Price hike sweetens prospects

Khon Kaen Sugar Industry shares closed at Bt14.90 yesterday, a three-month high, following government approval of a Bt5 hike in domestic sugar prices, to Bt22.50 to Bt23.50 per kilogram.

However, 13 brokers with the Securities Analysts Association have mixed views about the stock. Their target prices fall into a range of Bt10 to Bt17.73 per share.

The stock opened yesterday at Bt15.20, the level unseen since January this year, before weakening to end the day at Bt14.90, up 3.47 per cent from Tuesday's close.

Khon Kaen Sugar is Thailand's fourth-biggest sugar miller, with a daily crushing capacity of 5 million tonnes. Domestic sales normally account for 30-40 per cent of the total volume of sugar it sells. The rest is exported.

The Office of the Cane and Sugar Board said Thailand would produce 72.86 million tones of sugar cane this year. Khon Kaen Sugar has already procured 5.74 million tonnes, or 7.88 per cent of this annual production. The company has also diversified into ethanol manufacturing, with a capacity of 150,000 litres per day; power generation, with a 30-megawatt plant; and fertiliser production.

In March, Khon Kaen Sugar's board decided the company should build a new sugar factory with a daily crushing capacity of 14,000 tonnes; a new plant capable of producing 200,000 litres of ethanol per day; a 45MW power plant; and a fertiliser plant in either Sa Kaew or Kanchanaburi.

The projects will cost a combined Bt4.5 billion.

Kim Eng Securities (Thailand) recommends investors take a profit from Khon Kaen Sugar shares and gives them a fair value of Bt15 apiece.

"Khon Kaen Sugar Industry can sell domestic sugar at higher prices, but this does not fully benefit the company, because the cost of sugar cane has also increased. Moreover, the average sugar price in this fiscal year will likely not be enough to support sugar-cane purchases for the year at the current cost of Bt807 a tonne. The Office of the Cane and Sugar Board may have to compensate for this additional increase," the broker said yesterday.

Kim Eng Securities revised upwards its forecast for average sugar prices, from Bt12.30 kilogram to Bt13, and its exchange-rate assumption to Bt30 to the US dollar.

"Therefore, we have also revised our 2007-08 net profit forecast for Khon Kaen Sugar to Bt1.07 billion on growth of 27.8 per cent year on year," the broker said.

Trinity Securities said the sugar-price hike would benefit Khon Kaen Sugar shares but recommended investors be prudent, because domestic oversupply could result if other sugar manufacturers increased their domestic distribution volumes.

The broker recommends "speculative buy" on shares in the short term and is revising its target price.

However, Asia Plus Securities and Sicco Securities are both bullish on Khon Kaen Sugar's outlook and are recommending "buy".

Asia Plus Securities said the domestic sugar-price increase would bode well for Khon Kaen Sugar's earnings.

The broker revised upwards its net profit estimates for Khon Kaen Sugar's fiscal 2008 and fiscal 2009 by 4.3 per cent and 7.6 per cent to Bt1.08 billion and Bt1.27 billion, respectively. The company's fiscal year ends on October 31.

"Khon Kaen Sugar Industry's domestic sales volume is at 40 per cent of total capacity, and the price hike will start to benefit the company from the second half of its fiscal year onwards," the broker said.

Asia Plus Securities also raised its fair value for Khon Kaen Sugar shares from Bt16.56 to Bt17.73 apiece on the back of rising prices for agricultural products. It said the fact that the company was an ethanol manufacturer was another of its outstanding points. The record-high prices for fossil fuels will be a blessing to substitute energy sources, including ethanol.

Sicco Securities said Khon Kaen Sugar's profitability would improve from the start of its second quarter this past February 1.

"The ethanol business will obviously recover following rising domestic consumption of gasohol, and exports will continue. Moreover, falling molasses costs will boost the profit ratio from ethanol production," the broker said.

Sicco Securities has set a fair value for Khon Kaen Sugar shares of Bt17.15 apiece.

"The sugar industry still thrives, because it is linked to global oil prices. The company will enjoy substantial growth in its next fiscal year after its sugar plants in Laos and Cambodia come on stream," it said.

Sicco Securities predicts Khon Kaen Sugar will post a net profit of Bt956 million for fiscal 2008 and Bt2.11 billion for fiscal 2009.

Khon Kaen Sugar reported a net profit of Bt173.56 million for its first quarter ending January 31, down from Bt192 million in the same period last year.