Olympic Industries Limited Fair Value Estimate (Dec 2014): BDT 260 per share Rating: OUTPERFORM

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1 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Sep-12 Sep-12 Nov-12 Dec-12 Jan-13 Jan-13 Feb-13 Apr-13 May-13 Jun-13 Jul-13 Jul-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Price, BDT Turnover, BDT Mn Analyst: Farah Tasnim Huque Sector: Consumer Good Initiating Coverage February 11, 2014 Fair Value Estimate (Dec 2014): BDT 260 per share Rating: OUTPERFORM Company Summary 52-week Price Range (BDT) Current Price (BDT) [Feb 10, 2014] Dec 2014 Fair Value (BDT) Price Return 36.0% Dividend Yield 0.4% Total Return 36.4% Number of Shares MM Market Cap BDT MM 22, Free Float 68.5% Average Daily Turnover BDT MM (2013) 76.6 Revenue & Profit (BDT MM) 2013A 2014E 2015E Total Revenue 7, , ,146.0 Operating Income , ,762.4 EBITDA 1, , ,037.2 Net Income ,314.4 Margin 2013A 2014E 2015E Gross Margin 25.7% 27.8% 29.2% Operating Margin 12.5% 14.4% 15.8% EBITDA Margin 14.5% 17.2% 18.3% Net Margin 8.7% 10.8% 11.8% Growth 2013A 2014E 2015E Revenue Growth 18.2% 30.6% 20.4% EBITDA Growth 36.5% 54.1% 28.2% Earning Growth 33.8% 62.7% 31.3% Per Share (BDT) 2013A 2014E 2015E Adjusted EPS DPS Restated BVPS Cash Flow (BDT MM) 2013A 2014E 2015E Operating , ,741.4 Investing (846.3) (650.0) (200.0) Financing (66.4) (223.1) (164.4) Valuation 2013A 2014E 2015E P/E 21.3x 30.9x 23.5x P/B 7.6x 11.7x 8.0x EV/EBITDA 13.1x 19.3x 14.3x Miscellaneous 2013A 2014E 2015E ROE 42.4% 45.6% 40.4% ROA 19.6% 23.7% 23.9% Debt/Equity 27.5% 12.6% 7.4% Payout Ratio 12.7% 11.7% 13% Figure: Price Performance of OLYMPIC since Growth momentum continues to drive superior return Olympic Industries Ltd. (DSE: OLYMPIC, Olympic ) is the market leader in Bangladesh in factory-made biscuit industry with 20%-22.0% market share. Initially in 1982, the company started operation as a dry-cell battery manufacturer and later the biscuit operation was launched in The company also acquired a listed ball-point pen manufacturer, Tripti Industries, in Currently biscuit & confectionary, battery and ball-point pen segments account for 92%, 4% and 3% of the company s revenue, respectively. Bangladesh s young demography with rising per capita income, increasing demand for quality packaged food coupled with Olympic s mindful product mix, supply chain management and marketing strategies drove its revenue and earnings CAGR of 37% and 69% per annum, respectively during the last 5 years. All these were catalyzed by a superior management that set and executed the right priorities since 2009 when the second generation of the sponsor-family took over important senior roles. We initiate coverage of Olympic with an OUTPERFORM rating with a target price of BDT 260 per share for December Our target price implies a forward P/E of 31.3x and EV/EBITDA of 19.5x based on our estimates for the FY While valuations look expensive, the earnings growth more than compensates for it. With the current market price of BDT 191, our valuation offers an upside potential of 36%, excluding a dividend yield of 0.4%. Key points from the investment thesis are as follows: Olympic will continue its strong growth momentum, primarily driven by the biscuit segment, in the next five years when its revenue and earnings will grow by 21% and 24% respectively. In FY2014 (ended in June), a biscuit expansion project will come online from the 3 rd quarter which will increase the biscuit segment s capacity by 40%. We estimate 31% and 20% revenue growth for the company in the next two years. Contrarily, the volume growth for the factory-made biscuit industry will be in the range of 15-20% in next five years as referred by the industry insiders. Olympic s margins are inversely related to weak commodity markets, particularly for wheat, sugar whose prices declined by 22% and 14%, respectively, in the calendar year We expect such weak commodity market to continue as forecasted in a recent World Bank study. Per unit ending inventory prices for Olympic s biscuit segment declined accordingly, by 37% YoY in FY 2013 that ended in June Additionally, the company has been able to pass-through cost inflation to the consumers, but does not revise down end-product prices if the raw material prices decline. Resultantly, we estimate gross margin improvement of total 3.5% during next two years. Economies of scale due to the capacity expansion will also be partially contributing to the overall margin improvement. Given a CAGR of 46% for Olympic s earnings in the next two years and higher valuation multiples for FMCG companies in comparable growth markets, we have a conviction that the seemingly-premium forward P/E of 31.3x will be realized. Turnover Adjusted Price Source: DSE, BRAC EPL Research, February 2014 See Important Disclosures section at the end of his report for important required disclosures, including potential conflict of interests.

