FC Research Analyst: Michelle Weerasinghe

Transcription

1 ALUMEX PLC FC Research Analyst: Michelle Weerasinghe SRI LANKA Corporate Update STRONG BUY ALUM.N0000 Current Price: LKR 20.0 Fair Value: LKR 25.5 Sep 2016 KEY DATA Share Price (LKR) 52w High/Low (LKR) Average Daily Volume (Shares) Average Daily Turnover (LKR) Issued Share Capital (Shares mn) Figure 1: ALUM Price Volume Graph Disclosure on Shareholding: Price Performance (%) 1 mth 3 mths 12mths ALUM -5% 12% 12% ASPI -3% 0% -10% Mr. D.W.P.N.Dediwela / ,195 5,788,475 Market Capitalisation (LKR mn) 5,986 Major Shareholders as at 30th Jun 2016 Hayleys PLC Akbar Brothers Pvt Ltd A/C No.1 Rosewood (Pvt) Ltd A/C No.1 Dean Foster (Pvt) Ltd A/C No % 13.44% 9.80% 4.75% 3.56% Estimated Free Float 17.34% First Capital Equities (Pvt) Ltd nor its entities have traded in the shares in the three trading days prior to this document, and will not trade in the shares for three trading days following the issue of this document. P/E 31 March FY15 FY16 FY17E FY18E FY19E Revenue (LKR mn) 3,307 3,995 4,596 5,361 6,252 YoY % Growth 18% 21% 15% 17% 17% Net Profit (LKR mn) ,120 EPS YoY % Growth 26% 24% 19% 29% 24% Valuations PER (x) PBV (x) Div Yield (%) 5.0% 5.0% 5.9% 7.6% 9.4% NAVPS DPS (LKR) Div Payout 63% 51% 50% 50% 50% Alumex PLC, a subsidiary of Hayleys PLC, is expected to grow its earnings potential to achieve a CAGR of 24% FY16-FY19E. ALUM is expected to grow its earnings mainly through its revenue increase and exploiting the static growth in global prices of its key raw material, aluminium. Expected revenue generation is attributing to construction boom in the country and increase in capacity leading to growth in volumes in its main product as well as new products. Net profit margins for FY16-FY18E are expected to rise on the back of improved operating profits with increasing revenues and cost efficiencies. FC Research expect ALUM to provide a return of 25.8% at LKR STRONG BUY Revenue driven by construction boom and capacity expansion: ALUM s revenue is expected to grow at a CAGR of c.16% through FY16-FY19E. Revenue is expected to grow with increase in volumes which is expected to arise as a result of emerging construction boom in the country and expansion of ALUM s capacity to cater to the demands in the commercial and the residential sector. ALUM is also expected to gain a competitive advantage with its obtaining products certified by United Kingdom Accreditation Service. Static movement in global aluminium prices to improve earnings: Global aluminium prices have been moving around USD 1,500/MT since The static movement in aluminium prices will positively reflect on ALUM s cost of sales leading to improved net earnings. Net earnings are to be recorded at c. LKR 700Mn for FY17E, a growth of 19% over FY16. ALUM to provide a 25.8% return in FY18E: FC Research expect ALUM to achieve a fair value of LKR 25.5 providing an annualized return of 25.8%. [DCF based LKR 23.9 and PER based LKR 27.2]. FY17E fair value stands at LKR [DCF based LKR 19.5 and PER based LKR 21.1]. Risks associated: ALUM is currently exposed to the exchanged rate risk and global aluminium price volatility. Net earnings of ALUM are subject to change if exchange rate depreciates further and global aluminium prices commence to rise from current levels (USD 1,463/MT-2016E).

