Hemas Holdings PLC. Interim Update (Q1 FY 14/15) 23 rd September 2014 Diversified Sector. Valuation. Recommendation: SELL LOLC SEC Valuation: LKR 52

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1 Hemas Holdings PLC Interim Update ( ) 23 rd September 214 Diversified Sector Revenue has gained 19.5% QOQ while profit attributable to shareholders decreased by 1.8% for the amidst the mix performance of different sectors. GP margins did not change much while the loss of Heladhanavi JV weighed on the net profit (The loss of LKR 77 Mn). Recommendation: SELL LOLC SEC Valuation: LKR 52 Share Details Bloomberg Ticker HEMS SL Share Price (LKR) 62. Market Cap (LKR Mn) 31,948 Revenue 6,786 7,243 7,646 8,776 9,545 7,267 EBITDA 1, ,231 1,36 1, PBIT , 784 1, Net Profit PE (X) PBV (X) *Figures are in LKR Mn while PE is calculated using trailing 12 months earnings. The FMCG sector performed well during the first quarter registering revenue of LKR 2.9Bn, a strong growth in comparison to last year. The multiple re-launches that took place during 2 financial year have started to deliver results and operating profits have grown in line with sales. Reduction of palm oil prices would bode well for the GP margins of the sector since the commodity is the main raw material in most of the FMCG products. Newest addition, J. L. Morison experienced an 8% drop in sales due to production being disrupted by a machine breakdown, which resulted in the closure of the manufacturing plant for several weeks. According to company data, the plant is back in its full production. The power sector loss is mainly due to the heat rate reserve for Heladhanavi being charged to the income statement from this quarter onwards. The power sector overall earnings declined by LKR 128Mn compared to last year. However, The Power Purchase Agreement (PPA) of the company will expire on December 214 the impairment charge is LKR Mn has already been incurred during FY. HHL raised up LKR 1 Bn through a debenture issue during the quarter. The objective of this issue was to repay high interest loans of the company and its subsidiaries. Hence it would have a positive impact on interest cost of the Company. At the current price of LKR 62, the share is trading at a trailing PE of 14.9X and a trailing PBV of 2.21X while the dividend yield is 1.45%. Valuation Issued Quantity (Mn) 515 Share Price Performance LKR m 6m 12m Absolute Relative To ASPI W High/Low (LKR) 62./ W Avg. Volume 351,5 Beta (6 months) Sep-13 Dec-13 Mar-14 Jun-14 Business Nature Hemas Holdings PLC is engaged in a diversified portfolio of businesses consisting FMCG, Healthcare, Leisure, Power and Transportation sectors. Shareholder Details A Z Holdings (Pvt) Ltd 17.61% Saraz Investment (Pvt) Ltd 16.77% Blueberry Investment (Pvt) Ltd 16.65% Amagroup (Pvt) Ltd 16.65% Employees Provident Fund 5.29% Analyst: Damith Wasantha damithwa@lolcsecurities.com Our Free Cash Flow Model values the stock (cost of equity-13% and terminal growth-5%) at LKR 52. At the current share price forward PE multiple is circa 13.6X. We believe the counter is overvalued, while the share price has risen by circa 26% during September month. Hence, we revise our recommendation to SELL.

2 Terminal Growth Rate Interim Update: Hemas Holdings PLC 23 September 214 LKR Mn 4, 3, 2, 1, Segmental Revenue FMCG Healthcare Leisure Transport Power 44% 42% 8% 5% 1% LKR Mn 3, 2, 1, -1, -2, -3, -4, -5, Segmental Profit 55% 32% 1% 23% -12% USD/ Mt Malaysian Palm Oil Prices Palm Oil consumption has dropped while commodity prices also weighed by strengthening dollar. Reduction in prices bode well for FMCG earnings margins. 5 9/19/12 3/19/13 9/19/13 3/19/14 9/19/ FMCG Healthcare Leisure Transport Power % CCPI % YOY Inflation is in a down trend since February 213. This situation bodes well for the FMCG sector growth with the increased consumption. Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Source: Interim Financial Statements, Bloomberg Table 1: Peer Comparison Name Market Cap (USD Mn) PE (x) PBV (x) Dividend Yield (%) ROE (%) John Keells Holdings Plc Aitken Spence Plc Hayleys Plc Ct Holdings Plc Vallibel One Plc Richard Pieris & Co Plc Hemas Holdings Plc Expolanka Holdings Plc Shanghai Jiaoda Onlly Co (China) Vinacontrol Group Corp (Vietnam) Source: Bloomberg Table 2: Valuation Sensitivity Matrix Cost of Equity Share price in LKR 12% 13% 14% 15% 16% 3% % % % % Source: LOLC SEC Research 2 LOLC Securities Limited