2 Company Background Olympic Industries started its journey in 1979 and commenced its commercial operation in 1982 Olympic Industries Ltd. (DSE: OLYMPIC) was incorporated in 1979 as a public limited company with the name Bengal Carbide Ltd.. The company started its commercial operation in 1982 with dry-cell battery production. The company name was later changed to Olympic Industries in 1996, following the launch of its biscuit and confectionery segment. The company has been listed on Dhaka Stock Exchange (DSE) since After twelve years of its listing with DSE, the company got listed on Chittagong Stock Exchange (CSE) in In 2008, OLYMPIC merged with Tripti Industries Limited (a former listed company) and took over the ballpoint pen manufacturing business. Company Description The company s portfolio includes three product lines - biscuit & confectionery, dry cell battery and ballpoint pen. The company has diversified its business with various fast moving consumer goods (FMCGs) over the years. At present, the company is engaged in manufacturing and marketing of three product lines - biscuit & confectionery, dry cell battery and ballpoint pen items. With its head office located in the capital city Dhaka, OLYMPIC operates three production facilities situated in Kanchpur, Lolati and Madanpur of Narayanganj. Two factories are assigned for biscuit and confectionery production while the other one is for ballpoint pen and battery. The company has achieved the HACCP certification, a globally recognized standard for food processing companies, in early 2010 as all its factories are in compliance with quality and safety standards. The company had soyabean oil, vegetable ghee, palm oil and electric bulb manufacturing operations which have been discontinued for quite sometime. Business Segments & Revenue Breakdown The company is the market leader in the automated biscuit manufacturing industry and holds the second position in the battery segment. Chart:01 Revenue composition from the three business segments: 3.7% 4.6% As mentioned earlier, OLYMPIC s product portfolio includes three segments - biscuit & confectionery, batteries and ball pen. Among the three, biscuit & confectionery is the main revenue generating segment for the company as it accounts for 92% of the total revenue. OLYMPIC is currently the market leader in automated biscuit manufacturing industry and has started exporting biscuits recently. The contribution from non-biscuit segments are not very significant as battery and ball-pen accounted for 5% and 4% of total revenue respectively in The company holds the second position in battery market. Chart:02 Product Porfolio of Olympic Industries Ltd. Biscuit Confectionery Ballpoint Pen Battery Salted Glucose Flavored Glucose Marie Cake Vegetable Cracker Candy Cereal Bar Gum Chutney Gel PVC Jacket Piano Type UM-1 UM-2 UM % Biscuit Ball Pen Battery Source: Company Annual Report, 2013 The BDT 31.3 billion biscuit industry has been growing at 15.0% per year since Source: Company Annual Report, 2013 Biscuit Industry in Bangladesh The automated biscuit industry in Bangladesh was estimated at BDT 23.7 billion (USD million) in 2011 and has been growing at an annual rate of 15.0% (in terms of value) since Hence after embedding 15.0% annual growth, the total size of the biscuit industry as of 2013 was estimated to be about BDT 31.3 billion (USD million). According to industry experts, the biscuit industry will continue to post 15.0% to 20.0% volume growth in each of the next five years. 2

3 BSTI is a government body regulating the biscuit industry in Bangladesh. The BSTI certification is compulsory for every food processing company. Regulatory Body of Biscuit Industry Bangladesh Standard and Testing Institution (BSTI) is a government body regulating and supervising the industrial, food and chemical industries of the country. Hence, It is mandatory for every company in food processing and related industries to comply with BSTI certification before selling their products in the market. The BSTI certification ensures quality and standard of each product for both local consumption and export. In addition to BSTI certification, some food processing companies (including OLYMPIC) hold international standards e.g. ISO standard (International Organization for Standardization) and HACCP (Hazard Analysis & Critical Control Points) Consumption of Biscuit by different Income Groups Biscuit is generally considered as a food item of mass consumption due to its low price. In developing countries like Bangladesh, the middle income and lower middle income groups account for about 95% of total consumption of biscuit. The remaining 5.0% includes the upper income group that mostly consume imported biscuits accounting for only 2% of the volume. 98.0% of total biscuit consumption is met by local manufacturers while only 2.0% is being imported. Middle income & lower-middle income groups account for 95.0% of total biscuit consumption. Upper income group consumes only 5.0%. Chart:03 Market Share of Local & Imported Biscuits 2.0% 98.0% Chart:04 Consumption by Middle & Upper Income Groups 5% 95% Local Biscuits Imported Biscuits Source: Nabisco Biscuit Bangladesh, 2014 Middle & lower-middle class Upper class Market Share of Local & Imported Biscuit Local biscuit manufacturers are protected from overseas competition with high supplementary duties and other taxes on imported products that sum up to about 200.0%. On the other hand, total tax incidence for the local players is only 15%. Glucose biscuits dominate the local biscuit market and account for the lion s share of total biscuit production. In the recent time, 98.0% of total biscuit consumption is met by the local manufacturers while only 2.0% is being imported abroad. However, in earlier times, imported biscuits used to hover around 25.0% of total biscuit consumption in Bangladesh. One of the reasons behind the falling demand for imported biscuits is high supplementary duty (SD) imposed on imported biscuits. Government imposes heavy duties and taxes on imported biscuit to promote local value-adding food processing industries, thereby substituting imports. Although, SD on imported (sweet) biscuits has been cut down from 100.0% in FY 2013 to 60.0% in FY 2014, the total tax rate (including SD) on imported biscuits is quite significant and sum up to 200.0%. The taxes and duties included in the computation of total tax (on imported biscuits) are supplementary duty, import tax, regulatory duty, advance trade tax, pre-shipment inspection tax etc. Whereas, the sales tax on local biscuits is 15.0%. Category of Biscuit Biscuit can be classified into four broad categories - glucose, arrow root (marie), sweet assorted (including coconut cookies, cream sandwich biscuits etc.) and plain salted. Among these four types, glucose biscuit dominates the market with 3

