ACL Cables PLC (ACL) CASE FOR INVESTMENT. Earnings Review BUY Rs December 2015

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1 1-Oct-13 1-Jan-14 1-Apr-14 1-Jul-14 1-Oct-14 1-Jan-15 1-Apr-15 1-Jul-15 1-Oct-15 Price (LKR) 2-Jan-14 2-Apr-14 2-Jul-14 2-Oct-14 2-Jan-15 2-Apr-15 2-Jul-15 2-Oct-15 Axis Title Volume (') ACL Cables PLC (ACL) Earnings Review BUY Rs.12. December 215 CASE FOR INVESTMENT ACL is the largest cable manufacture in the country which accounts for 7% market share of the total cable market. The company s innovative and high quality product range supports ACL to dominate the local cable market. The construction sector is expected to grow at a CAGR of 16% in the next 2 years; underpinned by declining interest rates and low inflation. The favourable economic environment setting in with low interest rates and economic development will eventually increase the housing construction activities. Declining global copper prices will significantly improve profit margins of ACL. Improving demand for the electricity will increase the demand for cables. Re-gaining of GSP plus scheme will enable ACL to improve their top line with the competitive advantage. Acquisition of the pure renewable energy provider Resus Energy will reinforce the top line and profit margins of the company. Investor Guide FY13 FY14 FY16 FY17 Revenue (LKR mn) 11,327 11,447 14,427 16,88 19,845 YoY Growth 1% 1% 26% 17% 18% Net Profit (LKR mn) ,263 1,696 YoY Growth 9% -17% 95% 47% 34% EBIT (LKR mn) 1, ,597 2,313 2,68 Growth 7% -11% 64% 45% 13% Gross margin 16% 17% 18% 22% 21% Operating margin 1% 8% 11% 14% 13% Net margin 5% 4% 6% 8% 9% Assets (LKR mn) 1,99 12,48 16,68 17,217 19,185 YoY Growth 14% 1% 33% 7% 11% Debt/Equity 53% 51% 47% 45% 4% ROE 9% 7% 12% 15% 17% ROA 5% 4% 5% 7% 9% MPS (LKR) EPS (LKR) BVPS (LKR) PE (x) PBV (x) DPS (LKR) Dividend payout 11% 14% 7% 9% 7% Dividend yield 2% 2% 1% 2% 2% A Member of the Colombo Stock Exchange Key Data Foreign Broker-Dealer of Maybank Kim Eng Securities USA Inc. Sector Foreign Broker-Dealer Manufacturing of CSE ticker ACL.N Maybank Kim Eng Securities USA Inc. Shares in issue 6mn Public holding 37.4% 52wk High - Low LKR Avg. daily volume 7,27 Current MPS LKR 12. Target price LKR Upside 18% Market Cap Market Cap LKR 7.bn USD.1bn Major Shareholders 3 th Sep 215 Mr. U. G. Madanayake 38.13% Mr. Suren Madanayake 22.21% Employees Provident Fund 4.93% Govindasami Ramanan 3.98% Deutsche Bank AG- National Equity Fund 1.77% Top 2 shareholders 83.1% Foreign ownership* 1.5% 8, 7, 6, 5, 4, 3, 2, 1, Relative Share Performance ASI ACL Price Volume Grapgh Volume Price ACL Page 1

