By Kasikorn Securities
CH-Karnchang Plc (CK)
Action and recommendation
We raise our 2013 fair value based on a PBV methodology to Bt20.0 from Bt13.5 to take into account the positive impact on CK’s overall value from the sales transaction of TTW to BECL scheduled for 1Q13. Despite hurting CK’s earnings outlook, the transaction will enhance its balance sheet while giving us more confidence in the value of its investments. Also, the new higher fair price of BECL (Bt45.0 from Bt34.0) boosts the value. Given the attractive upside of 34% to our new fair value, we maintain our Outperform rating on the stock and keep it as our top pick in the Contractor sector.
Key investment points
TTW deal to have mixed effect on earnings. CK disclosed it would sell 438.9mn TTW shares, equivalent to 11% of TTW’s paid-up capital, to a related company, BECL, at a price of Bt7.55 per share. We expect the transaction will be completed in 1Q13. Based on TTW’s BV in CK’s balance sheet of Bt2.11 per share, we see an extra gain from the transaction of Bt2.4bn (Bt1.9bn after tax). However, TTW will change from being categorized as equity income to become available for sales securities after the deal, as CK’s stake will fall from 30.04% to 19.04%, with equity income of about Bt700mn+ per year being deleted but dividend income of about Bt300mn+ being added. In addition, interest charges will fall sharply as cash inflow is used to repay debt (Fig 1). In sum, we maintain our earnings forecast for 2012, boost 2013 earnings by 377% but cut 2014 earnings by 26%. This is the only downside from the deal, in our view.
Balance sheet enhancement is key. We believe CK’s goal with this transaction is to strengthen its balance sheet as the share sale will help cut its interest-bearing D/E ratio from nearly 3.9x to just 1.8x (Fig 2). We attribute this great development to the re-clarification of TTW as available for sales securities from investment in an associate. This adjustment unlocks the value in TTW from BV (Bt2.11 per share) to market value (Bt7.55 per share). Moreover, any movements in TTW’s price from Bt7.55 at the end of each quarter will also be realized as a shareholder equity item. This is the same accounting method CK currently uses for its investment in BECL. The new stronger balance sheet not only indicates a low level of financial risk, but shows the company’s ability to manage and balance its investments and balance sheet, in line with the view we stated in our previous report.
2013 fair value raised to Bt20.0. We increase our 2013 fair value based on an adjusted BV methodology to Bt20.0 (Fig 3) from Bt13.5. While still using our conservative 2013 fair value of Bt6.30 for the remaining shares of TTW held by CK, we are more aggressive on our overall valuation of CK’s investment by removing the discounted factor versus the 20% used earlier. In addition, our recent fair price adjustment of BECL to Bt45.0 from Bt34.0 enhances CK’s fair value.20 Also, we apply a higher multiple on the PBV used in our valuation (+1.5SDV from +1.0SDV over the past five years or 2.55x instead of 2.29x) due to its stronger balance sheet. However, this is still very conservative compared with STEC’s level of nearly 5.0x. In our view, CK’s multiple should be lower than STEC’s as it contains earnings contributed from its investments, mostly in infrastructure-related businesses that should trade below 2.0x on a PBV basis. Note that we still see additional upside potential to our fair value if CK can convince the market that the value of its investments included in our valuation is too conservative.