Contents. Executive Summary 3. Industry Forecasts 5. Food: Dairy 8. Food: Poultry 10. Beverage: Alcohol 11. Other: Tobacco 12.

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2 Contents Executive Summary 3 Industry Forecasts 5 Food: Dairy 8 Food: Poultry 10 Beverage: Alcohol 11 Other: Tobacco 12 Retail 13 Valuation of Key Counters CCS 15 CAGR 18 2

3 Executive summary FMCG According to International Standard Industrial Classification Products that are sold quickly and at a relatively low cost Food Beverages Personal Hygiene Other Meat Dairy products Bakery products Biscuits Confectionery Oils and fats Alcoholic beverages Non alcoholic beverages Soaps and detergents Perfumes & deodorants Cleaning preparations Shaving gels Tobacco Pulp, paper & paperboard Inner garments Retail Modern Trade General Trade Supermarkets Hypermarkets Traditional trade Source: International Standard Industrial Classification 3

4 Executive summary The Fast Moving Consumer Goods (FMCG) is a significant contributor to the economy. FMCG sector which consists of FB&T (Food and non alcoholic Beverages (F&B), alcoholic beverages and tobacco) together with wholesale and retail trade contribute to above 30.0% of GDP and close to 20% of the overall employment in the country. Sri Lanka is a consumption heavy economy with consumption as a % of GDP continuing to hover around 75% of GDP among which private spending dominates with an 88.7% share in Expenditure on FB&T recorded a 5 year CAGR of 6.6% during In 2015 expenditure on FB&T recorded a significant YoY growth of 17.8% in comparison to 5.6% YoY growth recorded in This was mainly due to a one off salary increase that was made in Jan 2015 for the public sector employees (17.6% of total workforce) and the single digit lower inflation that prevailed during the year. However, in 2016 expenditure on FB&T slowed to 5.8% amidst increase in taxation, currency depreciation, uptick in inflation as well as increasing interest rate environment seen during the year. The expected per capita income growth in the country continues to be the key demand driver for the sector whilst population growth, reduction in income disparity and demand from the tourism sector are expected to be supplementary drivers. However, we expect a slight slowdown in spending on FB&T in the short term, despite the sector s reputation as a staple industry, mainly due to tightening monetary policy as well as increased inflation. Hence, we revise our initial estimate of 5 year CAGR ( ) to 8.1% from 9.8% which was published in In F&B, we continue to be optimistic on the demand dynamics of dairy products such as fresh milk, yoghurt and icecream as well as meat products such as chicken. Supply dynamics for dairy products are expected to improve with Government of Sri Lanka (GoSL) initiatives to promote local production. Currently, 77.0% of the dairy segment in the country are dominated by imports compared to 80.0% in On the poultry segment, despite escalation in the feed cost (which contributes to an estimated 70% of the total cost) and regulation on controlled selling prices of whole chicken, we remain optimistic on the segment. We are moderately optimistic on hard liquor mainly due to rise in per capita income coupled with growth in tourist arrivals. However, threat from illicit products remains a concern for the industry. Beer could be a potential longer term option amongst drinkers as it has been perceived as a less harmful alternative for hard liquor. However, recent excise duty hike made taxes on beer higher than hard liquor based on pure alcohol content and has impacted beer sales growth and also slowed down the conversion from hard liquor to beer. Hence, we remain pessimistic on beer products. We remain pessimistic on legal tobacco products mainly due to GoSL plans to restrict the growth of cigarettes. During 4Q2016, the per cigarette price increased by 43% to LKR 50. In addition to excise hike and VAT introduction, the industry was also impacted by the exponential growth in the beedi market and illicit products. We remain optimistic on retail trade (especially on modern trade) due to increasing spending power amongst households, increase in retail penetration as well as the increasing interest from foreign retail sector investors (direct and indirect) to enter into the country in the coming years. 4

5 Industry forecasts Key factors that drive the FMCG sector DEMAND LOCAL FOREIGN Population Per capita disposable income Share of income allocated to FMCG purchases Expenditure on FMCG by tourists Population growth Trends in population Age, Gender etc. Growth in income Income distribution Inflation rate Expenditure trends Consumer confidence Interest rates Tourist arrivals Expenditure trends of tourists SUPPLY LOCAL FOREIGN Domestic production Distribution Imports Resource availability/constraints Capacity utilization Modern trade vs General trade Regional distribution network Import trends Currency effect exchange rates 5