2 (billion kwh) E 216E ACL was incorporated in 1962, as Associated Cables Ltd under Associated Motorways Ltd (AMW) as a Subsidiary for the manufacture of electric cables becoming the first electric manufacturing company in Sri Lanka. ACL Group is the largest cable manufacture in the country which is accounted for 7% of the cable market. The company started their business with technical assistance from Mitsui of Japan, providing cables to fulfil the infrastructure development of the country. In 198 the Company moved out of AMW Group. With the acquisition of technology from Alind of India, Aluminium Conductor plant was set up to jointly manufacture and supply 14MT of AAC Conductors to Ceylon Electricity Board and ACSR. During July 212, ACL began operations in the country s first ever Copper rod manufacturing plant which help to control the cost of input in cable production and bring value addition to the products. During 213, ACL incorporated ACL Electric (Pvt) Ltd to manufacture switches and sockets under ACL brand. Further enhancing the product portfolio ACL introduced a fire resistance circuit integrity power cable for the first time in local market. Today, ACL is the most required brand of cables in Sri Lanka, having supplied 8% the requirements of duty free projects involving overseas investors approved by the Board of Investment. ACL diversified their business in 215 by acquiring 35% stake of Hamas Power Plc, a pure renewable energy company in Sri Lanka and renamed the company as Resus Energy Plc. In 1995 ACL established their foot prints in Bangladesh and Maldives. Accordingly the company export their products to markets include India, New Zealand, Australia, UK, Dominican Republic and few African countries including Tanzania. ACL exports approximately 15% of the total production Construction sector growth at constant (22) prices 3% 25% 2% 15% 1% 5% % ACL was awarded ISO 92 Certificate in the year Accordingly the company was awarded from ISO 91 and ISO 141 for their quality standards and systems. Sector Review Sri Lanka economy grew at a pace of 7.4% in last year. However, with the changes in economic policies and political shakiness occurred during the year amid the government change, resulted to revise the GDP growth forecasted by World Bank for year 215 to 6.9% from 7.5% projected earlier. Accordingly Asian Development Bank projected a growth rate of 6.3% for year 215 while IMF forecasted a growth rate of 6.5% which was below the 7% growth rate projected earlier National electricity demand and production capacity Nonetheless, the Sri Lankan construction industry last year continued to grow at 2.2% on the back of declining interest rates and low inflation, the industrial sector continued to perform well which was the second largest contributor to the GDP with 32.6% in the second quarter of 215 while construction subsector contributed 9.5%. The construction sector is Sri Lanka s one of the booming segments in last few years, which also resulted to record favourable earnings in related industries. Construction sector grew at a CAGR of 21% in last 4 years and expected to grow at a CAGR of 16% in Further, favourable prospects of regaining the GSP Plus will affected positively to the export sector as well as to the country s economy as a whole. The depreciation of the Sri Lankan Rupee is also a major concern as it can boost the country s export demand to enjoy the competitive advantage. Consumption Production ACL Page 2

3 USD/MT Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 USD/MT TWh MW 45 Econometric Demand Forecast 8% 8 Projected future development of NCRE 4 7% % 5% 4% 3% 2% 1% % Demand (TWh) Growth % Cumulative Mini hydro addition Cumulative Biomass addition Cumulative Wind addition Cumulative Solar addition Source -: Ceylon Electricity Board Long Term Generation Expansion Copper price outlook Copper prices slumped more than 25% in November declining below the physiological level of USD 5,/MT Copper prices significantly declined during the year by hitting a six and a half year low of USD 4,59/MT in mid-november owing to rising stocks and weak demand in the market, but bounced back to close the month at USD 4,799.9/MT. This lower demand was mainly driven by the economy slowdown in China, world second largest economy which eventually led to a slowdown in china s construction sector. However, the World Bank and other analysts released their forecasts on copper prices in October estimating that the prices will move upwards slightly in the future. 8, 7, 6, 5, 4, 3, 2, 1, Copper prices declined 24% within a year 6% 4% 2% % -2% -4% -6% -8% -1% -12% Copper price reduction & benefit World Bank Copper price outlook USD November 214 November % USD 6,712.85/MT USD 4,799.9/MT 1 USD = USD = LKR , 7, 6, 5, 5, LKR LKR 879,45/MT -22% LKR 687,394/MT 4, 3, 2, Saving LKR 192,56/MT due to price reduction Source -: World Bank Commodity Forecast Price data October 215 ACL Page 3