4 more than 50.0% contribution to the total biscuit production in the country. This is because, most of the biscuit consumers in Bangladesh belong to middle and lower middle income groups and prefer low-priced glucose biscuit over the premium ones. With increasing per capita income and improved customer sophistication, we may expect a steady rise in demand for premium biscuits in the years to come. The other types of biscuit - sweet assorted accounts for 25.0% of total biscuit production, marie about 10.0% and salted about 5.0%. Chart 05: Category of biscuit as a percentage of total production Salted 5% Marie 10% Sweet 25% Glucose 60% 0% 10% 20% 30% 40% 50% 60% 70% Source: Small Industry Setup and Costing, Website Energy Plus and Glucose are the two most popular glucose biscuits in the country. Under the glucose segment, the two most popular brands in the market are Energy Plus (OLYMPIC) and Glucose (Nabisco Biscuit Company Ltd.). Other popular brands in the biscuit industry include - Horlicks Biscuit (GlaxoSmithKline Bangladesh Ltd.), TIP (OLYMPIC), Lite Crackers (Romania Food & Beverage Ltd), Marie Biscuit (Haque Biscuit Ltd) etc. Major Players in the Industry There are about 160 companies in the automated biscuit industry - out of them only 30 to 40 are currently in operation. The top eleven companies hold about 62.4% share of the total biscuit market. The remaining 37.6% of the market share is occupied by a large number of small biscuit manufacturers. Table 01: Market Share of Top 11 Biscuit Companies Rank Name of Companies Market Share 1 Olympic Industries Ltd 16.0% Out of 160 registered biscuit companies, only are currently operational. 2 Al Amin Bread & Biscuits Ltd 10.1% 3 Pran Foods Ltd 5.7% 4 Nabisco Bread and Biscuits Ltd 5.4% 5 Globe Biscuits and Dairy Milk Ltd 4.0% 5 New Olympia Biscuit Factory Ltd 4.0% 5 Romania Foods and Beverages Ltd 4.0% 8 Silex Limited (Multi-Novelty) 3.6% 9 Dekko Foods Ltd 3.4% 10 Danish Foods Ltd 3.2% 11 Haque Brothers Industries Ltd 3.0% Top 11 biscuit companies 62.4% Source: Sector Assessment Survey conducted by Matrix Consulting Ltd., 2011 OLYMPIC has retained its leadership position in the biscuit industry for the last few years. At present, it enjoys 20.0% to 22.0% market share. Based on a past survey on biscuit industry (conducted by Matrix Consulting Ltd. in 2011), OLYMPIC was found to be the market leader in 2011 with 16.0% market share. According to the industry experts, OLYMPIC still holds on to its leadership position in the automated biscuit industry and enjoys about 20.0% to 22.0% market share. The expansion of market share is reasonable for OLYMPIC as its topline has been growing 2.4 times faster than the annual industry growth of 15.0% in the last two years. In fact, the company has 4

5 Table 02: Total Revenue (BDT mn) of Biscuit industry and OLYMPIC year CAGR Biscuit Industry 23, , , Annual Growth 15.0% 15.0% 15.0% OLYMPIC Biscuit 3, , , Annual Growth 55.5% 19.7% 36.4% Market Share 15.0% 19.9% 20.8% Source: Company Annual Report & Sector Assessment Survey conducted by Matrix Consulting Ltd., 2011 retained the top position in the last couple of years. However, the second position has hovered around a number of companies in the last few years. Al Amin Bread & Biscuits Ltd. used to rank second in The company has recently resumed its operations after remaining inactive for some time during The brief demise of a strong competitor like Al-Amin certainly helped OLYMPIC to enhance its market share in the last two years. However, we may see the level of competition going up in coming years, given the recent resumption of Al-Amin s operations. The other strong players in the industry are Pran Food Ltd., Nabisco Bread & Biscuit Ltd., Globe Biscuit & Dairy Milk Ltd., Romania Foods & Beverages Ltd. etc. GLAXOSMITH is a new player in the automated biscuit industry. The company sells Horlicks biscuits, which are manufactured by OLYMPIC. GlaxoSmithKline Bangladesh (DSE:GLAXOSMITH) has recently entered into the automated biscuit industry by leveraging its strong brand name Horlicks. The company launched its Horlicks biscuit and cookies in market in early Notable here, GLAXOSMITH does not manufacture Horlicks biscuits in its own factories rather outsources the entire production to OLYMPIC. The Horlicks brand has gained much popularity within the first year of launching. Informal Players in the industry Outside the automated biscuit industry, a number of small bakeries and shops are also involved in the manufacturing of biscuits. These informal players sell non-branded biscuits in market along with other fast food items. In addition to the small bakeries, there are also many small entrepreneurs which supply home -made biscuits to the retail stores. Business Segments of Olympic Industries: 1. Biscuit & Confectionery OLYMPIC commenced operating in the biscuit segment in1996; since then, it has registered strong growth in its top-line. The revenue from biscuit has been growing at a CAGR of 47.6% in the last five years. With such commendable growth, the biscuit line now contributes about 91.7% of the total company revenue. OLYMPIC better recognized the market potential of this segment relative to its competitors and has been able to implement the right strategic priorities to take the full advantage, being the most organized industry player. Product Mix Over the years, the company has expanded its product portfolio from primarily glucose biscuit to a diversified product mix (including confectionery items). At present, it produces six types of biscuit under 17 different brands. Among the wide range of biscuits it offers, Energy Plus and Tip are among the most popular brands in the country. These two flagship brands together account for about 35.0% of the total company revenue. Energy Plus - the largest selling glucose biscuit in the country - alone provides % of the total company revenue. However the company will be launching country s best sandwiching line in 2014 with Peters sandwiching machinery coming from Peerless Food 5

