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Khon Kaen Sugar Industry

1Q14 earnings beat estimate; a better quarter ahead

Khon Kaen Sugar Industry

Above expectations

KSL posted a 1Q14 (Nov 2013-Jan 2014) net profit of Bt427m, up by 321% QoQ and 10% YoY. The result was 38% above our estimate and 20% clear of the consensus, due to higher-than-expected ethanol prices and sales volumes and lower-than-modeled tax expenses.

Results highlights

The earnings growth was due to: 1) greater electricity sales volume (up 20% QoQ [but down 3% YoY] to 72,034MW-hr), 2) increased ethanol sales volume (up 5% QoQ [but down 28% YoY] to 23mt), 3) a higher ethanol sales price (up 33% YoY to Bt26.11/liter), 4) a higher electricity sales price (up 2% YoY to Bt3,476/MW-hr) and 5) lower tax expenses—KSL's effective tax rate dived to 2% in 1Q14 from 9% in 1Q13.

Although the sugar unit posted a net loss of Bt44m for 1Q14, the power & ethanol businesses lent support to the bottom-line for the quarter.

Outlook

We are now entering peak earnings season—the second and third quarters of the financial year. We expect KSL's profit to rise both QoQ and YoY in 2Q14 (Feb-April 2014), driven by high season for the sugar business, sales price increases and the fact that some sugar deliveries were delayed to 2Q14 (as a result of the political unrest).

What's changed?

The 1Q14 net profit represents 21% of our FY14 forecast of Bt1,992m. We maintain our model unchanged.

Recommendation

Despite expectations of lower Brazilian output, we still anticipate a global supply surplus this year. So, the current world sugar price uptrend is likely to lose steam soon (prices recently declined—possibly a trend reversal). Moreover, KSL reported losses at its sugar businesses in Thailand, Cambodia and Laos for 1Q14. Diminished expectations for the sugar business may cap the share price in the near-term.

However, we still forecast strong core profit growth of 41% YoY in FY14, driven by the ethanol and power units, which should support the share price. The stock currently trades at an FY14 PER of 12.7x, a 8.6% discount to the sugar producer average of 13.9x.








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