4 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 LKR mn. Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 USD/MT 7, 6,8 6,6 6,4 6,2 6, 5,8 5,6 5,4 5, Copper price vs. gross margin 14% Copper price 17% 15% 25% 22% Gross Margin Quarterly profit movement 3% 25% 2% 15% 1% 5% % 5% 4% 3% 2% 1% % -1% Quarter Performance Net earnings up by 65%YoY to LKR 316mn on increase in other income, decline in cost of sales and operating expenses in 2QFY16 Net profit for the quarter increased notably by 65%YoY to LKR 316mn compared to LKR 192mn recorded in 2Q. This was mainly driven by the increase in other income and decline in cost of sales, administrative expenses and net finance cost. Earnings inclined by 159%YoY to LKR 66mn in 1HFY16. Copper is the main component use for production process followed by Aluminium and Metal. Copper accounts for approximately 6%-65% of the production cost. Therefore, the reduction in the global copper price has favourably affected the cost of sales where it reduced by 18%YoY in 2QFY16 to LKR 2.5bn from 3.1bn reported in 2Q. Copper price has declined more than 1% during the quarter from USD 5,833.1/MT to USD 5,217.25/MT. Revenue was down by 1%YoY to LKR 3.3bn from LKR 3.7bn in 2QFY16 while marginally up by 3%YoY to LKR 6.7bn in 1HFY16 due to slow down in the construction sector. The business segments namely manufacturing PVC Compound and other segment was down by 15%YoY to LKR 39bn and 36%YoY to LKR 23mn respectively in 1HFY16 while the core business segment, manufacturing cables increased marginally by 5%YoY to LKR 6.4bn. Further, notable decline in export sales by 33%YoY to LKR 837mn in 1HFY16 also affected adversely to the business segments. Other income rose notably during the quarter significantly by 194% to LKR 11mn from LKR 4mn. PAT-E QoQ Growth ACL managed to reduce the net finance costs from 83mn to 78mn; down by 6%. 2,5 2, 1,5 1, 5 World Aluminium Price movement 8% 6% 4% 2% % -2% -4% -6% -8% -1% Profit margins in 2QFY16 improved notably where net margin improved from 5% to 8% while gross margin and operating margin grew from 17% and 1% to 24% and 15% respectively. FY14/15 Performance Net profits up notably by 95%YoY on increase in revenue and other income Net profit for advanced to LKR 86mn from LKR 441 recorded in the comparative year with a significant profit growth of 95%YoY. Revenue increased by 26%YoY to LKR 14.4bn in the year supported by high activity levels witnessed in CEB. 7%-8% of the BOI projects are done by the ACL group and the increasing activity level of the CEB contributed positively to the company s top line. Further, decrease in fuel price reduction and other essential items have also affected favourably to the top line as individual investors and institutional investors acted more actively in the construction sector. ACL Page 4

5 FY12 FY13 FY14 FY16E FY12 FY13 FY14 FY16E LKR FY12 FY13 FY14 FY16E FY12 FY13 FY14 FY16E LKR (mn) LKR (Bn) FY12 FY13 FY14 FY16E LKR Bn. Cost of sales increased by 25%YoY to LKR 11.9bn in mainly because of the increase in raw material prices during the period. Other income increased significantly by 599%YoY to LKR 193mn form LKR 28mn due to a revaluation of investment properties. The group incurred a gain on revaluation of LKR 176mn during the accounting period. Profit margins improved marginally where net margin improved from 4% to 6%, gross margin improved from 17% to 18% while operating margin improved from 8% to 11%. The company has a liquid cash of LKR 1.bn, and continues profitability of ACL translated to a healthy 3-year CAGR of 21%. Return on equity improved from 7% to 12% while return on assets merely improved from 4% to 5% Revenue contribution 1% 5% Revenue Composition % Exports Local Manufacturing Cables PVC Compound Other Profit movement 12% 1% 8% 6% 4% 2% % -2% Profit margins with turnover 2% 18% 16% 14% 12% 1% 8% 6% 4% 2% 1-4% Turnover Gross profit PAT-E Growth Operating profit Net profit 2.5 DPS vs. Payout 16% 16 Net asset value per share & grwoth 35% % 12% 1% 8% 6% 4% 2% % % 25% 2% 15% 1% 5% % DPS (LKR) Payout ACL Page 5