2 Figure 2: Market share based on Revenue among listed Companies 1.0 Introduction 1.1 Market leader in Aluminium Products : Alumex PLC, a subsidiary of Hayleys PLC, listed on the Dirisavi Board of the Colombo Stock Exchange. Founded in 1986, Alumex commenced commercial operations in The head office and factory premises are located at Makola. The Company has 5 distribution centres, one concept centre and 62 dealerships spread throughout the island. The Alumex Group comprises three fully-owned subsidiaries: ALUM ALUF LALU Source: Annual Reports FY16 Alco Industries (Pvt) Ltd. - involved in manufacturing and selling Aluminium components and industrial tools Avro Enterprises (Pvt) Ltd. - dormant during FY16 and amalgamated with Alumex PLC in April Alumex Systems (Pvt) Ltd - manufacturing of extrusions using advanced technology Figure 3: ASPI vs ALUM Share Price Performance: Following the peak of LKR 19.7 in August 2015 ALUM price moved with little volatility before it began to decline from early 2016 with overall market dipping. However, since March 2016 ALUM s price regained upward momentum and been trading recently around the LKR 20.0 mark. 1.3 Industry Analysis ALUM ASI Source: CSE History and Usage of Aluminium: It was merely about 150 years ago aluminium was considered to be silver from clay and an extremely expensive kind of metal. At present, aluminium ranks number two in the consumption volumes among all the metals, surpassed only by steel. Global daily average aluminium production as at July 2016 is metric tonnes. China accounts for 50% of the world's volume of aluminium production and consumption. It is expected that in the coming decades the demand for aluminium will continue increasing at persisting rates due to recent developments in the motor industry, the rapid growth of cities, new potential uses of aluminium as a substitute to copper in the power industry. Currently usage of aluminium is seen in many areas including construction, durable goods, electrical (power), machinery, packaging, transportation, and other. Globally, the largest volumes of aluminium are used by the transportation and construction industries in 2014 they accounted for 27% and 25% of consumption respectively Production of Aluminium: The aluminium market consists of the producers of primary aluminium and its alloys the upstream segment, the producers of aluminium products the downstream segment and the producers of aluminium out of processed raw material (aluminium recycling). 2

3 The upstream segment does not just involve the production of primary aluminium and hundreds of various alloys, but also the whole raw material supply chain preceding this process. To produce aluminium, bauxite is mined, processed it into alumina and delivered it to an aluminium smelter. This is subsequently alloyed to industrial grades. The largest bauxite reserves are concentrated in the tropical and subtropical zones, and so the main production output levels are provided by the countries of Southeast Asia, Latin America and Africa, as well as Australia. Figure 4: Aluminium Production Process Bauxite mining Crushing Digestion Precipitation Rolling Foundry alloys Casting Electrolytic reduction Extrusion Recycling Source: aluminiumleader.com Recycling Aluminium: Aluminium is widely recyclable as less energy is needed to produce recycled aluminium than to extract Aluminium from its ore. Further it causes less damage to the environment and positively contributes to environmental sustainability and a green economy. Figure 5: Aluminium consumption by industry % 13% 27% 15% 5% 9% 25% Transport Consumer Goods Machinery & Equipment Construction Foil & Packaging Electrical Engineering Other Source: aluminiumleader.com 3

4 A FC Research 2.0 Revenue driven by construction boom and capacity expansion Figure 6: ALUM revenue growth 22% 21% 20% 18% 18% 17% 17% 16% 15% 14% 13% 12% 10% 2.1 Revenue growth at CAGR of 16% Source: Annual Reports and FC Research Estimates Revenue growth via volume growth: ALUM s revenue is expected to grow at a CAGR of c.16x% through FY16-FY19E. Revenue is expected to grow with increase in volumes which is expected to arise as a result of emerging construction boom in the country and expansion of ALUM s capacity to cater to the demands in the commercial and the residential sector. Construction Boom: The anticipated boom in construction Industry in Sri Lanka, is expected to produce an increasing demand for aluminium profiles especially with high rise developments relating to apartments, hotels, houses and other which may support ALUM to record strong earnings through FY17E- FY19E. Growing Tourist industry increase demand for high quality building finishes: Continuous growth in tourism sector has created a need to design hotels and leisure sector buildings to international standards in order to attract tourists and repeat their visits. Hence, ALUM may have a growth in its revenues by catering to the building finishing needs of the tourism sector. Increase in living in apartment blocks: With increasing constraints on land and increasing population density (Urban Population in Sri Lanka %) higher demand for living in apartments can be observed currently. With expected greater demand for apartments in the future ALUM may be benefitted with the increase in demand for aluminium profiles. 4

