Ch Karnchang

Building on publich investment and affiliates
Buy

Ch Karnchang Plc (CK)

Contractors are the headliners as the government moves into its Bt2trn

infrastructure building that will carry through 2019. As one of

Thailand's largest contractors, CK will benefit handily, with estimated

sales growth of 23% in 2013, 28% in 2014 and 29% in 2015. Gross margin

will do well off a shortage of qualified contractors in a climate of high

demand, beating the 8.0% average to stand at 10.5% through 2017, the

peak of this public investment. We BUY with TP of Bt38/share, using

sum-of-the-parts (SOTP) with DCF valuation on contractor business.

"Overweight" contractors. We are of the view that Thailand's public investment

cycle is the most exciting segment of the economy in the coming years, driven by the

government's Bt2trn infrastructure spending plan. We base our calculations on an

assumed industry backlog growth, mostly from public spending, of an average 9%

during 2013-2019, with leading listed contractors, including CK, poised to benefit the

most. The Bt2trn Infrastructure project Act is likely to be approved in 1H13, assuring

the market public investment will proceed as scheduled.

Three years of high backlog. At the end of 2012, CK reported Bt118bn backlog and

we forecast this to jump to Bt166bn at the end of 2013; this includes unsigned

contract backlog of Bt28bn. CK has looked over the government projects carefully and

selected those it is best suited to do and submit bids for these. It expects to acquire

15-20% or Bt160bn of the entire package of public works, working out to additional

jobs of Bt40bn-Bt50bn per year through 2013-2015.

Significant core earnings growth. We estimate 2013 core earnings to rise to

Bt600mn and jump to Bt1.5bn in 2014 and Bt1.8bn in 2015. In 2013, net profit is

expected to reach Bt8.9bn, reflecting the sale of a portion of its holding in TTW that

brought its shareholding down to 19.4percent from 30% but giving it Bt2.3bn profit before

tax (Bt1.8bn after tax). It also marked TTW shares to market and this gives a value of

Bt6bn. CK's net debt to equity in 2013 will halve to 1.2x from 2.5x in 2012.

CK's investment will be value plus. CK has invested in entities related to

infrastructure, and these provide a steady flow of cash. They include its 15.05% in BECL,

24.61% in BMCL, and 19.04% in TTW (down from 30.04% after selling a portion in 1Q13).

CK also holds 30% in Xayaburi Power. This is a very large hydropower project and

though contribution is small now, when it is fully up and running it is expected to

contribute Bt15bn annually, nearly four times the Bt4bn now contributed by Southeast

Asia Energy (SEAN), which is under CK Power.

Valuation. We value CK's construction business using a combination of DCF (WACC

10%, market return 16.5%, 7-year growth of 5%) and sum-of-the-parts for its

investment in affiliates. This gives a target price of Bt38/share.

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Article source: http://www.thethailandlinks.com/2013/03/18/ch-karnchang-4/