6 USD/MT TZS, -25.8% YTD ER change against USD AUD, -15.1% NZD, -17.% LKR, -7.9% BDT, -.4% MVR, -.7% GBP, -2.1% -3.% -2.% -1.%.% Future Outlook We have estimated a profit of LKR 1.3bn in FY16E and LKR 1.7bn in FY17E with profit growths of 47%YoY and 34%YoY respectively. The growth may mainly supported by the increase in revenue and decrease in cost of sales. Further reduction in corporate income tax rate from 28% to 15% which will be effective in FY 16/17 also may contribute favourably to the notable profit growth in FY17E. Revenue projected to increase by 17%YoY to LKR 17bn in FY16E (FY17E - LKR 2bn, +18%). Manufacturing cables segment may continue to perform as the key player with a revenue growth of 16%YoY to LKR 16bn in FY16E. However, the lack of pace in the construction industry may slowdown the segmental growth compared to. The export sales may likely to increase in FY16E and after with the prospects of re-gaining the EU GSP Plus scheme in next year. Nonetheless, the global economy slowdown may affected for the top line of the company as the main export regions namely Australia, New Zealand and Tanzania currencies have significantly declined this year. 2,3 2,1 1,9 1,7 1,5 1,3 1, World Bank Aluminium price outlook 1, Further, with the diversification of business process into Power Generation through the acquisition of Resus Energy will enable the company to make healthy turnover supported by the renewable energy segment. Resus Energy now working for their new projects located in in Kandy and Kegalle districts and they have entered into Standardised Power Purchase Agreements with CEB for 1.4MW- Gomale Oya and 1.5MW- Moragaha Oya hydropower Projects. The cost of sales may increase slightly by 1%YoY to LKR 13bn due to increase in global raw material prices. The World Bank has forecasted the commodity prices to be increased in the future as the copper prices forecasted to increase to USD 5,749/MT in 216 and USD 5,876/MT in 217. Source -: World Bank Commodity Forecast Price data October 215 The company import all their raw-materials mainly from countries like India, Korea etc. Therefore the current depreciation of rupee may affect for the COS. However, the company manages its currency risk by a natural hedging mechanism to a certain extent by matching currency outflows for repayments on raw material imported with currency inflows for goods sold in foreign currencies. Profit margins may improve as net margin may stand at 8% in FY16E and 9% in FY17E while gross margin and operating margin may increase to 22% (FY17E 21%) and 14% in FY16E (FY17E 13%) respectively. Trailing debt to equity ratio is at 3% while trailing return on equity ratio is at 2%. Further, trailing return on assets ratio stand at 11%. The trailing asset value stand at LKR per share. The increasing profitability of the company may translate to a CAGR of 29% in next 3-years. ACL Page 6

7 We believe that the company may maintain the same dividend level at LKR 2. per share which translates to a dividend pay-out of 5%- 7%. However, the budget 216 stated that the dividend pay-out needs to increase to 15%. If so the dividend would be increased to that level from FY17E onwards. Market Price (LKR) 12. DCF valuation Value per share (LKR) Upside 18% Valuation ACL is trading at a PE of 5.8x and a PBV of.9x which are at 4% and 46% discounts to the manufacturing sector PE of 9.7x and PBV of 1.7x. However according to the discounted cash flow method we have arrived to an attractive price valuation of LKR per share with an upside of 18%. Considering the positive earnings prospects of the company and attractive multiples we believe that the counter will perform well in the future. Hence, we recommend BUY. Cost of equity 12% Risk free rate 7% Equity risk premium 5% Relative valuation Price earnings ratio Forecast EPS (LKR) 28.3 Historical avg PE (x) 6.97 Value per share (LKR) Upside 64% 52wk Low MPS 52wk High DCF Price Price-to-book ratio Forecast book value (LKR) 17.8 Historical avg PBV (x).9 Value per share (LKR) Upside 34% Historical PBV Historical PE Peer Comparison Counter EPS (LKR) PE(x) PBV(x) Manufacturing sector RCL.N LWL.N CERA.N KCAB.N ACL.N APLA.N PARQ.N TILE.N DIPD.N TYRE.N SIRA.N TKYO.N GLAS.N ALUM.N ACL Page 7