6 3,50 0 3,00 0 2,50 0 2,00 0 1,50 0 1, % 25.0 % 20.0 % 15.0 % 10.0 % 5.0% 0.0% 6, , , , , , Industry forecasts Total expenditure (LKR Bn) on Food, Beverage and Tobacco (FBT) and FBT as a % of GDP ( ) Per capita income (USD) ( ) 22.1% 24.2% 18.4% 19.1% 18.6% 20.8% 20.3% 26.9% Expected growth in per capita income to drive expenditure on FBT 3, , , , , , , , ,420 1,750 1,605 1,827 1,930 2,274 2,407 3, E ~~ 2021 E Total expenditure on Food, Beverage and Tobacco LKR Bn F,B & T as a % of nominal GDP Composition of household expenditure in Sri Lanka 2012/13 Real interest rate (Jan 2010 Jun 2017) Other non food and drink, 28.0% 14.0% 12.0% 364 day T Bill Inflation Food and drink, 37.8% 10.0% 8.0% Education, 3.5% Fuel and light, 4.2% Personal care and health, 5.3% Transport, 8.3% Liquor and tobacco, 1.7% Housing, 11.3% 6.0% 4.0% Increased inflation and tighten monetary 2.0% policy measures may bring down private consumption in short to mid term 0.0% Jan2010 Jan2011 Jan2012 Jan2013 Jan2014 Jan2015 Jan2016 Source: CBSL, Department of Census and Statistics, NDBS Research 6

7 4,50 0 4,00 0 3,50 0 3,00 0 2,50 0 2,00 0 1,50 0 1, Industry forecasts The sector is expected to expand by LKR 1.28 Trillion in the next 5 years D/D 2,539 D/I 191 T 69 D/D 2,760 D/I 221 T 84 D/D 3,001 D/I 255 T 104 D/D 3,264 D/I 294 T 127 D/D 3,549 D/I 319 T 157 LKR 2,799 Bn LKR 3,066 Bn LKR 3,361 Bn LKR 3,685 Bn LKR 4,026 Bn 2017E 2018E 2019E 2020E 2021E Growth LKR 1.28 Trillion CAGR 8.1% Domestic direct LKR 1.1 Trillion Domestic indirect LKR 0.1 Trillion Tourism LKR 0.1 Trillion Pop. growth LKR 0.1 Trillion Inc. growth LKR 0.9 Trillion Inc. dist. impact LKR 0.1 Trillion The largest contributor to FMCG in Sri Lanka is domestic direct purchases (91% contribution in 2016). Of this, we expect the largest growth factor to be the growth in income. Note D/D Domestic direct expenditure on F,B&T D/I Domestic indirect expenditure on F,B&T (hotels, cafes, restaurants etc.) T Tourist expenditure on F&B 7

8 1, Zimbabwe Mongolio China Iran Kazakhstan Japan South Korea South Africa India Sri Lanka Switzerland European union Canada United States of America Norway Iceland United Kingdom Australia New Zealand (1 0.00) Food: Dairy Milk collection, equivalent litres of imported milk products vs per capita milk availability in Sri Lanka ( ) Annual milk collection 'Mn (ltrs) Annual import 'Mn (ltrs) Per capita milk availability (ltrs) 3 Per capita milk based products consumption in litres *In Sri Lanka milk availability per capita has been assumed as per capita consumption Annual milk collection as a % of total milk production has been stagnant at ~60.0% since 2012, though it has improved from ~52.0% in Milk collection % in Sri Lanka remains one of the lowest amongst peer countries Total milk production (cows and buffalos) recorded a 15 year CAGR of 4.9% during Medical research institute recommends per day per capita milk consumption to be 275 ml (100 ltrs per annum). Current consumption in Sri Lanka is just 50% of the recommended amount. In order to meet the required demand, the country needs to produce ~ 2 Bn ltrs per annum whereas in 2015 it only produced ~18.0% (374 Mn ltrs) of the requirement. Milk based product imports currently contributes to ~67.8% of milk availability in the country. Source: Department of Animal Production and Health (DAPH), Canadian Dairy Information Centre, CBSL 8

