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Khon Kaen Sugar Industry

Gearing up for 2Q14

Khon Kaen Sugar Industry Plc (KSL)


- KSL held its analyst meeting on 19 March.


- High cost sugar inventory. The sugar business suffered from low margins in 1Q14

due to higher-cost carried-over inventory, leading to a loss of Bt23m. The rest of the

year is likely to fare better with 60-70% of sugar contracts signed. The company

reported that its average selling price is better than that of the Office of Cane and

Sugar Board's (OCSB) at 18.5Usc/lb. This is positive for margins.

- Loei oblivious to license. Although management is putting their hopes on a quick

resolution from a newly formed committee, the worst-case scenario of the overhang

continuing into the next crushing season is not dire, in our view. The company would

have to pay a Bt1.1m penalty for operating Loei without a license this year. This is

not significant to its bottom line.

- Ethanol's momentum. Domestic demand for ethanol has proven to be beyond the

cancellation of ULG91 in Jan 2013. Since then, demand has risen 34%. In line with

this improving demand, KSL's selling price in 1Q14 is up 33% YoY, partly due to low

contractual export prices in 1Q13. Although demand softened in January due to

political unrest, we expect driving to shift to full gear for the Songkran festival, which

would benefit demand in 2Q14.

- Power revving. 1Q14 posted Bt321m for power, up 19% YoY due to the newly

operational 40MW plant in Loei. Earnings from power are historically strongest in 2Q

and 3Q.

- Global outlook stable in 1H14. Management expects prices to remain stable

around the current 17-18Usc/lb. This is above our forecast of 14.9Usc/lb as the

Brazilian harvest is set to start in earnest in May. Low yield or excessive rain slowing

down the harvest would put upward pressure on prices.

Earnings and target price revision

- No change.

Price catalyst

- 12-month price target: Bt16.30 based on a DCF methodology.

- Catalyst: Brazilian harvest, Loei and Khon Kaen full operation, sugar price inflection.

Action and recommendation

- We maintain our Outperform recommendation as we go into 2Q14, which is the

seasonally strong quarter for the sugar, ethanol, and power businesses.

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