5 % FC Research Figure 7: Urban Population (% of total) Capacity expansions and new products Source: World Bank Introduction of new products: ALUM s long term strategy includes new designs targeting the commercial sector and broadening the range of products. ALUM is also expected to gain a competitive advantage with its obtaining products certified by United Kingdom Accreditation Service. Expanding plant capacity: Enhancing extrusion and powder coating capacity and developing the export market are ALUM s objectives which may lead to increase in its volumes. Recent acquisition of freehold land: ALUM acquired a freehold land for LKR 420Mn from Hayleys Fibre PLC. The acquisition by ALUM is strategically planned for the capacity expansion. Figure 8: ALUM revenue composition Local Sales - Extrusions Local Sales - Aluminium Components Other Sales Source: Annual Report FY16 5

6 USD/MT FC Research 3.0 Static movement in global aluminium prices to improve earnings Figure 9: Global Aluminium Price Movements 1,800 1,750 1,700 1,650 1,600 1,550 1,500 1,450 1,400 1,350 1,300 Price appreciation forecast-only a CAGR of 1.62% 2016E-20E Source: World Bank 3.1 Price movement and Exchange rate affect earnings Global Prices static at a low level: Global aluminium prices have been moving around USD 1,500 since December The static movement in aluminium prices will positively reflect on ALUM s cost of sales leading to improved net earnings. Slow price appreciation allows pass on effect: As per the forecast aluminium prices are expected to grow at a slow pace for the next 4 years- CAGR of 1.62% 2016E-20E. This allows ALUM to pass the increase in cost to the customer without difficulty allowing it to maintain margins Exchange Rate movement: Exchange rate volatility has a major impact on ALUM s Cost of Sales as its key raw materials are primarily imported for production. About 75% of ALUM s imports are aluminium which form a vast share in cost of sales. 6

7 LKR Mn FC Research 4.0 ALUM to provide a Total Return of 41.2% P/E 31 March FY15 FY16 FY17E FY18E FY19E Revenue (LKR mn) 3,307 3,995 4,596 5,361 6,252 YoY % Growth 18% 21% 15% 17% 17% Net Profit (LKR mn) ,120 EPS YoY % Growth 26% 24% 19% 29% 24% Valuations PER (x) PBV (x) Div Yield (%) 5.0% 5.0% 5.9% 7.6% 9.4% NAVPS DPS (LKR) Div Payout 63% 51% 50% 50% 50% ALUM Earnings CAGR of 24% FY16-19E: We expect ALUM s earnings to reach LKR 1.1bn in FY19E (24% CAGR). In FY17E ALUM is expected to record a net profit of LKR 700Mn, growing by 29% in FY18E and 24% in FY19E. At the current price forward PER is expected to be 8.5x, 6.6x and 5.3x by FY17E, FY18E and FY19E respectively. Figure 10: Earnings to grow at 24% CAGR FY16-FY19E 1,200 Net Profit 1,100 1, Source: Anuual Report and FC Research Estimates 7

