Tokyo Cement Company Lanka PLC (TKYO) TKYO.N - Rs TKYO.X - Rs 13.50

Transcription

1 Sri Lanka Equities CORPORATE UPDATE August 29 John Keells Stock Brokers (Pvt) Ltd. A JKSB Research Publication Dimantha Mathew dimantha@jkstock.keells.com Tokyo Cement Company Lanka PLC (TKYO) TKYO.N - Rs TKYO.X - Rs 13.5 BUY TKYO Reuters Code Bloomberg Code Share LKR Non- Issued Share Capital (Shares) Non- 12 mth High/Low (Rs.) Non- 12 mth High/Low (Rs.) Average Daily - TKYO.N Average Daily - TKYO.X Market Capitalisation Rs. mn TKYO.CM TKYO.SL ,, 9,, 274. / / 7. 27, ,335 3,978 Performance (%) 1 mth 6 mth 12mth ASPI TKYO.N TKYO.X Fiscal year Net Profit (Rs m) EPS (Rs) EPS (Rs) Non- EPS Growth (%) PER (X) PER (X) Non (4.45) (31.94) (37.36) E E ROE (%) TKYO / Graph Jan-5 Apr-5 Jul-5 Oct-5 Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Oct-8 Jan-9 Apr-9 Jul-9 TKYO.X / Graph Aug-5 Oct-5 Dec-5 Feb-6 Apr-6 Jun-6 Aug-6 Oct-6 Dec-6 Feb-7 Apr-7 Jun-7 Aug-7 Oct-7 Dec-7 Feb-8 Apr-8 Jun-8 Aug-8 Oct-8 Dec-8 Feb-9 Apr-9 Jun-9 Aug-9 6, 5, 4, 3, 2, 1, 16,, 14,, 12,, 1,, 8,, 6,, 4,, 2,, Executive Summary Tokyo Cement, a joint venture between local conglomerate St. Antony s Consolidated and Nippon Coke & Engineering Company of Japan is a dominant player in the domestic cement industry with a 3% market share. The group doubled its grinding capacity in FY9 to 1.8m MT increasing total installed capacity of 2.4m MT per annum. Tokyo Cement completed its long delayed 1MW Bio Mass power plant in FY9 which will provide its total electricity requirement while qualifying for gaining carbon credits bringing in additional revenue to the company. The company s grinding facility is located in the Eastern sea port of Trincomalee, ideally located for the rebuilding boom. With the declining trend in inflation and interest rates and improving consumer spending, the construction sector is likely to pick up rapidly towards the final quarter in CY9. Resulting from adverse economic conditions, the construction sector went through a moderate slowdown in CY8 to 7.8%. However, the end of the North-East conflict and the rebuilding effort through housing and infrastructure projects is expected to fast track the growth momentum in the industry indicating a 1% plus growth rate through CY11. The cement industry imports 53% of its requirement providing domestic producers ample ground for expansion. With the construction industry expected to boom, cement growth in FY9 is expected to increase by a modest 3%, while FY1 growth is likely to exceed 15%. Tokyo Cement earnings declined 37% to Rs.347m for FY9 on account of high clinker prices, energy and transportation costs and high finance costs. Clinker prices have softened since 3QFY9, and margins improved to 2% in 4QFY9 from 13% in 3QFY9. Given the large scale infrastructure projects in the pipeline and the expected boom in cement demand we expect TKYO revenue prospects to be healthy. With the 1MW bio mass power plant now completed and clinker prices declining, it is likely to help Tokyo Cement to significantly improve its margins. We expect TKYO to post an earnings growth of 69% to Rs.587m in FY1E and earnings growth of 59% to Rs.935m for FY11E. At , the voting share trades at a PER of 7.12x FY1 earnings and 3.79x FY11 earnings. At 13.5, the non-voting share trades at a PER of 6.1x FY1 earnings and 3.25x FY11 earnings. The voting and nonvoting shares trade at a discount to the broader market on FY1E earnings. This document is published by John Keells Stockbrokers (Pvt.) Limited for the exclusive use of their clients. All information has been compiled from available documentation and JKSB s own research material. Whilst all reasonable care has been taken to ensure the accuracy of the contents of this issue, neither JKSB nor its employees can accept responsibility for any decisions made by investors based on information contained herein.

