CK Power

CK Power Plc (CP) 

 

Investment thesis

We recently discussed CKP’s outlook with its management, whose guidance for 2H15 and 2016 is seemingly neutral to slightly negative, with no growth excitement in the near future. Nam Bak 1 (NB1) hydroelectric project has been delayed indefinitely as its feasibility is still being reviewed, while the remaining Bang Pa-in cogeneration 2 (BIC2) and Xayaburi (XPCL) projects remain on track. Though we believe CKP is able to succeed in the co-operative solar farm scheme, the firm seems ambivalent to such projects and will only look to participate in two of the scheme’s first phase. Given our more cautious view on NB1, and the lack of short-term positive news flow and dividend yield to back the valuation; we cut our rating to SELL with a revised target price of Bt2.30. Presently, we deem other utilities players more attractive—EGCO is our preferred pick from the conventional space and TSE and IFEC from renewables.

Preview for 3Q15

We expect CKP’s top and bottom-line to remain more or less flat QoQ, leading to a YoY drop of 5% in revenue and 7% in core net profit for 3Q15—at Bt91m. We saw an exceptionally good year in 2014, where BIC1’s industrial user power demand is still recovering from the unplanned shutdown of one of its clients in 1Q15. 

Nam Bak 1 still on the drawing board

Although the NB1 hydroelectric project’s MoU has been extended, we are likely to see the planned commissioning date of 2018 postponed indefinitely. Because the project’s entire offtake will be sold to Electricite du Laos (EDL) and hence receive a lower payment tariff, the firm is hard-pushed to make sure the project’s return is sufficient for an acceptable hurdle rate of 10%. The project is still in planning stages as costs are still being reviewed. Regarding its other projects, the BIC2 and XPCL plants are on track for completion in early 2017 and 2018—CKP’s 2017 net profit is to grow 45% from 2015 (BIC2) and 2019 to leapfrog 172% in 2019 (XPCL) as a consequence.

Little upside from co-operative solar farms

The company has indicated that it has only signed MoUs with two co-operatives in the Central and Northeastern regions under the co-operative and state enterprise solar farm scheme—disappointingly lower than our previous anticipation on 11 September (Watch for renewables comeback). Management informed us that a number of its partnership co-operatives had been excluded from the newly announced grid connection points for this phase. What’s more, we estimate the projects to generate ~Bt4.1m net profit per MW (at 10% profit sharing), giving a mere Bt0.01 per share per MW for CKP. We will provide an update after the 10 November deadline, at which time we should see the real players emerge.