shipments of sugar during the period, which was the sugar business high season (the second- and third-quarter of the financial year) will make for a surge in sugar sales realization in 4Q14. As such, we expect KSL’s profit to rise both QoQ and YoY in 4Q14 (Aug-Oct 2014). We see the prevailing subdued sugar price trend as a relatively short-term phenomenon and expect the global sugar market to achieve balance or go into deficit in 2015.

What’s changed?

Our FY14 earnings forecast stands unchanged at Bt2,024m. The 9M14 net profit represents 70% of our full-year forecast. 

Recommendation

We believe that the current stock price has already factored in anticipation of poor 3Q14 earnings. With earnings to recover in 4Q14 and improving sugar demand-supply dynamics, we expect the share price to rise going forward. Moreover, expectations of firmer sugar prices next year coupled with better performances by the ethanol and power units will lend support to the stock, we believe. Our BUY rating stands with an end-Oct 2015 target price of Bt18.60, premised on a strong FY15 earnings growth profile and a cheap valuation—KSL currently trades at an FY15 PER of 10.8x, far below its long-term mean of 15.8x and the regional peer average of 14.3x.