2 2 l John Keells Stock Brokers (Pvt) Limited l Corporate Update The newly constructed grinding plant of 9,MT capacity in Trincomalee is fully owned by TSCCL and has doubled the grinding capacity of the Group to 1.8m MT while the total capacity extends to 2.4m MT with the bagging plant in Colombo. Profile Tokyo Cement Company (Lanka) PLC (TKYO), is one of the largest grinders of Portland and Pozzollana cement in Sri Lanka on a joint venture between local conglomerate St. Antony s Consolidated and Nippon Coke & Engineering Company of Japan. The group structure consists of 3 subsidiaries out of which Fuji Cement Company (Lanka) Ltd. (FCCL) and Tokyo Super Cement Company Lanka (Pvt) Ltd. (TSCCL) are fully owned while Tokyo Cement Colombo Terminal (Pvt) Ltd. (TCCT) is a 56.85% subsidiary. Tokyo Cement operates a cement grinding plant with a capacity of 6,MT while FCCL cement grinding plant capacity is 3,MT. Both plants are situated in Trincomalee where the company owns a private 1 metre jetty, which can berth 25, tonnage ships. TCCT operates a bagging plant within the Port of Colombo consisting of 6,MT. The newly constructed grinding plant of 9,MT capacity in Trincomalee is fully owned by TSCCL and has doubled the grinding capacity of the Group to 1.8m MT while the total capacity extends to 2.4m MT with the bagging plant in Colombo. The group currently owns 3 ships with capacities of 17,5MT, 2,MT & 22,MT respectively to ensure an uninterrupted supply of raw materials, predominantly clinker. Construction Industry The industry boomed in 26 & 27 as growth rates picked up by 9.2% and 9% respectively on the back of rapid escalation of housing and condominium projects. However, with inflation and interest rates skyrocketing, the growth in the sector slipped during CY8 while large scale infrastructure projects in the country which multiplied with the liberation of the East gave some respite to the sector. Construction sector growth in CY8 lost pace slowing to 6.2% in 4QCY8 and 7.8% for CY8. % Quarterly Growth in Construction Industry The burst of the commodity bubble saw commodity prices sloping down bringing inflation to a manageable level. The point to point inflation in June stood at 3.3%. Central bank cut interest rates 4 times with inflation easing off in the 1HCY9, signaling a buoyant period for the construction sector towards the latter half of CY9. Conflict Zone The Eastern Province of the island was completely liberated from the clutches of terrorism and the Provincial Council elections were held in May 28. The successful completion of military operations in the Northern Province in May, has brought to an end the three decade long conflict. Similar to the era of the ceasefire agreement in 22-25, the end of the conflict is expected to result in a construction boom, particularly in the North and East. The Government had already pledged to launch the program Uthuru Vasanthaya aimed at re-developing the North with houses, roads, bridges and electrification. Q1 FY7 Q2 FY7 Q3 FY7 Q4 FY7 Q1 FY8 Q2 FY8 Q3 FY8 Q4 FY8

3 John Keells Stock Brokers (Pvt) Limited l Corporate Update l 3 Domestic Production is dominated by Tokyo and Holcim Lanka each having a 3% market share. Tokyo s expansion is now on stream, doubling grinding capacity to 1.8 million MT per annum from FY1. Cement Industry The cement industry has shown considerable growth in the last few years with cement consumption growing at a CAGR of 9.4% from CY3-CY7 while CY7 consumption grew 1.7%. The current total cement consumption is 4.2m MT per annum while domestic production is almost 2m MT where the balance 53% is imported from countries such as India, China, Thailand and Indonesia. The domestic production of cement is dominated by Tokyo Cement and Holcim Lanka each having a 3% market share (including of imported cement). Both companies are looking to expand production capacity with only 47% of the demand met by domestic production and grinding. Tokyo cement already doubled its grinding capacity in CY8 while Holcim which obtained approval to expand to Trinco will be starting construction in CY9. Tokyo Cement has capacity of 2.4m MT per annum while Holcim has 1.4m MT per annum (Source: Index Cement Index The growth momentum of cement was affected by the slow performance in private construction activities mainly housing and commercial projects due to the increased cost of borrowing and raw materials in CY8. The rise in demand from resettlement and rehabilitation activities in the Eastern province, continuation of tsunami reconstruction activities and state infrastructure development projects, managed to partially offset the decreased demand of cement from the private sector construction activities. With the end of the conflict we expect demand for cement to grow as the construction sector is likely to pickup with the government aiming to fast track the rebuilding process in the North and East. Clinker Given the rise in demand for cement in China, India and Middle East clinker prices surged up rapidly in CY7 and CY8. Clinker cost is the largest cost for the Group amounting to approximately 85% of production cost (including frieght) Tokyo cement imports clinker mainly from Thailand, Indonesia and Malaysia while powder for the bagging plant of TCCTL is imported from Indonesia. The Group purchased 3 vessels with the intention of saving on freight charges which amounts to almost 39% of production cost. The company experiences a considerable saving on freight by maintaining its own fleet of ships. 3 Jan-7 Mar-7 May-7 Source: Central Bank Jul-7 Sep-7 Nov-7 Jan-8 Mar-8 May-8 Jul-8 Sep-8 Nov-8 Jan-9 In addition to the rising clinker prices, the depreciation of the Sri Lankan Rupee has caused considerable concern to the company where the LKR depreciated almost 8% from December 28 to June 29 making clinker more expensive. A 1MW Boi Mass Power Plant which will meet the company s entire energy requirement and more was commissioned recently. This will reduce costs by over 4% as well as attract carbon credits. 1MW Bio Mass Power Plant Being in an energy intensive industry, Tokyo cement uses approximately 4kWh of energy annually. The company satisfies its energy requirement through its own 3.5MW thermal power plant and partly by the national grid. The energy costs account for 6% of the group production costs. With the intentions of saving energy costs and providing Green Energy Tokyo Cement commissioned a 1MW Bio Mass power plant which would meet the entire energy requirement of the Group with the excess power being sold to the National Grid. The power plant uses paddy husks available especially in the North Central and the Eastern Provinces, where rice mills are in abundance. Fuel wood is to be obtained from Gliricidia plantations. Apart from the considerable cost savings with the Bio Mass power plant the