3 Table 3: Forecast Income Statement and Balance Sheet Figures in LKR Mn FY FY FY (F) FY 15/16 (F) Income Statement Revenue 26,98 32,833 7,267 33,525 36,71 Cost of Revenue (18,75) (22,614) (4,667) (22,37) (24,12) Gross Profit 8,23 1,219 2,6 11,155 11,969 Distribution cost (2,87) (2,764) (795) (2,964) (3,189) Administration cost (3,93) (4,568) (1,365) (4,16) (4,476) Operating Income 2,434 3, ,249 3,55 Net Non-Operating Gains (Losses) (27) (331) 119 (71) 13 Pretax Income 2,46 3, ,178 3,563 Income Tax Expense (472) (486) 18 (522) (565) Profit After Tax 1,934 2, ,656 2,998 Net Profit att. to shareholders 1,658 2, ,348 2,664 Balance Sheet Cash & Near Cash Items 3,223 3,133 2,157 4,594 5,432 Accounts & Notes Receivable 5,565 8,523 6,965 8,951 9,644 Inventories 2,425 3,933 3,847 3,47 3,774 Total Current Assets 12,948 16,748 13,589 18,538 2,385 Total Long-Term Assets 13,6 17,63 18,572 17,166 16,729 Total Assets 26,8 34,379 32,161 35,73 37,114 Accounts Payable 4,421 7,957 7,384 9,353 1,82 Other Short-Term Liabilities 1, Total Current Liabilities 8,791 12,422 9,678 12,388 12,373 Total Long-Term Liabilities 2,84 4,327 4,744 3,87 3,12 Total Liabilities 11,595 16,749 14,422 16,195 15,475 Share Capital 1,61 1,61 1,61 1,61 1,61 Retained Earnings & Other Equity 1,553 12,7 12,855 14,579 16,71 Total Equity 14,412 17,63 17,738 19,58 21,639 Total Liabilities & Equity 26,8 34,379 32,161 35,73 37,114 Source: Company Data and LOLC SEC Research 3 LOLC Securities Limited

4 Table 4: Forecast Cash Flow Statement and Ratios Figures in LKR Mn FY 11/12 FY FY FY (F) FY 15/16 (F) Cash Flow Statement Net Income 18.5% 21.9% 25.81% 2.11% 7.59% Depreciation & Amortization -.9% 37.1% 45.34% -2.53% 13.42% Changes in Non-Cash Capital 3.7% 3.74% 31.13% 33.27% 33.18% Cash From Operations 5.65% 6.35% 7.34% 7.1% 7.38% Capital Expenditures Increase in Investments Cash From Investing Activities Dividends Paid Change in Short-Term Borrowings 11.35% 13.64% 16.85% 14.52% 14.55% Cash from Financing Activities 5.34% 6.37% 7.1% 6.58% 7.18% Net Changes in Cash 18.57% 18.94% 22.72% 16.27% 11.61% Ratios 2.5% 1.91% 1.96% 1.47% 1.67% Revenue growth 18.5% 21.9% 25.81% 2.11% 7.59% Net profit growth -.9% 37.1% 45.34% -2.53% 13.42% GP Margin 3.7% 3.74% 31.13% 33.27% 33.18% NP Margin 5.65% 6.35% 7.34% 7.1% 7.38% Earnings per share (LKR) Book Value per share (LKR) PE ratio (X) PBV (X) Current Ratio (X) Asset turnover ratio (X) ROE 11.35% 13.64% 16.85% 14.52% 14.55% ROA 5.34% 6.37% 7.1% 6.58% 7.18% Debt to Equity Ratio 18.57% 18.94% 22.72% 16.27% 11.61% Dividend per share (LKR) Dividend yield 2.5% 1.91% 1.96% 1.47% 1.67% Source: Company Data and LOLC SEC Research 4 LOLC Securities Limited