9 Food: Other value added dairy products Composition of milk based products in Sri Lanka (2012/13 household survey) Fresh milk, 2.7% Ice Cream, 4.2% Growth in per capita spending on dairy sub segments* Milk based products Milk Powder Fresh milk Ice Cream Yoghurt Yoghurt Fresh milk Milk based products Yoghurt, 5.8% Milk Powder Milk Powder, 79.1% Butter, 1.3% Cheese, 1.1% Ice Cream Per capita ice cream (litres) consumption in Sri Lanka E) E / / /13 All segments indexed to per capita total spending on dairy products per month in 2006/07 According to medical research, consumption of fresh milk provides more nutrition than the consumption of milk powder due to high heating process involved in the milk powder manufacturing which extracts the available nutrition. Industry sources cite ample demand being created in yoghurt and fresh milk subsectors where the yoghurt demand outstripped supply during 2015/16. Main hindrance towards fresh milk consumption in the country is lower level of refrigerator penetration (in 2010 it stood around 60%). Increasing farm gate price per litre to LKR 70.0 in June 2015 from LKR 60 and GoSL initiatives to import high yielding cows and knowhow is expected to increase domestic milk production in ensuing years. Source: Department of census and statistics, CBSL, listed company annual reports, NDBS Research 9

10 India Pakistan Sri Lanka Thailand BRICS Vietnam EU28 Mexico OECD countries Canada New Zealand Malaysia Australia USA Food: Poultry Chicken production in SL (MT Mn) Composition of expenditure on meat (2012/13 household survey) Chicken, 76.2% Beef, 16.7% Mutton, 2.0% Pork, 2.0% Processed meat, 2.1% Other meat, 1.0% Chicken Meat Production MT Per capita chicken consumption Chicken dominates with ~70.0% of market share amongst meat industry in Sri Lanka. Amongst Chicken, broiler chicken commands a higher proposition of the market and produced by large scale local commercial producers. As at 2014, there were 17,000 chicken farms in operation and ~88% of which were considered as small farms with less than 1,000 (on average) chickens per farm. Avian Influenza (AI) outbreak which occurred in the latter part of 2016 in most of the countries is expected to drive export demand for Sri Lanka. Supply shortage in China and Hong Kong also would support exports to these destinations. Nearly ~70% of costs incurred in chicken production are attributed to poultry feed. Inadequate supply of maize and soybean in the country may further exert pressure on cost as international prices are escalating. Source: OECD, Department of Animal Production and Health (DAPH), News paper articles 10

11 Beverage: Alcohol Russia Australia United Kingdom New Zealand United States Sri Lanka Thailand India Malaysia Indonesia 4,50 0 4,00 0 3,50 0 3,00 0 2,50 0 2,00 0 1,50 0 1, Hard liquor and malt liquor production (litres Mn) ( ) 4,200 Duty per litre of pure alcohol 3,800 3,720 3, Hard liquor proof litres Mn Malt liquor (Beer) bulk litres Mn Per capita pure alcohol consumption Recorded Unrecorded Strong beer Mild beer (>5% alcohol) (<5% alcohol) Country made foreign liquor Molasses and Coconut Arrack Toddy (>5% alcohol) Hard liquor production has recorded a 10 year CAGR of 2.0% during 2005 to 2015 despite the threat from illicit products (currently accounts for more than 50% of total consumption). We expect the demand for hard liquor to be substantial due to increasing per capita income amongst locals as well as increasing tourist arrivals to the country. On the other hand, malt liquor (beer) beverages increased their market share substantially over the 10 year period to ~23.0% in 2015 from ~13.0% (based on pure alcohol content) in During the period production has recorded a 10 year CAGR of 6.1%. However, the trend seem to be reversing in comparison to 2014 mainly due to higher duty charges on malt liquor based on pure alcohol content. During 2015/16, increase in excise duty elevated prices of strong and mild beer by 70% and 27% respectively. Post tax increase volume of beer industry has dropped by 38%. Main player in the beer production got affected by recent floods and started to import in order to meet the demand. Source: Department of Census and Statistics, Sri Lanka Excise Department, Listed company annual reports, NDBS Research 11