4 4 l John Keells Stock Brokers (Pvt) Limited l Corporate Update company now qualifies for carbon credits worth of Rs.2m-3m. Given the number of infrastructure projects in the pipeline, the rebuilding of the North and East with houses, schools, hospitals, roads and bridges would indicate a considerable growth in the sector, signaling a significant boost in demand for cement. % GP Margins Earnings Tokyo Cement earnings dropped 37% to Rs.347m for FY9 while 4QFY9 earnings ended at Rs.123m as lower sales volume were recorded with the slowdown in the construction sector. Despite a drop in sales, revenue grew 26% cumulative and 33% for the quarter on the back of repeated price revisions during the year. As cement has been brought under the list of products with price controls, Tokyo cement has experienced a time lag in the transfer of increase in costs to the consumers with the delay in price increases by the government. The company had also continued to experience pressure on margins with increases in retail price not matching the surge in costs. In 1st half FY9 clinker prices, energy costs and transportation costs surged rapidly dropping margins of Tokyo Cement from 18% in 2QFY8 to 16% in 1QFY9, 15% in 2QFY9 and 14% in 3QFY9. However with the decline in clinker prices in the 4th quarter, margins improved to almost 2%. The group suffered from high finance cost of Rs.834m up by 113% resulting from increased debt financing with the installation of the new vertical roller mill which doubled the grinding capacity of the Group. 1 5 Q1 FY7 Q2 FY7 Q3 FY7 Q4 FY7 Q1 FY8 Q2 FY8 Q3 FY8 Q4 FY8 Q1 FY9 Q2 FY9 Q3 FY9 Q4 FY9 Taxation Sri Lanka customs filed a case against Tokyo Cement, on an under-invoicing allegation. Under normal rules a company importing goods has to disclose the Cost of the Goods, Insurance paid and the Cost of Freight (CIF).Customs duty, VAT and Ports and Airport Levy is charged on this sum. Resulting from the usage of their own ships the group is claimed to have shown only part of their freight costs and thereby declaring a lower sum when bringing goods into the country. Tokyo Cement states it had agreed to co-operate with Customs in an under-invoicing investigation and that the authorities had agreed not to press action to recover value added tax amounting to Rs.146.7m. TKYO informed that the amount pending to be investigated by the Sri Lanka Customs is Rs.46m while it was also opined that the amount claimed is above the expressed provisions of the law. Valuations We expect Tokyo Cement revenue to reach Rs.17bn for FY1 inspite of an anticipated drop in sales prices with the decline in raw material prices. TKYO volumes are expected to pick up as the construction sector is likely to improve with favourable macro economic conditions. In addition to the declining interest rates and inflation, the success of the military effort would pave the way for rapid development in the cleared provinces. Given the number of infrastructure projects in the pipeline, the rebuilding of the North and East with houses, schools, hospitals, roads and bridges would indicate a considerable growth in the sector, signaling a significant boost in demand for cement. Tokyo Cement is fully geared for the expected increase in demand for cement with the newly built Vertical Roller Mill which doubled the grinding capacity to 1.8m MT annually increasing total production capacity to 2.4m MT. With the downward revision of fuel prices group s transportation costs have declined

5 John Keells Stock Brokers (Pvt) Limited l Corporate Update l 5 sharply in the recent months. The operation of the Bio Mass power plant is expected to increase group margins with the company gaining carbon credits as well. With clinker prices on the decline we expect the company to further improve its margins in the subsequent quarters. Total borrowings have increased by 5% to Rs.3.4bn while liabilities payable within 1 year increased by 28% and is recorded at Rs.2.6bn for FY9 resulting from debt financing of the Bio Mass power plant and the Vertical Roller Mill projects. The drop in interest rates is likely to favour the group with lower finance costs in the subsequent quarters. We expect TKYO to post earnings of Rs.587m and Rs.1,12m for FY1E and FY11E respectively excluding the customs duty claim. At Rs , the voting share trades at a PER of 7.12x FY1 earnings and 3.79x FY11 earnings. At Rs. 13.5, the non-voting share trades at a PER of 6.1x FY1 earnings and 3.25x FY11 earnings. The voting shares trade at a discount of 35% to the broader market while the non-voting share trades at a discount of 47% to the broader market on FY1E earnings. BUY

