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Khon Kaen Sugar Industry

Tighter sugar balance in 2015

Khon Kaen Sugar Industry Plc (KSL)

Investment thesis

The key messages at the analyst meeting confirmed our view of the prospects for the global sugar market and KSL's outlook. The firm will benefit from better sugar demand-supply dynamics and a 2015 sugar price uptrend. Also, expected better performances across all key businesses through next year will lend support to the stock, we believe. However, we have cut our FY14 profit forecast 2% to Bt2,024m to factor in a lower ethanol sales volume assumption. Our target price declines slightly to Bt17.10 from Bt17.50. Our TRADING BUY rating stands.

World sugar balance might go into deficit in 2015—good for KSL

Adverse weather in Brazil (and, perhaps, the El Nino effect in 2H14) will limit global sugar supply next year, we believe. Morgan Stanley forecasts that the global sugar surplus will decline from 6.0mt in 2014 to 1.82mt in 2015. KSL's expect the global sugar market to be balanced or in deficit next year. As such, the global sugar price should rise to 19-23 cents/lb range next year from 15-20 cents/lb this year.

Thai cane production to increase next year

KSL guides that Thai cane production will rise from 103mt this year to 110mt in 2015. Ample rain during June-Oct would ease concerns over unfavorable conditions earlier in the year. Also, the govt has encouraged rice farmers to switch to sugar cane, boosting the cropping area. We expect KSL's capacity to hit 10mt of cane in FY15 (from 8.5mt this year), due to capacity expansion at its mills in Loei and Khon Kaen provinces.

Concerns over KSL's sugar sales volume this year

Big sugar inventories in Brazil left over from last year caused industry-wide sugar deliveries in Thailand to be postponed. The paucity of deliveries in 1H14 generated concerns over whether KSL will hit its FY14 sugar sales volume target of 810kt (it reported 1H14 sales of only 260kt). The firm normally delivers sugar sales volume of about 390kt in the second-half of its financial year (May-Oct). We maintain our FY14 sugar sales volume assumption at 740kt. Our sensitivity analysis suggests that for each additional 10kt that sugar sales exceed our assumption, profit would beat our FY14 forecast by 1.1%.

Power and ethanol businesses—the key FY14 drivers

The power and ethanol units will continue to drive earnings growth through FY14. A new power plant in Loei Province will boost KSL's electricity sales this year. We also expect ethanol consumption in Thailand and the average sales price to increase further. However, we doubt that ethanol sales volume will achieve KSL's target of 105m liters, due to the absence of export sales this year (it reported 1H14 sales of only 43m liters). As such, we have cut our FY14 ethanol sales volume assumption 14% to 90m liters.

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