5 Recommendation Guidance BUY expected return > 1% in excess of benchmark return SELL expected return less than benchmark return HOLD expected return between % and 1% in excess of benchmark return Investment Horizon: 3 years Benchmark Interest Rate: Average Weighted Fixed Deposit Rate (AWFDR) published by Central Bank of. Head Office Branches LOLC Securities Limited Level 18, West Tower, World Trade Center Colombo 1 Tel: Fax: Kurunegala Branch No 6, 1st Floor, Union Assurance Building, Rajapilla Mawatha Kurunegala, Tel: Fax: Galle Branch No 18, Sri Dewamitta Mawatha, Galle Tel : Matara Branch 1 st floor, E.H. Cooray Towers, No 24, Anagarika Dharmapala Mawatha, Matara Tel: Contact Us Sriyan Gurusinghe CEO/Managing Director / sriyang@ lolcsecurities.com SALES Head Office Maniesh Rodrigo Assistant General Manager / manieshr@ lolcsecurities.com Samadhi Jayasinghe Manager Institutional Sales / samadhij@ lolcsecurities.com Dinusha Gomes Assistant Manager International / dinushago@ lolcsecurities.com Imesh Fernando Sales Senior Investment Advisor / imeshf@ lolcsecurities.com Balendiran Janegan Senior Investment Advisor / janeganb@ lolcsecurities.com Naleen Sadeesh Investment Advisor / naleensa@ lolcsecurities.com Damith Chaminda Investment Advisor / damithc@ lolcsecurities.com Dushan Rajaguru Investment Advisor / dushanr@ lolcsecurities.com Asendra Wijesiri Investment Advisor / asendraw@ lolcsecurities.com Dinuka Niwantha Investment Advisor / dinukan@ lolcsecurities.com Niraj Jayamanne Investment Advisor / nirajj@ lolcsecurities.com Kurunegala Branch Rohana Chandrasiri Assistant General Manager / rohanac@ lolcsecurities.com Anurudda Rajakaruna Investment Advisor / anuruddhar@ lolcsecurities.com Nuwan Fernando Investment Advisor / nuwanfe@ lolcsecurities.com Galle Branch Bimal Malinda Branch Head / bimalm@ lolcsecurities.com Matara Branch Lalinda Liyanapathirana Investment Advisor / lalindal@ lolcsecurities.com Ahamed Aadil Investment Advisor / aadila@ lolcsecurities.com RESEARCH Shehan Bartholomeuz Head of Research / shehanb@ lolcsecurities.com Damith Wasantha Senior Research Analyst / damithwa@ lolcsecurities.com Hiruni Perera Associate Research Analyst / hirunip@lolcsecurities.com Rehan Ariyaratne Business Development Associate / rehana@lolcsecurities.com LOLC Securities Limited, a trading member of the Colombo Stock Exchange (CSE), is engaged in facilitating stock trading transactions at Colombo Stock Exchange, providing investment research on n equity, providing investment planning advices with services such as portfolio construction & formulation of IPS (Investment Policy Statement) and facilitating other investment opportunities in the country including private equity. Disclaimer: This report is based on information from sources that LOLC Securities Limited believes to be reliable. Whilst reasonable care has been taken to ensure accuracy of the information presented in the report, LOLC Securities Limited does not give a guarantee on the accuracy of the information presented in the paper nor will take the responsibility on investment decisions taken based on the information provided by the report and hence LOLC Securities Limited nor its employees accepts any liability whatsoever for any loss arising from investments decisions taken using the information provided in this paper. The reader also should note this paper does not give recommendations to any particular category of investors and investor should consult investment advisors for further clarifications regarding risks involved in investing in equity market. LOLC Securities Limited or its employees may or may not hold positions in the securities discussed in the report and the information provided in the report should not be construed as a buy or sell instruction for any securities mentioned in the report. LOLC SEC Research Reports are also available at Bloomberg LOLC <GO> 5 LOLC Securities Limited