8 4.1 ALUM Total Return of 41.2% Fair Value of LKR 25.5: FC Research target price for ALUM stands at LKR 25.5 providing an annualized return of 25.8% (total return 41.2%) based on the company s value as at March The target price of LKR 25.5 is based on the average price of LKR 23.9 via DCF valuations and LKR 27.2 via PER based valuations. FY17E: For FY17E we expect a fair value of LKR 20.3 based on average price of LKR 19.5 via DCF valuations and LKR 21.1 via PER based valuations providing a total return of 7% at current market price of LKR Expected ALUM price FY17E FY18E DCF Valuation based target price PER based target price Average Target Price Target price (Rounded up) Dividend Yield of 14%: FC Research expects a DPS of LKR 1.5 for FY18E resulting in a dividend yield of 14% for ALUM. Return FY17E FY18E Target Price Current Price Capital Gain (LKR) Dividend (LKR) Capital Gain % 1% 28% Dividend Yield % 6% 14% Total Return % 7.3% 41.2% Annualized Return % 7.3% 25.8% COE (K e) R f 10% R m 17% 1.1 K e =R f + (R m -R f ) 18% WACC K e 18% K d 13% D/E Assumption 40 / 60 Terminal Growth (%) 3% WACC 15% 4.2 Discounted Cash flow Valuation Valuations FY17E FY18E NPV 5,929 6,942 (+) Cash (-) Debt (423) (343) Total Value of Equity 5,843 7,141 No. of shares Value of Equity per share FY18E Terminal Growth (%) FY17E Terminal Growth (%) WACC 24 13% 14% 15% 16% 17% 1% % % % % WACC 20 13% 14% 15% 16% 17% 1% % % % %

9 LKR FC Research 4.3 Average PER of 9.0x PER based Valuation FY17E FY18E Earnings (LKR 'Mn) No. of Shares ('Mn) EPS Expected Average PER 9.0x 9.0x Price at 9.0x Earnings Figure 11: PE Band Graph Source: 8 CSE 10and FC Research Price Estimates Source: CSE and FC Research Estimates ALUM price has been trading between 10.0x 15.0x bands during the last 2 years. We expect ALUM to trade at a PER of 9.0x by FY17E and FY18E. ALUM s FY18E EPS is expected to reach LKR At 9.0x earnings, the price for ALUM stands at LKR Investment Risks Exchange Rate Risk: Volatility in exchange rate against the USD plays a major risk for ALUM since its cost of sales is highly affected by the key raw materials which are imported. ALUM manages its exchange rate risk through the foreign currency forward contracts and by maintaining a minor amount of foreign currency dominated assets to hedge against liabilities. Further, ALUM is keen on settling the import payments early to avert this risk. Global Aluminium price volatility: Aluminium price volatility is expected to be minimal to ALUM since for the past three years it had been moving on a downtrend. As per World Bank forecasts it is expected to grow at a CAGR of 1.62% which may be easily passed on to the customer. 9

10 6.0 Peer Valuations 6.1 ALUF and LALU to record a revenue growth of 19% and 12% respectively for FY18E ALUF - P/E 31 March FY15 FY16 FY17E FY18E FY19E Revenue (LKR mn) YoY % Growth 95% 51% 19% 20% 20% Net Profit (LKR mn) EPS YoY % Growth -120% 232% 33% 17% 17% Valuations PER (x) PBV (x) Div Yield (%) 0.0% 0.0% 0.0% 0.0% 0.0% NAVPS DPS (LKR) Div Payout 0% 0% 0% 0% 0% LALU - P/E 31 March FY15 FY16 FY17E FY18E FY19E Revenue (LKR mn) 1,401 1,541 1,726 1,933 2,165 YoY % Growth 20% 10% 12% 12% 12% Net Profit (LKR mn) EPS YoY % Growth 355% -20% 40% 21% 20% Valuations PER (x) PBV (x) Div Yield (%) 3% 1.1% 1.9% 2.3% 2.8% NAVPS DPS (LKR) Div Payout 30% 12% 15% 15% 15% 6.2 ALUF and LALU to provide total returns of 14.5% and 31.6% respectively ALUF fair value at LKR 52.0: ALUF is expected to have a fair value of LKR 52.0 [DCF based LKR 39.3 and PER based LKR 65.3] providing a total return of 14.5%. Based on the current price of LKR 45.4, ALUF would generate an annualized return of 9.5%. SELL LALU fair value at LKR 114.0: LALU is expected to have a fair value of LKR [DCF based LKR 56.1 and PER based LKR 172.8] providing a total return of 31.6%. Based on the current price of LKR 89.5, LALU would generate an annualized return of 20.1%. BUY 10