12 Other: Tobacco 100 % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Tobacco industry market share composition E 20% 80% 44% 2% 54% 50% 8% 42% E Cigarette legal Cigarette illicit Beedi Singapore Sri Lanka* Price of a cigarette pack regional comparison 2014 Legal cigarette industry continues to loose it s share to alternative products such as beedi and illicit cigarette (this includes smuggled cigarette, counterfeit cigarette and genuine cigarettes which have not paid applicable taxes) mainly due to steep increases in excise duties. Later part in 2016, GoSL increased excise duties to 28% and the introduction of VAT of 15% resulted in average cigarette stick price to increase by 43% to LKR 50. Sri Lanka has one of the highest tobacco taxation in the world with currently 67.0% 72.0% of the cigarette price been taxes to the government. In comparison, taxes on beedi is just under 13.0% of its price. During the last five years, a stick of cigarette price increased by LKR 25 to LKR 50 whereas a stick of beedi price increased by LKR 2.5 to LKR 3.0. On average, over 14% of Sri Lankans above the age of 15 were consumers of tobacco products in 2013 (~29% of males and 0.4% of females). Industry sources cite adhoc tax imposition towards legal tobacco products would hamper demand dynamic of the industry as well as induce illegal producers to enter the market thereby do more harm to the consumers and society. GoSL plans to stop tobacco cultivation by 2018 (CTC, only legal cigarette manufacturer in the island source their entire tobacco leaves from local farmers) which may further exert pressure on legal tobacco producers in the country. Japan Malaysia India Thailand Maldives China Bangladesh Myanmar Nepal Indonesia Philippines Vietnam *Price reflects Q tax increase Price in Sri Lanka is the highest among South East Asia region and 2 nd highest in the entire Asia region. Source: WHO, Department of Census and Statistics, Ceylon Tobacco Corporation annual reports 12

13 8, , , , , , , , Retail China India Malaysia Indonesia United Arab Emirates Saudi Arabia Vietnam Sri Lanka Philippines Brazil Russia South Africa 22.0 % 21.0 % 20.0 % 19.0 % 18.0 % 17.0 % 16.0 % 15.0 % 14.0 % 13.0 % 12.0 % 11.0 % 10.0 % 8, , , , , , , , % 80% 70% 60% 50% 40% 30% 20% 10% 0% USA UK Malaysia Thailand Indonesia China Sri Lanka India Services segment, Wholesale and Retail Trade (WRT) and WRT as a % of services segment 21.3% 20.1% 6, % 19.4% 6, , , % 19.0% 4, , , % 85% Penetration of organized retail % 55% 40% 30% , , , ,264 20% 16% 8% Services segment LKR Bn Wholesale and retail trade LKR Bn As a % of Services Global Retail Development Index (GRDI) ranking vs per capita retail sales , ,000 1,266 6,900 3, Rank Per capita retail sales Sri Lanka improved 2 places from 2015GRDI rank. 1,476 (USD) 1,301 2,171 3,111 1,855 Wholesale and retail sector which accounted for 10.8% of the GDP in 2015 recorded a 5 year CAGR of 11.3% during However, in 2015 it recorded a YoY growth of 5.9%. According to AT Kearney s GRDI report (2016) Sri Lanka per capita retail sales stood at USD 1,500, approx. 37.5% of per capita income Increasing per capita income, expanding middle income earners, growing women work force participation and convenience in shopping are expected to drive demand for retail trade. Several international retain chain networks are eyeing to enter into Sri Lanka s retail landscape thus may provide impetus to drive growth within the industry and allow greater choices for consumers. Source: Central Bank, AT Kearney, Daily FT, listed company annual reports 13

14 FMCG Sector FMCG Sector Valuation of key counters Valuation of key counters Ceylon Cold Stores PLC (CCS) Cargills (Ceylon) PLC (CARG) 14

