Khon Kaen Sugar Industry

Khon Kaen Sugar Industry Plc (KSL) 

 

Investment thesis

The weak world sugar price continues to pressure KSL’s sugar performance. We forecast 12.5% YoY core profit growth for FY15 against broad SET core earnings growth of 20% YoY. There aren’t any obvious share price catalysts going forward that we recognize. However, we believe the world sugar price has already bottomed out. Demand-supply dynamics are gradually improving and a sugar price recovery is expected in 2H15. Thus, share price downside risk from here appears limited. 

Given the weak profit growth profile, we have cut our rating from BUY to HOLD and our YE15 target price from Bt18.6 to Bt14.1, pegged to PER of 14.9x (0.25SD below its long-term average)—the valuation that KSL has traded at during previous low sugar price environments.

Expect strong QoQ earnings growth for 1Q15

Our model indicates a net profit of Bt355m for 1Q15 (Nov 2014-Jan 2015), up 67% QoQ but down 17% YoY. The drivers of the expected QoQ earnings jump are: 1) greater ethanol sales volumes (up 9% QoQ to 27m liters) and 2) lower SG&A and interest expenses (no sugar shipment delays are expected for the quarter). The assumed YoY profit fall is due to: 1) a lower sugar price and diminished sales volume and 2) a lower ethanol sales price. 

World sugar price recovery expected in 2H15

High sugar inventories, a 10-year low for the BRL and an oil price downtrend continue to pressure world sugar prices. However, a shrinking global surplus coupled with limited reinvestment in cane planting should eventually lead to higher prices later this year. We expect the global sugar price to rise to 16-18cents/lb. in 2H15 and an average world sugar price of 16cents/lb for FY15 (against 17cents/lb. in FY14).

Lower expectations for KSL’s sugar performance 

The ethanol and power businesses remain the key earnings drivers in FY15, driven by expanding ethanol and electricity sales volumes, as lower sugar sales prices will squeeze the sugar performance. We currently model for 920kt of sugar sales volume (we previously assumed only 850kt) in FY15 for KSL. However, we have cut our FY15 sugar sales price assumption to Bt15k/t from Bt18k/t (we assume Bt16k/t for FY16). Due to lower expectations for KSL’s sugar performance, we have slashed our earnings projections by 27% for FY15 to Bt1.77bn and by 22% for FY16 to Bt1.97bn.

New projects to come

KSL plans to expand its ethanol capacity from 350k liters/day to 550k liters/day in FY16. The new capacity will be added at Namphong plant (budgeted at Bt700-800m). The next project is capacity expansion at the Sa Kaeo plant—40k tonnes/day of cane and 30k liters/day of ethanol capacity (budgeted at Bt7-8bn).