11 Expected ALUF price FY18E DCF Valuation based target price 39.3 PER based target price 65.3 Average Target Price 52.3 Target price (Rounded up) 52.0 Return FY18E Target Price 52.0 Current Price 45.4 Capital Gain (LKR) 6.6 Dividend (LKR) 0.0 Expected LALU price FY18E DCF Valuation based target price 56.1 PER based target price Average Target Price Target price (Rounded up) Return FY18E Target Price Current Price 89.5 Capital Gain (LKR) 24.5 Dividend (LKR) 3.8 Capital Gain % 15% Capital Gain % 27% Dividend Yield % 0% Dividend Yield % 4% Total Return % 14.5% Total Return % 31.6% Annualized Return % 9.5% Annualized Return % 20.1% 6.3 DCF value of LKR 39.3 for ALUF and LKR 56.1 for LALU for FY18E Valuations - ALUF FY18E NPV 334 (+) Cash 140 (-) Debt - Total Value of Equity 474 No. of shares 12 Value of Equity per share 39.3 Valuations - LALU FY18E NPV 930 (+) Cash 135 (-) Debt (296) Total Value of Equity 768 No. of shares 14 Value of Equity per share

12 6.4 PER of 12.5x for ALUF and LALU for FY18E Figure 12: PE Band Graph At 12.5x ALUF is expected to have a PER based value of LKR Figure 13: PE Band Graph At 12.5x LALU is expected to have a PER based value of LKR

13 Appendix 1 Recommendation Criteria Categorization Grade A Grade B Grade C Company Category S&P SL20 Companies Rest of the Companies Companies less than LKR 1Bn Market Cap Strong Buy Buy Hold Sell T.Bill + 10% & T.Bill + 13% & T.Bill + 16% & T.Bill + 5% & T.Bill + 8% & T.Bill + 11% & T.Bill + 1% & T.Bill + 3% & T.Bill + 6% & Below T.Bill + 1% Below T.Bill + 3% Below T.Bill + 6% *1 Year T Bill rate as of % Appendix 2 Income Statement Income Statement (LKR Mn) FY15 FY16 FY17E FY18E FY19E Y/E 31st March Revenue 3,307 3,995 4,596 5,361 6,252 Less - NBT Net Revenue 3,241 3,916 4,504 5,253 6,127 Cost of Sales -2,343-2,739-3,077-3,489-4,032 Gross Profit 899 1,177 1,427 1,764 2,095 Other Income and Gains Selling and Distribution Cost Administrative Expenses Operating Profit ,008 1,274 1,556 Finance Cost Finance Income Profit Before Tax ,223 1,514 Income Tax Expenses Profit for the Year ,120 EPS Source: Annual Reports and FC Research Estimates 13

14 Appendix 3 Balance Sheet Balance Sheet (LKR Mn) FY15 FY16 FY17E FY18E FY19E As at 31st March Non-current Assets Property, Plant and Equipment 1,273 1,293 1,740 1,750 1,708 Investment Property Intangible Assets Investments in Subsidiaries Current Assets 1,290 1,333 1,787 1,807 1,777 Inventories ,072 1,250 Trade and Other Receivables Advances and Prepayments Income Tax Receivable Other Current Financial assets Cash and Cash Equivalents ,351 1,548 1,894 2,351 3,012 Total Assets 2,641 2,881 3,681 4,159 4,789 Equity and Liabilities Stated Capital Reserves Retained Earnings ,280 1,733 2,293 Total Equity 1,690 1,898 2,249 2,701 3,261 Non-Current Liabilities Interest Bearing Loans and Borrowings Retirement Benefit Liability Deferred Tax Liabilities Current Liabilities Trade and Other Payables Interest Bearing Loans and Borrowings Other current financial liabilities Provisions Income Tax Liabilities ,102 Total Equity and Liabilities 2,641 2,881 3,681 4,159 4,789 NAVPS Source: Annual Reports and FC Research Estimates 14

