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CH. Karnchang

Bualuang Securities Expect good 2Q14 profit and an even better third-quarter



CH. Karnchang Plc (CK)

Investment thesis

CK now looks better than ever. Not only will construction income resume strong growth next year, thanks to the Bt2.4trn plan to upgrade national infrastructure, but investment income (dividend and equity income) is expected to grow at a good clip. To better reflect the value of the firm's investments, we have changed our methodology from PBV multiple to sum-of-the-parts valuation. Our YE14 target price, thus, rises to Bt31.25 from Bt25.25. Our BUY rating stands.

2Q14 earnings preview

We expect CK to report a 2Q14 net profit of Bt354m, down by 72% YoY and 3% QoQ. Stripping out a Bt1bn gain from selling a 7.97percent stake in BMCL in 2Q13, core profit would jump 124% YoY, led by equity income—a stronger CKP performance and shallower losses at BMCL (from rising ridership and capital restructuring) and Xayaburi Dam (from capitalizing expenses). The top-line is expected at Bt8.6bn, up 3% YoY but flat QoQ. Management guides for a flat QoQ gross margin of about 11%, but we expect some upside from cost adjustments for the MRT Purple Line project following construction completion in 2Q14.

Divestment gain boost 3Q14 bottom-line

3Q14 should be the peak earnings period of the year. Besides dividend income from BECL and TTW (normally paid in the third-quarter), CK will book a before-tax gain of Bt1bn from selling 1,025m shares in BMCL for Bt1.65/share. We expect the transaction to reduce its net gearing to a comfortable level of 1.5x from 2.1x at end-March. Management said the firm will maintain its stake in BMCL at 25% and has no plan to sell any investments in the near future.

Order book should start rising late this year

CK expects to sign contracts for the Bangpa-in Cogeneration (SPP) project phase II (Bt4.75bn) in 4Q14 and the Nam Bak hydroelectric power project in Laos (Bt17bn) in FY15. With regard to state infrastructure projects, the MRT Dark Green Line (Bt26.5bn) is likely to be the first big-ticket project to open for tender. The project TOR is subject to being re-approved by the MRTA board on August 19 and contractors will be required to submit bids within the 28 days following the board meeting.

With regard to double-track railways, although the projects have been delayed indefinitely, as the NPCO wants to scrutinize them, we believe tenders will open soon, given that the double-track lines have apparently been prioritized by the junta.

Another project which looks likely to be secured is M&E work for the Blue Line extension worth more than Bt20bn. BMCL is likely to award a contract to operate the Blue Line extension and it will almost certainly offer the M&E work to CK. The backlog at end-March stood at Bt104bn, of which Bt25bn is expected to be recognized as revenue during 2Q-4Q14.


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