15 Analysis of listed FMCG counters Ceylon Cold Stores (CCS) Target Price LKR Recommendation Hold Share Data Market Price as at Week Range Shares in Issue (as at ) Average Daily Volume (52 Weeks) Main Shareholders as at No. of Shares % John Keells Holdings PLC 67,109, Whittal Boustead (pvt) Ltd 10,165, Chambers Street Global Fund, LP 2,682, GF Capital Global Limited 2,074, A N Sethna 789, Price Performance LKR Volume, Mn LKR LKR ,040,000 20,913 Estimated Free Float (%) 29.3% Source: Bloomberg, company reports, CSE, NDBS Research Jul16 Oct16 Jan17 Apr17 Volume Price Adjusted ASPI CCS is the market leader for carbonated soft drinks and frozen confectionary in the country. The company also owns retail chain of Keells supermarkets via its fully owned subsidiary Jaykay marketing services (pvt) ltd. CCS is owned and controlled by the largest listed conglomerate JKH Holdings PLC (JKH). The retail segment revenue, accounted for 68.5% of group revenue, and gross profit recorded a YoY growth of 32.1% and 29.4% during FY16/17. According to the management, CCS added 15 new larger format outlets whilst closing down 1 outlet during FY16/17 bringing the total number of outlets to 64 as at 31 st March We expect outlet expansion to continue, with 15 new outlets being added every year during our forecasted period. Increased footfall as a result of outlet expansion, coupled with a higher average basket value (partly influenced by uptick in inflation), is expected to result in a 3 year revenue CAGR of 25.1% for the segment, from FY17/18 FY19/20. Furthermore, the retail segment is expected to benefit from the removal of deemed VAT provisions since January 2016 (The company paid deemed VAT of LKR Mn in FY15/16). The manufacturing segment comprising of beverages and ice cream, recorded a YoY revenue and segmental result growth of 14.9% and 19.1% respectively during FY16/17. Going forward, we expect the growth to be driven by ice cream, with per capita consumption expected to grow from 2.0 litres per annum in FY 16/17 to over 2.7 litres by FY19/20. In order to meet the growing demand and to locally manufacture certain impulse Ice Cream ranges CCS has invested LKR 3.2 Bn to build a new Ice Cream plant. However, we do not expect the beverages segment to witness a significant growth mainly due to shifting in customer preferences. As a diversifying strategy CCS has introduced new flavors to the existing products while launching the range of fruit drink products and an isotonic drink to the market during FY16/17. Overall, we forecast a 3 year revenue CAGR of 18.3% for the manufacturing segment. The estimated gearing (debt/equity) stood at 7.0% as at 31 st Mar Low gearing combined with a strong cash position provides the company with the financial flexibility to invest in expansion. During FY16/17 CCS made a notable investment to sustain the growth momentum. During FY17/18 to FY19/20, we forecast revenue and net profit CAGR for the group of 23.0% and 22.3% respectively. CCS trades at a P/E of 23.2X, premium to domestic and regional peers. Based on our free cash flow based valuation method we have derived LKR per share. Over the last one year period the price has appreciated by 63.0% whereas EPS grew by 23.6% (between FY15/16 and FY16/17). Hence, we adjust our recommendation to HOLD from BUY. 15

16 Analysis of listed FMCG counters Ceylon Cold Stores (CCS) Income Statement Figures in LKR, Mn FY14/15 (A) FY15/16 (A) FY16/17 (A) FY17/18 (E) FY 18/19 (E) FY 19/20 (E) Revenue 27,699 34,497 43,519 52,951 66,462 81,091 Less: Cost of Sales (24,029) (28,573) (36,479) (44,266) (55,513) (67,609) Gross Profit 3,670 5,925 7,039 8,684 10,949 13,482 Other income 1,197 1,150 1,293 1,573 1,975 2,409 Administration Expenses (886) (1,090) (1,210) (1,473) (1,848) (2,255) Distribution Expenses (1,312) (1,473) (1,593) (1,931) (2,424) (2,958) Other expenses (509) (583) (741) (902) (1,132) (1,381) Operating profit 2,160 3,928 4,788 5,952 7,519 9,298 Finance cost (61) (12) (7) (79) (106) (138) Finance income Changes in fair value of investment property Share of results of equity accounted investees (18) (21) (11) (11) (11) (11) Profit Before Tax 2,147 4,052 5,090 5,954 7,519 9,313 Taxation (621) (1,178) (1,537) (1,798) (2,270) (2,812) Profit After Tax 1,525 2,875 3,553 4,156 5,249 6,501 Profit Attributable to Equity Holders 1,525 2,875 3,553 4,156 5,249 6,501 Figures in LKR, Mn FY14/15 (A) FY15/16 (A) FY16/17 (A) FY17/18 (E) FY 18/19 (E) FY 19/20 (E) Turnover 27,699 34,497 43,519 52,951 66,462 81,091 Profit Attributable to Equity Holders 1,525 2,875 3,553 4,156 5,249 6,501 Gross Profit Margin (%) EPS Forward P/E (X) * DPS Dividend Yield (%) BV PBV (X) ROE (%) Total Debt/Equity (%) *P/Es from FY14/15FY16/17 have been calculated using year end share price. P/Es for FY17/18FY19/20 have been calculated using the target price. 16