6 Equipment- a globally renowned supplier, thereby targeting the premium segment of the market with better ASP and margin. The other production line to be added in 2014 will be a multi-purpose line aiming to cater to increased demand for the existing products. Production & Capacity OLYMPIC is currently operating with five biscuit lines across two production facilities. The capacity for biscuit line has grown at a CAGR of 38.6% over the past five years. Even after multiple times expansion in last five years, the company is heading toward full capacity. OLYMPIC is currently operating with five biscuit lines across two production facilities. The company undertakes an ongoing capacity expansion program to satisfy the growing demand for its biscuits. The capacity for biscuit line has grown at a CAGR of 38.6% over the past five years. Even after multiple times expansion in last five years, the company is heading toward full capacity in biscuit segment. The capacity utilization of the segment already reached 70.0% in 2013 after an Chart 06: Production (MT) and Capacity (MT) of Biscuit & Confectionery 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10, PRODUCTION (MT) CAPACITY (MT) Source: Company Annual Report, addition of 49.3% capacity in that year. In 2013, the company produced 50.9 thousand MT biscuits (including the outsourced 3.2 thousand MT) against annual capacity of 73.7 thousand MT. OLYMPIC started producing Horlicks biscuit for GLAXOSMITH in Supply Agreement with GlaxoSmithKline Bangladesh Ltd. OLYMPIC produces Horlicks biscuits for GlaxoSmithKline Bangladesh (a listed company). The company has been outsourcing biscuits from Oriental Bakery for the last six years since late OLYMPIC has entered in a supply agreement with GlaxoSmithKline Bangladesh (DSE: GLAXOSMITH) in November Under the contract, OLYMPIC produces Horlicks brand biscuits & cookies and supplies to GLAXOSMITH and its affiliates. OLYMPIC has to reserve some of its capacity for GLAXOSMITH because it produces Horlicks biscuits in its own factory premises. The biscuits were launched in early Outsourcing to Third Party OLYMPIC outsources some of its biscuit items to a third party named Oriental Bakery and Biscuit Industries Limited, Chittagong. OLYMPIC is tied up with Oriental Bakery for the last five years since Table 03: Biscuit Outsourced to Oriental Bakery Ltd Biscuit Outsourced (MT) , , ,227.0 As a % of Total Production 5.2% 1.9% 1.5% 9.0% 9.1% 6.3% Source: Company Annual Report,

7 Chart 07: Quantity Sold & Price (BDT) of Biscuit & Confectionery 60,000 50,000 40,000 30,000 20,000 10, Quantity sold in MT (LHS) price per MT (RHS) 130, ,000 70,000 40,000 10,000 Table 04: Growth numbers in biscuit & confectionery Revenue (BDT mn) , , , , , ,502.2 Gross profit (BDT mn) Operating profit (BDT mn) Revenue growth 27.4% 56.7% 44.4% 19.4% 62.2% 55.5% 19.7% Volume growth 24.7% 20.6% 35.6% 27.8% 33.8% 39.0% 20.0% Price growth 2.2% 29.9% 6.5% -6.6% 21.3% 11.9% -0.3% Gross profit growth 19.5% 59.1% 99.3% 31.4% 41.3% 52.5% 24.5% Operating profit growth 22.7% 28.4% 261.8% 24.6% 27.2% 84.2% 31.1% Source: Company Annual Report Source: Company Annual Report, The biscuit line has posted a staggering top-line CAGR of 41.9% over the last six years. The company has been able to pass through cost inflation to its customers. Revenue Growth The biscuit segment has posted an impressive topline CAGR of 41.9% over the last six years. Much of the growth is driven by volume growth which has grown at an annual rate of 29.3% in the past six years. During the same period, the annual growth in average price per MT of OLYMPIC s biscuit was 9.8% against its direct cost per MT growth of 8.1% and annual CPI food inflation of 9.5%. Table 05: Price Growth of Olympic Biscuit against Direct Cost & CPI Inflation Fiscal Year CPI Food Inflation (12-month Avg) Growth in Direct Cost/ Ton Growth in Price/MT (Olympic Biscuit) % 3.7% 2.2% % 29.5% 29.9% % -3.2% 6.5% % -9.9% -6.6% % 27.7% 21.3% % 12.6% 11.9% % -1.6% -0.3% Source: Company Annual Report , Bangladesh Bank Thus, the company has been able to pass through cost inflation to its customers, sometimes with a time-lag though. In the last couple of years, the growth in OLYMPIC s biscuit has surpassed the overall industry growth. Since 2009, biscuit segment of the company grew by 37.8% per year as compared to 15.0% annual growth of the overall industry. According to the industry experts, the biscuit industry is likely to post 15.0% to 20.0% volume growth in the next five years. We expect that OLYMPIC will continue to grow at higher than industry average rate in the next five years. Raw-material The main raw-materials for biscuit segment are essential food commodities e,g. wheat, sugar, palm oil. The raw-material cost accounts for 89.0% of the company's COGS. The main raw-materials for biscuit production are wheat, sugar, vegetable oil, fat, flavor etc. Most of the ingredients are sourced locally except flavors and some packaging materials which are actually imported. However, the other ingredients (e.g. wheat, sugar, vegetable oil etc.) are procured domestically but from the local importers who import these essential food commodities from foreign countries. This implies that a significant portion of COGS (raw material costs account for about 89.0% of total COGS) is indirectly exposed to the exchange rate risk and commodity price fluctuations in the international market. Besides, OLYMPIC also imports wrappers (packaging materials) and flavors to deliver better customer experience. The price series of three global food commodities - wheat, palm oil (vegetable oil) and sugar are shown below. In general, these three items account for the major portion of raw-materials used in biscuit production - wheat (~65%), sugar (~15%) and vegetable oil (~15%). 7