15 Appendix 4 Cash flow Statement Cash flow Statement (LKR Mn) FY15 FY16 FY17E FY18E FY19E Y/E 31st March Cash Flows from Operating Activities Profit Before Taxation ,223 1,514 Adjustments for, Finance Cost Finance Income Provision for Retirement Benefit Liability (Profit) / Loss on Disposal of Property, Plant and Equipment Provision For Bad Debts Provision for Impairment of Investment Depreciation and Amortisation Operating Profit Before Working Capital Changes ,168 1,491 1,799 (Increase) / Decrease in Inventories (Increase) / Decrease in Trade and Other Receivables (Increase) / Decrease in Advances and Prepayments Increase / (Decrease) in Trade and Other Payables Cash Generated from Operating Activities ,103 1,339 1,606 Finance Cost Paid Income Tax Paid Retirement Benefit Liability Paid Net Cash From Operating Activities ,164 Cash Flows from Investing Activities Acquisition of Property, Plant and Equipment and intangible assets Proceeds from Sale of Property, Plant and Equipment Proceeds from Short Term Investments Finance Income Received Net Cash Flows Used In Investing Activities Cash Flows from Financing Activities Repayment of Interest Bearing Loans and Borrowings Proceeds from Interest Bearing Loans and Borrowings Principal Payments Under Finance Lease Liabilities New Shares Issue Dividend Paid Net Cash Flows from / (Used in) Financing Activities Net Increase in Cash and Cash Equivalents Cash and Cash Equivalents at the Beginning of the Year Cash and Cash Equivalents at end of the Year Source: Annual Reports and FC Research Estimates 15

16 Appendix 5 Key Ratios Y/E 31st Mar FY15 FY16 FY17E FY18E FY19E Growth Margin Gearing Revenue 18% 21% 15% 17% 17% Cost of Sales 18% 17% 12% 13% 16% Gross Profit 16% 31% 21% 24% 19% EBIT 29% 33% 24% 26% 22% Net Profit 26% 24% 19% 29% 24% GP Margin 27% 29% 31% 33% 34% EBIT Margin 18% 20% 22% 24% 25% NP Margin 14% 15% 15% 17% 18% Debt/Equity 1% 0% 19% 13% 8% Debt/Debt+Equity 1% 0% 16% 11% 7% Source: Annual Reports and FC Research Estimates 16

17 HEAD OFFICE 347 1/1, Dr. Colvin R. De Silva Mawatha, Colombo 2 Sales Desk: Fax: BRANCHES 347 1/1, Negombo Dr. Colvin R. De Silva Mawatha, No.72A, 2/1, Colombo 2 Sales Desk: Old Chilaw Road, Negombo Fax: Tel: SALES BRANCHES CEO Jaliya Wijeratne Negombo Priyanka Anuruddha Colombo Priyantha Wijesiri Damian Le Grand Nishantha Mudalige Isuru Jayawardana Anushka Buddhika Gamini Hettiarachchi Thushara Abeyratne First Capital Equities (Pvt) Ltd RESEARCH Dimantha Mathew Amanda Lokugamage Atchuthan Srirangan Michelle Weerasinghe Hansinee Beddage FIRST CAPITAL GROUP HEAD OFFICE BRANCHES No. 2, Deal Place, Matara Kurunegala Kandy Colombo 3 No. 24, 1/3, 2nd Floor, No. 6, 1st Floor, No , Tel: Lakshman Cooray Building, Union Assurance Building, Peradeniya Road, Anagarika Dharmapala Mawatha, Rajapihilla Mawatha, Kandy Matara Kurunegala Tel: Tel: Tel: Disclaimer: This Review is prepared and issued by First Capital Equities (Pvt) Ltd. and is based on information available in the public domain, internally developed and other sources believed to be correct. Although all reasonable care has been taken to ensure that the contents of this document are accurate, First Capital Equities (Pvt) Ltd and its Directors and employees, are not responsible for its accuracy, usefulness and reliability and disclaim liability for any loss suffered by the use of information contained herein. First Capital Equities (Pvt) Ltd may act as a Broker in the investments which are the subject of this document or any related investments and may have acted on or have used the information contained in this document, or the research or analysis on which it is based, before its publication.