17 Analysis of listed FMCG counters Ceylon Cold Stores (CCS) Balance Sheet Figures in LKR, Mn FY14/15 (A) FY15/16 (A) FY15/16 (A) FY17/18 (E) FY 18/19 (E) FY 19/20 (E) Assets NonCurrent Assets Property, Plant and Equipment 5,365 6,123 8,107 9,305 10,576 12,214 Investment property Intangible assets Investment in equity accounted investees 5,362 5,887 6,029 6,229 6,436 6,650 Noncurrent financial assets Other noncurrent assets ,355 12,778 15,394 16,819 18,330 20,221 Current Assets Inventories 2,383 2,720 3,541 4,296 5,388 6,562 Trade and Other Receivables 1,481 1,746 2,228 2,708 3,390 4,131 Amounts due from related companies Tax recoverable 41 Other current assets Short term investments 730 2, ,131 Cash in hand and at bank ,356 5,140 7,053 7,061 8,697 11,143 13,854 Total Assets 16,495 19,831 22,455 25,516 29,472 34,075 Equity & Liabilities Capital & Reserves Stated Capital Revenue Reserves 8,764 9,745 10,102 11,765 13,864 16,465 Other components of equity 974 1,683 2,169 2,380 2,598 2,823 Total Equity 10,656 12,346 13,189 15,063 17,380 20,206 Non Current Liabilities Borrowings Deferred tax liability Employee benefits Other noncurrent liabilities Other deferred liabilities ,170 1,339 1,842 1,943 1,892 2,012 Current Liabilities Trade and other payables 3,121 4,039 4,805 5,831 7,312 8,905 Amounts due to related companies Income tax liabilities Short term borrowings Other current liabilities ,006 1,006 1,006 1,006 Bank overdrafts ,669 6,147 7,423 8,510 10,201 11,857 Total Equity & Liabilities 16,495 19,831 22,455 25,516 29,472 34,075 17

18 Analysis of listed FMCG counters Cargills (CARG) Target Price LKR Recommendation Buy Share Data Market Price as at Week Range Shares in Issue (as at ) Average Daily Volume (52 Weeks) Main Shareholders as at No. of Shares % C T Holdings PLC 157,249, Mr. V R Page 15,000, Employees Provident Fund 7,356, Odeon Holdings (Ceylon) Limited 4,822, Ms. M M Page 4,195, Price Performance LKR LKR LKR ,000,000 Volume, Mn Jul16 Oct16 Jan17 Apr17 Volume Price Adjusted ASPI 23,311 Estimated Free Float (%) 5.3% CARG is the largest retail chain operator, both in terms of revenue and number of outlets, a leading food and beverage company and a franchised restaurant chain operator in the country. The company is owned and controlled by one of the listed conglomerate CT Holdings PLC (CTHR). CARG recorded a revenue growth of 17.8% to post LKR 84.1 Mn during FY16/17, mainly driven by the retail segment, which accounted for ~79.0% of overall revenue recording a YoY growth of 17.8%. FMCG and restaurants, other two revenue segments of CARG, recorded a YoY growth of 13.6% and 16.2% respectively during FY16/17. Continuous focus on improving efficiency resulted in an operating profit recording a YoY growth of 47.0% to LKR 5.0 Bn during FY16/17. Among which retail, FMCG and restaurants contribute 53.2%, 41.6% and 5.2% respectively. Number of retail outlets of CARG reached 315 in FY16/17, where 17 new outlets were added during the year. We expect CARG to add new outlets each year through FY17/18 to FY19/20. Improvement in retail penetration rate, increasing per capita disposable income along with moderate store expansions are expected to increase average basket size and footfall to the CARG outlets. Removal of deemed VAT since January 2016 is further expected to boost profitability of the segment. We forecast retail segment revenue to record a 3 year CAGR of 10.0% between FY17/18 to FY19/20. The FMCG segment s 75.0% of segmental revenue is estimated to be generated from Dairy and Agrifood. Presence in most of the growth subsectors of FMCG would give edge for CARG to further consolidate its position, especially in Dairy and Ice Cream sub segments. We forecast a 3 year revenue CAGR growth of 13.4% for the FMCG segment through FY17/18 to FY19/20. The restaurants segment comprises franchise operations of KFC and TGIF. KFC with 30 outlets is estimated to contribute to over 90% of segmental revenue, whilst TGIF operates with 1 outlet. During FY16/17 segmental operating profit grew YoY by 113.7%, mainly attributable to leadership change in KFC and turnaround made in TGIF. We forecast segmental revenue to grow at a 3 year CAGR of 22.6% from FY17/18 to FY 19/20. Between FY17/18 FY19/20, we forecast revenue and net profit CAGR for the group of 11.2% and 29.1% respectively. CARG trades at a P/E of 20.9 X, which is significantly higher than the domestic and regional peers P/E of 10.0 X and 17.0 X respectively due to its future growth potential. Based on free cash flow based valuation method we have derived LKR as an intrinsic value for CARG. Hence we reiterate a BUY recommendation for CARG. Source: Bloomberg, company reports, CSE, NDBS Research 18

