Ch. Karnchang: The rerating train is fast approaching
- Expect 2Q24F earnings to jump q/q, and further improve in 3Q24F from dividend income, higher equity income, and progress of existing projects
- More than THB340bn of infrastructure/mega projects up for bidding in FY24F-FY25F
- Solid earnings outlook for FY24F-FY25F driven by rising backlog, steady GPM, and strong equity income
- Maintain BUY rating with SOTP-based TP of THB26.00
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Recap 1Q24 performance. CK reported earnings of THB121mn (-44% y/y, -23% q/q), surpassing our estimates due to better than expected GPM and lower interest expense. CK reported a higher GPM of 7.6% in 1Q24 (vs. 7.1% in 1Q23 and 6.3% in 4Q23), benefitting from a change in product mix towards high margin projects from its subsidiary company and lower-than-expected interest expense of THB359m (-9% y-y, -25% q/q) from adjusting intercompany transactions with Luang Prabang Power company limited (LPCL).
Equity income to improve in 2Q24F. CK reported equity income of THB165mn in 1Q24 (-17% y/y, -65% q/q). Equity income attributed to share profit from from i) Bangkok Expressway and Metro (BEM) at THB302mn (+14% y/y, flat q/q), ii) share of loss from CK Power Public Company Limited (CKP) of THB80m (loss of THB14mn in 1Q23 and loss of THB121mn in 4Q23) due to lower electricity output from Xayaburi project, and iii) loss from LPCL (20% stake) of THB16m (loss of THB51mn in 1Q24 and loss of THB15mn in 4Q23). We expect equity income from CKP to improve q/q in 2Q24F from an easing of the EL Nino impact and improvements from both BEM and CKP in 3Q24F supported by high season.
Management provides revenue guidance of THB36-37bn for FY24F. CK’s management provided FY24F revenue guidance of THB36-37bn assuming flat y/y new contracts and GPM of 7-8% in FY24F (vs. 7% in FY23). The key drivers are: i) huge backlog on hand of THB121.7bn as of 1Q24 to support strong earnings growth in FY24F-FY26F, ii) solid dividend income from its 19.4% stake in TTW Public Company Limited (TTW), iii) equity income from BEM and CKP in which CK has stakes of 35.3% and 30.0%, respectively, and iv) potential upside from the upcoming mega/infrastructure projects of THB340bn in 2H24-2025.
Huge backlog on hand underpins revenue for next 6 years. CK has a backlog of THB121.7bn as of end-1Q24, including the yet to be signed the West MRT orange line worth Bt109.2bn (civil works worth THB82.5bn and M&E works worth THB26.7bn). We forecast CK’s backlog to hit a record high of THB240bn and THB241bn in FY24F and FY25F, respectively.
Solid margins in FY24F-FY25F. CK’s margin should remain solid at 7.4% in FY24F-FY25F (vs. 7% in FY23) from high margin projects from its subsidiary company coupled with progress of Luang Prabang Hydroelectric Power, MRT Purple Line, and the Denchai-Chiang Rai double-track railway. Each project is expected to achieve 205 progress in FY24F.
Only one appeal left for West MRT orange line case.
The West Orange Line is worth a total of THB109.2bn and consists of both civil and mechanical and engineering (M&E) works. The project is PPP net cost. On 8 Aug 2022, the JV between BEM and CK was announced as the lowest bidder for West MRT orange line. However, no contracts have been signed as there are several lawsuits between BTS and MRTA as shown in the table below. The last lawsuit is pending and awaiting a ruling from the Supreme Administrative Court in June/July. If there are no further issues, the contract should be signed in 4Q24.
Potential auctions to be rolled out in 2H24F-FY25F. The potential projects in the pipeline that we expect the new cabinet will put up for bidding in 2H24F-FY25F are as follows:
- Khon Khen-Nong Khai Double track Railway THB28.8bn with potential TOR sale in 2Q24.
- Double Deck projects worth THB35bn already received EIA approval and under negotiation between BEM and EXAT on fare reduction and concession period.
- M5, M9, M11 motorway worth THB88.8bn
- Kratuu-Patong Expressway worth THB17.8bn
- Dark Red line 3 sections worth THB29.3bn
- Suvarnabhumi Airport east expansion worth THB6.6bn
Expect 2Q24F earnings to jump q-o-q. We expect CK’s 2Q24F earnings to beTHB350-400mn, up xx% q/q and should grow further in 3Q23F driven by dividend income from TTW of THB232mn in 2Q-3Q, recovery of CKP as we enter the rainy season, and progress of its existing projects including MRT purple line and Denchai-Chiang Rai double-track railway.
Solid earnings outlook for FY24F-FY25F. We expect solid earnings of Bt1.9bn in FY24F (+28% y/y) and Bt2.2bn in FY24F (+18%), driven by i) rising backlog to drive revenue growth of 3-5% in FY24F-FY25F; ii) steady GPM at 7.35%-7.40% in FY24F-FY25F; and iii) increased income from associates, especially BEM. Note that we have yet to include the construction value of the MRT Orange Line into our forecast.
Maintain BUY with TP of THB26.00. We see a brighter outlook for the construction sector as the FY24 annual budget takes effect in May 2024. Thus, we expect over Bt340bn infrastructure/mega projects to be up for bidding in FY24F-FY25F. There is potential for CK to re-rate based on i) new projects to be signed – including the West MRT orange line – and upcoming new projects – including expressway, double track railway, and motorway projects; ii) solid earnings growth outlook in FY24F-FY25F; and iii) a cushion from earnings from its associate companies. Key share price catalysts are signing the contract for MRT orange line and Term of Reference (TOR) sale of Khon Khen-Nong Khai Double track Railway in 2Q24.
We derive a TP of Bt26.00 for CK using the SOTP valuation. We assume a 23.0x FY24 PE for its construction business and applied a 40% discount to the market value of its investment portfolio. Note that CK’s current stock price implies a 37% discount, based on the current market value of its associates.
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