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Gunkul Engineering

EPC business will fuel 2014F BUY

Gunkul Engineering Plc (GUNKUL)

Strong revenue and profit growth expected for 2014F; EPC is key

Business with Myanmar should return to normal soon

Target price is cut to Bt18/share on stock dividend; BUY maintained

TP cut to Bt18/share to reflect stock dividend. We expect strong earnings growth

in 2014F, driven by the EPC (Equipment Procurement and Construction) business and

the return of its trading business in Myanmar. While earnings from renewable power

have stabilized since all solar power plants are on line, GUNKUL is developing wind

power plants. This will increase its equity-based capacity sharply; it will also gain more

revenue from EPC. We have cut our sum-of the-parts TP to Bt18 from Bt24 to reflect

the stock dividend on 2013 operations and maintain our BUY.

Revenue target of Bt3bn in 2014F, up 47% YoY driven by construction (EPC) that was

delayed from 2013. Based on backlog, EPC could generate 46% of total revenue in 2014F

to ~Bt1.4bn, comprising a part of BCP's solar power plant phase 3, electricity system

installation for TPIPL's cement plant#4 and installation of solar rooftops. The company

estimates its conventional business, equipment trading, could generate Bt1.5bn,

comprising Bt970mn from the domestic market and Bt480mn from foreign markets.

Equipment trading to Myanmar returning to life this year after the Myanmar

government decided to settle in international currencies (US dollar and euro), instead

of local. GUNKUL has secured Bt480mn business so far this year. Note that GUNKUL's

trading business overseas, mainly Myanmar, accounted for >20% of total sales before

the Myanmar government changed its payment policy. This slashed its foreign sales in

2013 to only Bt12mn from Bt640mn in 2012 on the greater FX risk and greater difficulty

in obtaining trading finance from banks. Gross margin on this business is an attractive

24-25% vs. 16-17percent for local sales.

Startup of two wind power projects in 4Q15. Completing its solar power plants in

2013, GUNKUL is turning to wind power projects with a combined capacity of 120MW.

The first (60MW), in which it holds 70%, is scheduled to start up in 4Q15 after required

licenses are secured. The record for wind speed is favorable at 5.7-5.8 meters/second.

The company is identifying the most suitable and efficient wind turbine and rotor

technology for Thailand's wind speed, after which it will proceed with financing. The

construction of the recently acquired second project (60MW, 100% interest), will follow

and operations start in 4Q16. These projects will boost GUNKUL's effective capacity to

129MW by 2016 from 27MW currently.

Gas engine power plant in Myanmar revenue to begin in 2014F when the

change in shareholding structure is completed. The first 25MW gas engine power plant

commenced operations in 3Q13 and the other one will come on line by the end of this

year. The Myanmar government has agreed to pay US$0.034/KWh for plant availability

under a take-or-pay agreement. These power plants could give it an annual profit of

Bt50-60mn, providing some offset for the lower income from equipment sales to


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