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Khon Kaen Sugar Industry

Entering peak earnings season

Khon Kaen Sugar Industry

Investment thesis

The key messages at the analyst meeting were in-sync with our view of the outlook for global sugar prices and KSL's FY14 earnings. Concerns that the mean sugar price may decline this year should be offset by anticipation of greater sales volume and a better sugar yield for KSL. Moreover, there are signs of a global sugar price recovery, led by improved sugar demand-supply dynamics. However, the sugar market is likely to remain over-supplied, so sugar prices are expected to be range-bound. As such, there's no obvious catalyst for the share price in the near-term.

World sugar prospects

Brazil, the world’s biggest producer of sugar, is facing an epic drought this year, which will make for lower output in that country. The 2013/14 world supply surplus is now projected to be 4.0mt, according to Newedge Group (a global brokerage), far below the 8.51mt surplus posted for 2012/13. In 2014/15, the global sugar market is forecast to achieve balance or go into deficit. We expect a sugar price recovery to clearly start manifesting by about the middle of this year.

Outlook for KSL

Thailand also faces drought conditions that are likely to make for a smaller sugar cane harvest next year. But in KSL's case, the greater capacity brought by the expansion of its Namphong sugar mill will support sugar sales volume in FY15.

With regard to the losses at its Laos and Cambodia units, the firm is trying to mitigate the effect of weak sugar prices in Europe by selling sugar in local areas and to neighboring countries instead. Nevertheless, we now expect the Laotian and Cambodian operations to post deeper YoY losses instead of breaking even (as we assumed earlier). We still believe the Thai unit will turn around in 2Q14. As the sugar industry is now entering peak earnings season, we expect KSL's consolidated 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.

Ethanol and power businesses—the FY14 profit drivers

The ethanol and power units will remain the earnings drivers through FY14. The govt's expanding gasohol program has made for stronger ethanol demand in Thailand—nationwide consumption rose to 2.8m liters/day in Jan 2014 from an average of 2.5m liters/day last year. Moreover, a new power plant in Loei Province will boost KSL's electricity sales this year.

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