19 Analysis of listed FMCG counters Cargills (CARG) Income Statement Figures in LKR, Mn FY14/15 (A) FY15/16 (A) FY16/17 (A) FY17/18 (E) FY 18/19 (E) FY 19/20 (E) Turnover 61, , , , , ,663.2 Cost of Sales (55,983.8) (63,454.8) (74,142.3) (81,548.5) (90,671.2) (100,114.7) Gross Profit 5, , , , , ,548.5 Other Income 1, , , , , ,507.3 Distribution Expenses (2,041.0) (2,313.3) (2,331.7) (2,454.1) (2,752.8) (3,059.6) Administration Expenses (2,895.9) (3,362.0) (3,860.2) (4,055.5) (4,549.1) (5,056.1) Other expenses (565.8) (397.4) (454.6) (465.2) (521.8) (579.9) Earnings Before Interest and Tax 1, , , , , ,360.1 Net Finance Cost (832.1) (604.1) (1,125.1) (1,573.7) (1,401.4) (1,161.9) Changes in fair value of investment property Profit Before Tax , , , , ,386.4 Taxation (557.4) (1,195.4) (1,869.9) (2,019.1) (2,738.5) (3,473.8) Profit After Tax , , , , ,912.6 Profit Attributable to Equity Holders , , , , ,680.2 Minority Interest Figures in LKR, Mn FY14/15 (A) FY15/16 (A) FY16/17 (A) FY17/18 (E) FY 18/19 (E) FY 19/20 (E) Turnover 61,631 71,442 84,191 92, , ,663 Profit Attributable to Equity Holders 223 1,624 2,140 2,720 3,690 4,680 Gross Profit Margin (%) EPS Forward P/E (X) * DPS Dividend Yield (%) BV PBV (X) ROE (%) Total Debt/Equity (%) *P/Es from FY14/15FY16/17 have been calculated using year end share price. P/Es for FY17/18FY19/20 have been calculated using the target price. 19

20 Analysis of listed FMCG counters Cargills (CARG) Balance Sheet Figures in LKR, Mn FY14/15 (A) FY15/16 (A) FY16/17 (A) FY17/18 (E) FY 18/19 (E) FY 19/20 (E) Assets NonCurrent Assets Property, Plant and Equipment 18, , , , , ,761.1 Investment property 3, , , , , ,276.2 Intangible assets 1, , , , , ,102.8 Investments in associates 1, , , , , ,208.6 Prepayment on leasehold land and building Deferred tax assets , , , , , ,569.7 Current Assets Inventories 6, , , , , ,069.1 Trade and Other Receivables 2, , , , , ,838.7 Amounts due from related companies , Other financial assets , , ,568.6 Cash and cash equivalents 1, , , , , , , , , , , ,878.3 Total Assets 37, , , , , ,448.1 Equity & Liabilities Capital & Reserves Stated Capital Other equity (1,974.3) (2,251.7) (2,761.2) (2,964.9) (3,365.2) (3,820.8) Reserves 7, , , , , ,372.4 Retained earnings 6, , , , , , , , , , , ,761.6 Minority Interest Total Equity 12, , , , , ,727.5 Non Current Liabilities Borrowings Deferred tax liability , , , ,040.0 Deferred income Employee benefits Put liability 1, , , , , , , , , , , ,801.9 Current Liabilities Trade and other payables 7, , , , , ,391.6 Current tax liability , , , , ,132.4 Amounts due to related companies Dividends payable Borrowings 11, , , , , , , , , , , ,918.6 Total Equity & Liabilities 37, , , , , ,

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