CH-Karnchang

A bed of roses

CH-Karnchang Plc (CK)

Action and recommendation * We maintain our positive view on CK's earnings and business outlook after attending its analyst meeting on Friday. In addition to the favorable prospects for its construction business, most of CK's investments have reached the harvesting phase. Divestment of TTW will produce a sizable gain and strengthen its BS in 1Q13 while the listing of CKP will unlock its hidden value in 2Q13. CK expects its construction revenue will grow continuously by 15-25% over the next few years and its strong BS will allow it to make sound new investments (focusing on the infrastructure business) both in Thailand and in neighboring countries, providing upside potential to our current estimates. We maintain our Outperform rating with a 2013 fair value of Bt30.0.

Key investment points

2013-15 revenue growth targeted at 15-25%. CK is targeting its construction revenue to grow 25%, 20% and 15% in 2013-15, respectively, driven by its current backlog of Bt118.3bn, to-be signed contracts valued at Bt28.1bn and new projects that are likely to flow onto the market in the next few years, of which CK is aiming to participate Bt839bn (Fig 1). In contrast, we forecast CK's growth at 24%, 11.6% and 5% over the same period, indicating our conservative projections at the moment. For water resource management projects, although Team-Thailand JV (CK holds 60%) has qualified for only 2 modules in the conceptual stage (Fig 2), it still has a chance to participate in the construction phase as a subcontractor in all projects.

Investments in harvesting phase. In addition to providing a big extra gain of more than Bt7.0bn (Bt2.2bn gain from sales + >Bt5.0bn marked-to-market) in 1Q13, the divestment of TTW will help cut CK's gearing to nearly 1.0x from 2.6x in 2012. Also, the listing in 2Q13 of CKP, which holds all of CK's power-generating businesses, will unlock the value of these types of investments and provide an easy funding source in the future as shares are sold into the market. Note that CK will not sell its stake in CKP during the IPO, although its holding will fall to 32percent from 38%. Excluding BMCL, which is still making a loss, and the correction of its small equity base that is underway, all of CK's other investments (BECL, TTW and CKP) have very strong CFs and BSs. They will thus be key sources of funds for CK for new investments.

Ready for new investments. After completing the business restructuring that we mentioned above, we believe that CK will be ready to make a new round of investments both in Thailand and in neighboring countries such as Lao PDR and Myanmar. This will clearly be another factor providing upside potential to our current estimates. A 120MW hydro power project in Lao PDR, Nam Bak II, worth Bt17bn, and SPP Phase II at Bang Pa-In are clear examples of this. *

Outperform rating maintained. We maintain our earnings forecasts and 2013 PBV-based fair value of Bt30.0 despite seeing some upside potential to our projections. Although, the current higher trading price of TTW against the figure we use in our model (Bt10.9 vs. Bt9.0) may create additional extra gains from the marked-to-market transaction than our forecast in 1Q13, it will not impact our valuation. However, the fair value adjustment of TTW and higher-than-expected fair price of CKP will be the key short-term catalyst to our valuation of CK. Given the 14.5% return (13.2% upside gain plus 1.3% DY), we maintain our Outperform rating on the stock. Note than CK announced a dividend for its 2012 operation of Bt0.35/share. Price catalysts * Excellent 1Q13 earnings, listing of CKP in 2Q13 and XD date on 7 May. * Contract signings for Purple Line @ 4 (Bt20.8bn) and Green Line @ 2 (Bt2.4bn)