8 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Chart 08 : Wheat prices (USD/ MT) Wheat Source: World Bank, January 2014 Chart 09: Palm oil prices (USD/ MT) The global food commodity prices are currently facing downward pressure Palm oil Source: World Bank, January 2014 Chart 10: Sugar - White #5 (Liffe) (USD/ MT) Sugar - White #5 (LIFFE) Source: Capital IQ, February 2014 Distribution Network The company s products are distributed to more than 600,000 outlets across the country. For distribution and marketing of its consumer products, OLYMPIC employs a field force of 1,000 people who hands over the company s products to more than 300 distributors nationwide. They ensure that the products reach both rural and urban areas of the country, given the presence for local biscuits is more intense in rural areas and semi urban areas. The products of OLYMPIC sell in over 600,000 outlets across the country. 8

9 Chart 11: Distribution network of Olympic Industries Ltd. Oriental Bakery OLYMPIC Field Force Dealers Retailers Supplies about 9.0% of total biscuits to Olympic Supplies its own biscuits to field force and Horlicks biscuits to GSK Field force of 1000 people who hand over goods to dealers 300 dealers of Olympic are located all over the country Dealers supply the products to ~ 600 thousand retail ends GLAXOSMITH Supplies horlicks biscuits to dealers and retailers Source: BRAC EPL Research, Company Annual Report, 2013 Margins The gross margin averaged 24.3% over the last seven years and remained at or above 25.0% in all years except in 2007 and The gross margin averaged 24.3% over the last seven years and remained at or above 25.0% in all years except in 2007 and During these two years, the margin dropped below 20.0% due to inflation in essential commodities - wheat, flour, palm oil etc. - which are the main raw-materials for biscuit. In the last three years, the company has maintained very stable gross margin, hovering around 25.0%. The operating margin expanded from 6.2% in 2007 to 13.4% in 2013 as the company achieved economies of scale with increased capacity utilization and triggered the efficiency curve. The improvement in operating margin also flowed into net margin which went up from 5.3% in 2007 to 13.7% in Table 06: Margins of Biscuit & Confectionery Gross Profit Margin 19.0% 19.2% 26.6% 29.2% 25.5% 25.0% 26.0% Net Profit Margin 5.3% 4.0% 10.8% 12.0% 9.8% 12.0% 13.7% Operating Profit Margin 6.2% 5.1% 12.7% 13.2% 10.3% 12.3% 13.4% Source: Company Annual Report, Expansion Plan The company plans to install two additional lines (line 6 & 7) in the biscuit segment in 2014 at an expected cost of BDT million. The company plans to install two additional lines (line 6 & 7) in the biscuit segment in 2014 at an expected cost of BDT million. The CAPEX will be partially financed through debt worth BDT million while the rest will be financed from the internal funds. The new lines are expected to start commercial production in March 2014 and will together add 30,000 tons per annum to its existing capacity. With these two lines, the company will not only be able to cater to increased demand for the existing products but also be launching cream sandwich biscuits targeting the premium market-segment with better ASP and margin. 2. Dry Cell Battery At present, the company produces three sizes of dry sell battery - UM-1, UM-3 and UM-4 and holds the second position in the battery industry. The company has been involved in battery manufacturing for more than three decades. In fact, OLYMPIC started its commercial operation with battery and then later diversified its product portfolio with other consumer goods like biscuit and ball pen. At present, the company produces three sizes of dry sell battery - UM-1, UM-3 and UM-4 and holds the second position in the battery industry (after Quasem Drycells (DSE:QSMDRYCELL) which is currently the market leader). The battery segment posted BDT million worth revenue in 2013 and contributed 4.6% to the company s topline. Six years ago, the contribution from battery line was much higher - about 40.0% of total revenue. Recently, in 9

10 an attempt to revamp performance of the battery segment, the company partners with the leading local consumer electronics manufacturer- R. B. Group to supply UM-3 and UM-4 batteries for their Walton branded durables remote controls. Likely implications of such partnership include better topline growth and margin expansion of the battery operation due to a shift to a B2B business model. Production & Capacity The company produced 46.5 million pieces battery in 2013, against an annual capacity of million pieces. Since capacity utilization is below 50.0% as of 2013, the company is less likely to go for CAPEX in coming years. Chart 12: Production (MT) and Capacity (MT) of Dry Cell Battery 140,000, ,000, ,000,000 80,000,000 60,000,000 40,000,000 20,000, PRODUCTION (MT) CAPACITY (MT) Source: Company Annual Report, Although demand for UM-1 battery is shrinking, revenue from the other two batteries - UM-3 and UM-4 - are posting decent growth in the recent years. The capacity utilization remained low from 2007 to 2010, largely due to the poor demand for UM-1 battery. The utilization rate averaged only 24.4% during the period. After the launch of UM-4 battery in 2010, the utilization picked up from 23.8% in 2009 to 50.0% in Although demand for UM-1 battery is shrinking day by day, revenue from the other two batteries - UM-3 and UM-4 - are posting decent growth in the recent years. The company also added capacity twice in last three years seeing growing demand for UM-3 and UM-4 batteries. Supply Agreement with R.B. Group Chart 13:Quantity Sold & Price of Dry Cell Battery 49,000,000 42,000,000 35,000,000 28,000,000 21,000,000 14,000,000 7,000, Quantity sold in Psc (LHS) Source: Company Annual Report, 2013 Price per unit (RHS) In recent time, the company has entered into of a Tripartite Agreement with R.B. Group of Companies Ltd. and its agent Mr. Mohammod Sirajul Islam. OLYMPIC is to manufacture Walton Brand UM-3 (R-6), Size-AA and UM-4 (R- 03), Size-AAA, 1.5V, Mercury and Cadmium free Drycell Battery in its factory as per requirement of the R.B. Group and will supply those to them or to their appointed agent against approved rates. The agreement will initially remain valid till December 31, 2014 given a further provision for renewal under mutually agreed terms. Following this strategic partnership with Walton (the local giant in consumer durable manufacturing), the utilization and margins of OLYMPIC s battery segment may improve. Revenue Growth The topline growth in battery segment was sluggish over the past years. The battery revenue grew at only 3.8% per annum over the last six years. The company suffered de-growth in its revenue from 2007 to The period was challenging for the overall battery industry, particularly so for the UM-1 battery. The demand for UM-1 battery (which are mostly used in torch lights) almost died in the market for a number of reasons. First, the availability of electricity in 10