8 Quarterly Earnings Quarterly Earnings 2QFY16 2Q Change % 1HFY16 1H Change % Revenue 3,327 3,71-1% 6,68 6,486 3% Cost of sales (2,521) (3,72) -18% (5,134) (5,465) -6% Gross Profit % 1,546 1,21 51% Other income % % Distribution costs (219) (175) 25% (432) (336) 28% Administrative cost (89) (11) -12% (188) (187) 1% Operating Profit % % Net finance costs (78) (83) -6% (163) (168) -3% Share of profit of investments Profit before income tax % % Income tax expenses (131) (82) 59% (216) (16) 13% Profit for the period % % Profit for the period - Equity Holders % % Total Assets ,31 13,331 7% Equity - Equity Holders ,819 6,258 25% Total Liabilities ,571 6,34-12% Group Structure ACL Cables PLC ACL Plastics PLC (65.2% ) ACL Electric (Pvt) Ltd (1%) Ceylon Copper (Pvt) Ltd (1%) ACL Kelani Magnet Wire (Pvt) Ltd (1%) ACL Metals & Alloys (Pvt) Ltd (1%) Ceylon Bulbs and Electricals Ltd (95.3%) Lanka Olex Cables (Pvt) Ltd (1%) Resus Energy (34.51%) Kelani Cables PLC (79.3%) ACL Polymers (Pvt) Ltd (65.2%) SWOT Analysis for ACL Strengths Weakness Related and non-relation diversifications in the business process. Prestigious rewards for the accreditations by leading Local & International bodies. High quality standards. Highly capable and innovative work force. Barriers to market entry is relatively high (ACL accounted for 7% of the market share). Dependency on government related projects. Competitive market conditions. Opportunities Threats Rapid development of the construction sector. Growing demand for innovative products. Favourable economy conditions. Prospects of GSP plus Scheme. Rupee depreciation in the terms of exports to gain competitive advantage over rivalry. Increase in interest rates. Increase in commodity prices. Changes in government rules and regulations. Slowdown in global economies may impact negatively to the export market. ACL Page 8

9 Real Estate Portfolio Group Name of the Owning Company and Location Land (Acres) Freehold Buildings (Sq. Ft) Net Book Value 215 (LKR ) 214 (LKR ) ACL Cables PLC Welithotuwa Road, Batakettara, Piliyandala ,216 1,125, ,58 Sarabhoomi Housing Scheme, Batakettara,.11 1,17 7, 5,372 Piliyandala Ensalwatta, Madapatha Road, Piliyandala , 4, AMW Premises, Nagoda, Kaluthara , 12, Venivelkole Mukalana, Korala Ima, Kahathuduwa , 48, 6, Rodney Street, Colombo 8-15,288 76,5 6,216 Kelani Cables PLC ,611 1,387,57 1,48,646 Wewelduwa, Kelaniya ,36 389,5 283,27 Mahena Road, Siyambalape ,35 7,5 37,66 Cinco Watta, Raja Mawatha, Ekala, Ja-Ela , 13, ,71 668, 45,93 ACL Plastics PLC Temple Road, Ekala, Ja-Ela ,39 167,22 133,68 Niwasipura, Ekala, Ja-Ela.6 1,69 11, 9, , ,22 142,592 ACL Kelani Magnet Wire (Pvt) Ltd No.7, Raja Mawatha, Ekala, Ja-Ela ,74 211, 174,9 Ceylon Bulbs & Electricals Ltd 6, Rodney Street, Colombo ,56 59,51 523,848 ACL Metals & Alloys (Pvt) Ltd Welithotuwa Road, Batakettara, Piliyandala - 23,46 85,85 71,287 Ceylon Copper (Pvt) Ltd Welithotuwa Road, Batakettara, Piliyandala.99 7,15 6,698 39,796 ACL Electric (Pvt) Ltd Miriseatte Estate, Millewa, Moragahahena, Horana ,96 52,627 47,215 Total value of land and buildings ,2 3,232,99 2,499,214 ACL Cables PLC - Annual Report ACL Page 9

