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Khon Kaen Sugar Industry

In line with our estimate; peak earnings quarter ahead!

Khon Kaen Sugar Industry Plc (KSL)

In line with our estimate

KSL posted a 2Q14 (Feb-April 2014) net profit of Bt627m, up by 47% QoQ and 7% YoY. Stripping out a Bt10m profit from investments in derivative instruments for the quarter, core profit would be Bt617m, up by 44% QoQ and 62% YoY. The results were in line with our estimates and the street. The effect of lower-than-expected sugar sales volume was offset by a lower cost-of-sales and lower SG&A expenses than modeled.

Results highlights

The core earnings growth was due to: 1) greater sugar sales volume (up 16% QoQ [but down 21% YoY] to 140,056t), 2) increased electricity sales volume (up 19% QoQ [but down 1% YoY] to 85,984MW-hr), 3) a higher ethanol sales price (up 27% YoY [flat QoQ] to Bt26.08/liter), 4) a higher electricity sales price (up 2% YoY [flat QoQ] to Bt3,490/MW-hr) and 5) an SG&A/sales ratio decline from 16.4% in 1Q14 to 14.6%.

Outlook

The third-quarter will be the peak earnings period of the financial year. We expect KSL's profit to rise both QoQ and YoY in 3Q14 (May-July 2014), driven by high season for the sugar business and the fact that some sugar deliveries were delayed. We assume a smaller global supply surplus this year (and, possibly, a deficit in 2015). There could be scope of upside to the sugar price if the El Nino effect were to make for a poor Brazilian sugar harvest.

The ethanol and power units will remain the earnings drivers through FY14. Ethanol consumption and the average sales price have increased. Moreover, capacity expansion at a power unit in Loei Province should boost earnings going forward.

What's changed?

We have cut our sugar sales volume assumption by 12% to 740kt to factor in lower 2Q14 sugar sales volume than modeled, but our FY14 cost-of-sales and SG&A expense assumptions also drop. As such, our FY14 earnings forecast stands at Bt2,075m. The 1H14 net profit represents 51% of our full-year forecast.

Recommendation

With the peak earnings quarter ahead and improved sugar demand-supply dynamics, we expect the share price to rise in the months ahead. Moreover, expectations of firmer sugar prices next year coupled with better performances by the ethanol and power businesses will lend support to the stock, we believe. Our TRADING BUY rating stands with a target price of Bt17.50, pegged to a PER of 15.8x (KSL's long-term mean).




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