11 Table 07: Growth numbers in Dry Cell Battery Revenue (BDT mn) Gross profit (BDT mn) Operating profit (BDT mn) Revenue growth -36.4% -19.4% -15.8% 0.4% 25.1% 22.4% 20.0% Volume growth -48.0% -16.5% -8.8% 2.4% 28.2% 29.0% 18.4% Price growth 22.2% -3.5% -7.6% -1.9% -2.4% -5.1% 1.3% Gross profit growth -49.4% 19.6% -8.9% 11.8% 25.6% 22.6% 26.0% Operating profit growth -71.6% 186.9% -22.2% 42.3% 61.1% -5.2% 69.2% Source: Company Annual Report, rural areas reduced the use of torch lights. The second reason was easy accessibility of rechargeable torch lights (which do not require batteries). Third, the growing customer sophistication together with increasing popularity of cell phones with built-in torch lights also dampened the demand for torch lights. On the backdrop of falling demand, the company s total battery revenue declined 36.4% in The sale of UM-1 battery dropped by 50.0% in the same year. The battery segment later recovered in 2010, after the company launched UM-4 size batteries- which are commonly used in remote controls and toys. At present, the major portion of battery revenue comes from UM-3 and UM-4 category batteries. Despite the slowdown in demand for UM-1 size battery, the segment managed to post commendable topline growth in the recent years. The growth was above 20.0% per annum in the last three years. Margin Though the battery line did not see much growth over the years, but the margins improved significantly in last six years. Though the battery line did not see much growth over the years, but the margins improved significantly in last six years. The steady decline in rawmaterial price has helped the gross margin increase from 15.1% in 2007 to 28.5% in The operating margin was not very stable in the last six years. One of the reasons behind the volatility was higher marketing expenses. OLYMPIC used to undertake aggressive marketing and promotional activities to recover its battery sales. Table 08: Margins of Dry Cell Battery Column Gross Profit Margin 15.1% 22.4% 24.2% 27.0% 27.1% 27.1% 28.5% Net Profit Margin 1.5% 7.2% 5.8% 9.6% 13.3% 10.5% 15.4% Operating Profit Margin 2.3% 8.2% 7.6% 10.8% 13.9% 10.7% 15.1% Source: Company Annual Report, Ball Pen OLYMPIC took over the ballpoint pen manufacturing business following the acquisition of Tripti Industries Limited (a former listed company) in The production of ballpoint pen commenced in The company now manufactures seven brands of pen to meet various demand of the market. The company expanded its ball pen capacity by 47.6% in 2013, after utilization rate hit 90.6% in the previous year. Production & Capacity Following 47.6% capacity expansion in the last year, utilization rate in ball pen segment dropped to 56.9% in June 2013 compared to 90.6% rate in the previous year. The company produced 84.0 million pieces of pen against its annual capacity of million pens. 11

12 Chart 14: Production (MT) and Capacity (MT) of Ball pen 160,000, ,000, ,000, ,000,000 80,000,000 60,000,000 40,000,000 20,000, PRODUCTION (MT) Source: Company Annual Report, CAPACITY (MT) Revenue Growth Chart 15:Quantity Sold & Price of Ball Pen 100,000, ,000, ,000, ,000, ,000, Quantity sold in Psc (LHS) Price per unit (RHS) Source: Company Annual Report, Ball pen accounted for 3.7% of total revenue in The segment has been growing at 22.1% CAGR in revenue over the last four years. The company incurred a net loss of BDT 20.0 million and posted a negative gross margin of 2.7% in the inception year for the ball-pen segment. The business soon returned to profitability from 2010 onwards. In 2013, the company reported revenue worth BDT million, which was 11.6% lower than that of the last year. The dip in the revenue resulted from 9.1% fall in volume and 2.7% decline in average price per pen. Table 09:Growth numbers in ball pen Revenue (BDT mn) Gross profit (BDT mn) Operating profit (BDT mn) Revenue growth 5.7% 34.3% 77.3% -11.6% Volume growth 5.6% 38.6% 61.8% -9.1% Price growth 0.1% -3.1% 9.6% -2.7% Gross profit growth NA 5.2% 40.0% 30.2% Operating profit growth NA NA NA 288.6% Source: Company Annual Report, Margin Ball pen is the lowest margin product for OLYMPIC compared to other segments - biscuit and battery which provide margins roughly 25.0% and 27.0% respectively. The margins of ball pen are not very consistent. The gross margin has averaged 13.5% in the last four years, ranging from 10.1% to 16.3%. Ball pen is the low margin product for OLYMPIC compared to other segments - biscuit and battery which provide margins roughly 25.0% and 27.0% respectively. Margins especially operating and net margin improved significantly over the years and reached the highest in Table 10: Margins of Ball Pen Gross Profit Margin -2.7% 16.3% 12.7% 10.1% 14.8% Net Profit Margin -16.9% 0.2% 0.2% 0.5% 3.5% Operating Profit Margin -15.0% 1.3% -0.2% 0.7% 3.3% EBIT Margin -14.7% 1.7% 0.6% 1.8% 4.9% Source: 12