10 APPENDIX 1 Disclaimer This information and opinion contained in this report have been complied by our research department from sources believed by it to be reliable and in good faith, but no representation or warranty, express or implied is made as to their accuracy, completeness or correctness. All opinions and estimates contained in the document constitute the department s judgment as of the date of this document and are subject to change without notice and are provided in good faith but without legal responsibility. This report is not, and should not be construed as, an offer to sell or a solicitation of an offer to buy any securities. Capital Trust Securities (Pvt) Ltd. (the company) or persons connected with it may from time to time have an investment banking or other relationship, including but not limited to, the participation or investment in commercial banking transactions (including loans) with some or all of the issuers mentioned therein, either for their own account or the account of their customers. Persons connected with the company may provide or have provided corporate finance and other services to the issuer of the securities mentioned herein, including the issuance of options on securities mentioned herein or any related investment and may make a purchase and/or sale, or offer to make a purchase and/or sale of the securities or any related investment from time to time in the open market or otherwise, in each case either as principal or agent. This report may contain forward looking statements which are often but not always identified by the use of words such as anticipate, believe, estimate, intend, plan, expect, forecast, predict and project and statements that an event or result may, will, can, should, could or might occur or be achieved and other similar expressions. Such forward looking statements are based on assumptions made and information currently available to us and are subject to certain risks and uncertainties that could cause the actual results to differ materially from those expressed in any forward looking statements. Readers are cautioned not to place undue relevance on these forward looking statements. Capital Trust Securities expressly disclaims any obligation to update or revise any such forward looking statements to reflect new information, events or circumstances after the date of this publication or to reflect the occurrence of unanticipated events. Exchange rate fluctuations may affect the return to investors. Neither the company nor any of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained therein. Capita TRUST Securities (Pvt) Ltd, their respective affiliate companies, associates, directors and/or employees may have investments in securities or derivatives of securities of companies mentioned in this report, and may make investment decisions that are inconsistent with the views expressed in this report., it s directors, officers, consultants, employees, associates or business partner, will not be responsible, for any claims damages, compensation, suits, damages, loss, costs, charges, expenses, outgoing or payments including attorney s fees which recipients of the reports suffers or incurs directly or indirectly arising out actions taken as a result of this report. ACL Page 1

11 TELEPHONE : (11) HOTLINE : (11) FAX : (11) E MAIL : inquiries@capitaltrust.lk TRADING DIVISION BOARD OF DIRECTORS Tushan Wickramasinghe (11) Moksevi Prelis (Chairman) Dakshana Gooneratne (11) Tushan Wickramasinghe (Managing Director/CEO) Lawrence David (11) Sarath Rajapakse (Director) M J M Husni (11) Sandesh Jayakody (11) Nilantha Perera (11) Saliya Gamagedera (11) Asanka Perera (11) Shanmugassharma Rakesh (11) Rasika Vidanalage (11) Thilina Yahampatharachchi (11) Sajee Perera (11) Gayan Vithanage (11) Anushan Kandasamy (11) Shehan Mendis (11) Chamila Fernando (11) Dilshard Hameed (11) Danushka Arambegedra (11) Laxman Ratnayake (11) KANDY BRANCH Arjuna Wilbawa (81) Dasantha Herath (81) Mohomed Faizan (81) FAX (81)-2215 KURUNEGALA BRANCH Dammika Senarathne (37) Indunil Pradeep (37) FAX (37) NEGOMBO BRANCH Sanjeewa Perera (31) Narada Abeysinghe (31) Srikanth Anton (31) FAX (31) MATARA BRANCH Venura Gamage (41) Jagath Rathnayake (41) Tharanga Wijeweera (41) FAX (41) MORATUWA BRANCH CAPITAL TRUST RESEARCH (PVT) LTD Suneth Fernando (11) Charitha Gunasekere (11) Bhanuka De Silva (11) Melani Nawaratne (11) Asoka Dharmatilaka (11) Ruvni Kaushalya (11) FAX (11) CUSTOMER SERVICE DIVISION CAPITAL TRUST CREDIT (PVT) LIMITED Prashani Perera (11) (11) ACCOUNTS DIVISION CAPITAL TRUST FINANCIAL (PVT) LIMITED Methmal Senivirathne (11) Anushan Kandasamy (11) Ranjini Jayawardena (11) Subani Wimalarathne (11) Kumari De Alwis (11) DOCUMENTATION DIVISION N.M.A Navaratne (11)