Khon Kaen Sugar Industry

Khon Kaen Sugar Industry Plc (KSL) 

 

Investment thesis 

The key messages at the analyst meeting were in-sync with our view of the outlooks for global sugar prices and for KSL. An earnings recovery in 4Q14 and better performances by the ethanol and power units next year in tandem with improved sugar demand-supply dynamics and a sugar price recovery in 2H15 will lend support to the stock. Thus, share price downside risk from here appears limited. Our BUY rating stands, premised on a strong FY15 earnings growth profile and a cheap valuation—KSL currently trades at an FY15 PER of 10.3x, far below its long-term mean of 15.8x and the regional peer average of 14.6x.

Expect sugar price recovery in 2H15

There were some concerns voiced during the meeting over subdued sugar prices. Greater-than-expected supply from Brazil and high sugar inventories in many countries continue to pressure the sugar price. However, management’s view was in-sync with our belief that the subdued sugar price trend will be a relatively short-term phenomenon. KSL expects the global sugar market to be balanced or in deficit next year. As such, the global sugar price should rise to 16-18cents/lb. in 1H15 and to the 18-20 cents/lb range in 2H15 (from a mean price of 17 cents/lb this year). 

Note that UNICA (the Brazilian sugarcane industry association) reported 372.7m tonnes of cumulative 2014/15 sugarcane production from the south-central region of Brazil through to September 1—up 1.99% YoY.

KSL’s cane volume to rise as Thai cane output declines next year 

Thai cane production will slip from 103mt this year to the range of 95-100mt in 2015. Low rainfall and crop diseases in some areas will mean lower output next year. In contrast, KSL’s sugar output will rise, led by capacity expansion at its Namphong Mill (to 35k tonnes/cane/day from 27k tcd) and a full capacity run for its Loei Mill in FY15. We model for 9-9.5mt of cane (up from 8.5mt this year) and 860kt of sugar sales volume (740kt this year) in FY15 for KSL.

Better performances by the ethanol and power units next year 

The power and ethanol units will continue to drive earnings growth in FY15. We expect ethanol sales volume of 105m liters (up 17% YoY) and an ethanol price of Bt27/liter (up 4% YoY) for FY15, buoyed by strong demand for ethanol in the face of limited supply. Moreover, electricity sales volume should rise to 360,000MW-hr, up 6% YoY. We project an electricity sales price of Bt3,500/MW-hr (flat YoY).