13 Table 11: Growth numbers of OLYMPIC Source: Company Annual Report, Historical performance and outlook of the consolidated operation 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014E 2015E 2016E Revenue 1, , , , , , , , , ,564.0 Biscuit , , , , , , , ,778.0 Ball Pen Battery Gross Profit , , , , ,965.9 Operating Profit ,336 1, ,167.0 Earnings ,001 1, ,607.0 EBITDA , , , , Revenue growth momentum to continue, driven by biscuit segment s expansion We expect that the company s biscuit revenues will grow by about 19.2% annually over the next five years in line with the industry growth of 15.0%. OLYMPIC has achieved a top-line CAGR of 37.2% in the last five years. The biscuit segment, which is the largest contributor to company s revenue, is mainly driving the growth of the company. We expect that OLYMPIC will achieve 32.0% revenue growth in biscuit segment in June 2014, given 40.7% capacity has been added during the year. We also expect that the company s biscuit revenues will grow by about 19.2% annually over the next five years, more than the industry growth of 15.0%. Overall we believe that OLYMPIC s ongoing CAPEX program as well as the industry s decent growth will continue to drive the company s topline. We expect that the company s dependence on biscuit segment will increase from 91.7% in 2013 to 94.2% in With 20.0% to 22.0% market share, OLYMPIC has marked its strong presence in the local biscuit industry. In addition to local market, the company also looks forward to export sales and has recently (in 2013) started exporting on a small scale. Moreover, OLYMPIC s deal with GLAXOSMITH to manufacture Horlicks biscuit and cookies will further add to the growth of the company. With regards to the non-biscuit segments, we expect that revenue growth from battery and ball pen will continue to slow down in the coming years. As a result, the contribution from these two segments is likely to decline going forward. Chart 16: Revenue Breakdown 101% 96% We expect that the company s dependence on biscuit segment will increase from 91.7% in 2013 to 94.2% in % 86% 81% 76% 2009A 2010A 2011A 2012A 2013A 2014E 2015E 2016E Biscuit Ball Pen Battery Source: Company Annual Report,

14 Table 12: Margins of OLYMPIC 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E Gross Margin 18.0% 19.7% 24.7% 28.4% 25.0% 24.3% 25.7% 27.8% 29.2% 29.2% 29.3% 29.3% Biscuit & Confectionery 19.0% 19.2% 26.6% 29.2% 25.5% 25.0% 26.0% 28.2% 29.6% 29.6% 29.6% 29.6% Battery 15.1% 22.4% 24.2% 27.0% 27.1% 27.1% 28.5% 28.5% 28.5% 28.5% 28.5% 28.5% Ball Pen Point -2.7% 16.3% 12.7% 10.1% 14.8% 14.8% 14.8% 14.8% 14.8% 14.8% Operating Margin 5.0% 5.3% 10.2% 11.9% 9.6% 11.1% 12.5% 14.4% 15.8% 16.0% 15.9% 16.0% Net Margin 3.1% 3.1% 6.1% 7.8% 6.6% 7.7% 8.7% 10.8% 11.8% 11.8% 11.8% 11.8% EBITDA Margin 7.2% 6.9% 12.5% 14.3% 11.4% 12.6% 14.5% 17.2% 18.3% 18.2% 18.0% 18.3% Source: Company Annual Report, Gross margin to improve due to commodity market weakness and scale Chart: 17: World Bank Commodities Price Forecast Forecasted price of wheat (USD/MT) Wheat, US, HRW Forecasted price of palm oil (USD/MT) Palm oil Forecasted price of sugar (USD/kg) Source: World Bank, Website Sugar, World The company has maintained stable gross margin (around 25.0%) over the past years except in 2007, 2008 and 2010 when the margin dipped significantly as the international commodity market rallied strongly in those years when the company could not pass -through the higher cost to the end-consumers immediately. Subsequently, the company raised product prices (biscuit price per ton was increased by 33% during ), thereby driving mean-reversion of the margins. The battery segment, contributing 5% of the total revenue, generates the highest gross margin of 28.5% (among the three lines). Going forward, we expect the margin will remain stable but the segment s contribution to total revenue will drop to % by 2017, exerting slight pressure to the company s overall gross margin. Ball pen is the lowest margin segment for the company. Although the margin remained unstable during the past years, we assumed a constant margin of 14.8% for ball pen in the years to come. We believe that in the best case, the partnership with R. B. Group will drive operating margin improvement for the battery segment given lower marketing expenses given the bulk business model. With regards to biscuit & confectionery (the largest revenue generating segment), we expect the company s gross margin will expand from 25.7% in 2013 to 29.6% in 2015 as we assume that the global commodity market will remain weak, thereby driving down raw material cost per ton for the biscuit segment. Based on World Bank s recent publication (Jan 2014) on global commodity outlook, the overall food commodities are projected to decline by a further 3.7% in CY The largest declines among food commodities will be in the grain group with maize, rice and wheat down by 13.0%, 9.0% and 4.0% in Thus OLYMPIC will be benefitted from the declining prices in grain sector as wheat and maize are one of the major ingredients for biscuit production. (The World Bank s price forecasts for wheat, palm oil and sugar are shown in the charts). Accordingly, the company saw a decline of 37.4% in the finished goods cost per unit. Hence, we estimate that gross margin will improve by total 3.5% until FY 2015 from the base of 25.7% in FY Notable here, gross margin has already improved by 1.4% in FY 2013 and by another 1.3% in the first half of the current year (FY 2014). The recent diversification efforts will also slowly drive the margin in the years to come. The company has recently launched a few confectionery items e.g. dry cake, éclair, hard candy etc. and will also roll out cream sandwich biscuit in the market soon. All these indicate OLYMPIC s efforts to diversify its mix with higher margin products. 14