6 6 l John Keells Stock Brokers (Pvt) Limited l Corporate Update Profit & Loss Statement For the year ended 31st March (Rs. Mn) E 211E Revenue 5,299 5,92 8,956 11,38 14,29 17,652 17,439 2,88 Cost of sales (4,354) (4,997) (7,456) (9,373) (11,977) (14,952) (14,62) (17,282) Gross profit ,5 1,935 2,52 2,7 2,819 3,598 Other operating income Selling and distribution (49) (435) (582) (82) (1,36) (1,95) (1,314) (1,577) Admin expenses (89) (88) (138) (153) (184) (328) (426) (554) Other expenses (6) (5) Profit from operations , ,481 1,18 1,568 Finance Cost (141) (122) (291) (361) (392) (834) (54) (323) PBT ,245 Taxation (2) 31 (289) (71) (19) Profit after tax ,136 Minority Interest (12) (1) (18) (11) (18) (34) Profit attributable to Equity Holders ,12 Balance Sheet As at 31 March (Rs. Mn) Assets Non current assets Property plant and equipment 24 2, , , , , ,359 21E 8,71 211E 8,42 Capital WIP ,563 3, Goodwill Non current receivables ,454 3,885 5,813 7,133 8,481 9,846 9,3 8,235 Current Assets Inventories ,212 1,388 1,482 1,775 Receivables and prepayment ,468 1,882 2,93 2,56 Cash and cash equivalents , ,42 1,788 1,993 2,861 3,581 3,984 6,36 Total Assets 4,277 5,287 7,61 9,126 11,342 13,427 12,987 14,27 Equity and Liabilties Capital and reserves Stated Capital ,1 1,1 1,793 1,793 1,793 1,793 Retained Earnings 1,9 2,168 2,716 3,385 3,212 3,45 3,974 4,975 2,25 2,518 3,816 4,485 5,5 5,243 5,767 6,768 Minority Interest ,311 2,555 3,875 4,613 5,152 5,41 5,943 6,978 Non - current liabilties Long term borrowings 934 1,45 1,532 1,772 1, Retirement benefit obligation Others ,76 1,173 1,631 1,892 1,363 1, Current liabilities Trade and other payables ,269 3,823 3,777 4,522 Loan Repayable ,35 1,44 2,9 2,574 2,1 1,772 Current tax liabilities (36) (71) (1) 32 Borrowings ,559 2,95 2,621 4,827 6,767 6,184 6,542 Total liabilities 1,966 2,732 3,726 4,513 6,19 8,26 7,44 7,292 Total equity & liabilties 4,277 5,287 7,61 9,126 11,342 13,427 12,987 14,27

7 John Keells Stock Brokers (Pvt) Limited l Corporate Update l 7 Cashflow Statement For the year ended 31st March (Rs. Mn) Net profit before tax E E 1,245 Adjustments ,822 1,571 1,37 Changes in Working Capital 29 (313) (194) (23) (351) 4 Inerest paid (141) (122) (251) (361) (386) (791) (54) (323) Tax Paid (5) (1) (13) (18) (51) (93) (1) (76) Defined Benefit Obligations paid (1) (1) - (5) - Net cashflow from operating activities ,279 1,294 2,524 1,386 2,194 Investing Activities Fixed Assets (184) (567) (1,416) (157) (611) (1,917) (4) (3) Interest received Expenditure on capital WIP (664) (3) (234) (2,318) (1,39) (328) (2) (2) Other (15) (15) (657) Net cashflow from investing activities (857) (68) (2,291) (1,742) (1,914) (2,245) (593) (491) Financing Activities Proceeds from issued capital Receipt / (Repayment) of term loans (75) (15) (2) Dividends (48) (53) (94) (146) (33) (18) (81) (135) Other (4) (22) (54) (22) (22) Net Cashflow from financing activities , (237) (253) (357) Net cash and cash equivalents (24) (68) (375) ,346 Cash and cash equivalents At start of the year 186 (18) (172) (13) 41 Increase / (Decrease) (24) (68) (375) ,346 At end of period (18) (172) (13) 41 1,755 John Keells Stock Brokers (Pvt) Ltd. 13 Glennie Street Colombo 2 Sri Lanka T F , Company No. PV 89