15 EBITDA margin will improve by 370 bps in next two years, on a larger base Operating margin will also increase going forward because of the improved gross margin as well as economies. Operating margin will also increase going forward because of the improved gross margin as well as economies of scale. General administration expense to sales is likely to go down with higher sales volume. We projected it will decrease from 2.5% in 2013 to 2.3% in However, selling and distribution expense will increase in line with or slightly higher than sales revenue. Overall, we estimate that EBIT and EBITDA margin will improve by 3.3% and 3.7% respectively during next two years until FY 2015 when the EBITDA margin will exceed 18% mark. Net margin improvement will drive 63% earnings growth in 2014 Net profit margin will improve from 8.7% in FY 2013 to 11.8% in FY 2015 to drive a 63% and 31% earnings growth for 2014 and 2015 respectively. The net margin is also projected to improve in line with the company s gross and operating margins. The company also earns significant financial income from its cash reserves which also contribute to higher net margin. OLYMPIC is a cash-rich company and has build up significant cash balance over the years owing to low pay-out ratio. Cash & cash equivalent stood at BDT 1,212.0 million as on June 2013, comprising an impressive 33.0% of the total company assets. Most of the cash balance is invested in Fixed Deposits from which OLYMPIC enjoys financial income. Such substantial amount of cash balance also suggests that the company can easily finance its upcoming CAPEX (with its cash balance) without depending too much on debt. Net profit margin will improve from 8.7% in FY 2013 to 11.8% in FY 2015 to drive a 63% and 31% earnings growth for 2014 and 2015 respectively. In the first half of FY 2014, earnings increased by 41%, but the growth will be better in the later half of the year since the additional capacity will come online in the 3Q along with easing raw material related cost pressure. Investment Positives Market leader in a growing industry Private consumption accounts for 77% of the GDP in Bangladesh. With young demography, rising per capita income and dual-income family, demand for packaged food is increasing at above GDP growth rate. We estimated that in the next five years, biscuit demand will grow in the range of 15-20% annually versus a nominal GDP growth rate of 13-14%. OLYMPIC s biscuit segment s revenue will grow by 21% in the next five years to maintain a market leadership with 20-22% volume market share. To better cater to outstanding demand, OLYMPIC has also diversified its product mix with wide variety and different flavors of biscuit & confectionery items. The company has rolled out three new items - dry cake, hard boil candy (new flavors) and éclair- in the recent years. Few more (e.g. cream sandwich biscuit) are in the pipeline and will be launched shortly within the next year. Superior management, strong brand-image, endmile distribution network, strong relationship with key suppliers and partners will drive OLYMPIC s greater bargaining power in the value chain, thereby driving its superior business results. Falling input prices will drive significant and sustainable margin improvement The company's gross margin may see significant expansion in the coming years if the global food commodities continue their weakness with further declining prices. Given no sooner recovery of the global commodity market, OLYMPIC may enjoy a higher margin of 29.6% by 2015 from the existing 25.7%. We expect such margin improvement to sustain given the company s strong competitive position and ability to pass-through cost inflation. 15

16 Strong balance sheet With 33% of the total assets being held as cash & equivalent, OLYMPIC s balance sheet is one of the strongest among the listed local manufacturing companies. Its debt to asset ratio also declined from 25.3% in 2007 to 12.9% in These reflect company s superior working capital management and greater headroom for financing opportunistic investments and/ or extra-ordinary dividend payment to shareholders. Attractive valuation offers upside potential With estimated earnings growth of 63% and 31% in next two years, the stock is traded at 14x EV/EBITDA and 23x forward earnings, thereby not reflecting the long-term growth potential of the company. Our estimated target price of BDT 260 implies an upside potential of 36% from current level. Risk, Challenges & Negatives Withdrawal/reduction of taxes on imported biscuits Due to a 200% total tax incidence on the imported biscuits, local biscuit manufacturers currently face limited competition from foreign players. We have seen a 40% cut of the Supplementary Duty (SD) for imported (sweet) biscuit in the last budget. Further reduction of taxes on imported biscuit may critically impact revenue growth and margins of local players including OLYMPIC. However OLYMPIC has a strong foothold in the local market with very good brand image and product mix; hence, we don t expect a dramatic business decline for OLYMPIC in case the import tax is withdrawn. Moreover, recently OLYMPIC has started export which indicates the company s international competitiveness. Input price reversion may hurt margin and growth Raw material (RM) costs account for about 89.0% of total COGS. Essential food commodities are the key ingredients for biscuits and account for a significant portion of RM costs. Any sharp increase in the prices of wheat, sugar and palm oil, in contrast to our base case assumptions, will hurt gross margin and negatively affect profitability of the company. Though we do not expect the global commodity market to recover any sooner, but if it does it will squeeze the margin. Political unrest may disrupt business potential We have seen continuous political unrest in 2013, not unlikely for an election year, which disrupts supply chain management and general economic activity, thereby dampening consumers income and demand for packaged food products including biscuit & confectionary items. Though the situation improved post-election on January 5 th, return of political uncertainties will impair OLYMPIC s short-to-mid term business prospect. Asset impairment may hurt a particular year s bottom-line The oil refining and hydrogenation unit will remain dormant until the company finds a counterparty to divest related assets. If the estimated market value of plant and machinery falls below the carrying value in the meantime, impairment charge might have to be booked in the income statement which may hurt a particular year s bottom-line leaving the long-term cash generating ability of the company intact. 16