Royal Ceramics Lanka PLC

Transcription

1 LKR Royal Ceramics Lanka PLC Interim Update Q4 FY 14/15 Equity Research Annual revenue increased by 13% compared to the previous year while gross profit margin slightly increased to 3% from 29%. 55% increase in net profits could be attributed to reduction in finance expenses (31%) and increase in profits (114%) of the associate company (LB Finance). Investment Considerations The country recorded a GDP of 7.4% in 214 with a 8% growth estimate by 218 indicating a positive economic outlook in years ahead. While the industry sector contribution to the GDP stood upto 32.3%, construction sub sector recorded the highest contribution to this growth in 214 signalling a positive trajectory for the demand of tile and ceramic products in the local market. We can expect an increase consumption of tile and ceramic products considering strong positive correlation between construction sector and tile and ceramic industry along with prevailing per capita income growth in Sri Lanka (11% estimated CAGR by 218). RCL holds dominant position in both local wall and floor tile markets following the acquisition of a controlling stake in Lanka Ceramic PLC and its subsidiaries which has made the RCL to realize synergies across the value chain to deliver exceptional results. Proving its outdone performance, Group topline and bottom line has recorded the highest in FY15 since its inception while allocating 26% of profit as dividend. Sri Lanka's tile and ceramic exports increased by 8% CAGR since 212 witnessing a growing demand for local ceramic products in international markets. RCL has been able to capitalize this demand growth by recording 88% YoY growth of its export revenue for FY15 while planning to expand its global footprint to North American market as well in FY16. While the industry significantly benefited from lowering electricity tariffs and LPG gas prices and resulted reduction in production expenditure, RCL growth is still vulnerable to the lack of streamlining of the mining and quary sector and the inadequately governed imported tile market. This negatives may not augurs well for RCL's operating income growth. RCL added one franchised showroom in Avissawella, along with two second grade sales locations in Thalawathugoda and Wattala while construction of new showrooms are underway in Kadawatha and Batticaloa. Six new showrooms will be added to the showroom network while nine showrooms to be upgraded, and five to be relocated in FY 15/16. ROE has recorded 18% for FY 14/15, gradually regaining its usual higher ROE figures which were recorded prior to CERA acquisition. Although RCL's gearing was significantly high subsequent to the acquisition of CERA, RCL has been able to noticeable reduce it to 14% from 131% during FY 14/15 while reducing the finance cost as well. RCL is trading at a trailing PE is at 8.8X and PBV is at 1.32X, comparatively attractive to the respective sector multiples at 17.6X and 2.3X. BUY LOLC SEC Valuation Share Price Upside/Downside Risk Level (refer page 7 for recommendation) Share Details Bloomberg Ticker CSE Sector GICS Sector RCL SL Manufacturing Industrials Market Cap (LKR Mn) 13,815 Issued Quantity (Mn) day avg T/O (LKR Mn) 3.92 Beta (6 months) 1.25 Quarter Financial Summary LKR Bn FY14 FY15 FY16(F) FY17(F) Revenue Net Profit S/H's Equity Total Assets ROA ROE Price Multiples PE (X) 8.8 PBV (X) 1.32 Price to Sales (X).68 Divdend Yield (%) 3.21 Price Behavior Per Share Details as at (LKR) LKR LKR % High 7 6/24/14 9/24/14 12/24/14 3/24/15 6/24/1 RCL Share Price ASI movement (adjusted to RCL base price) Earnings per share (trailing 12m) Net Asset Value per share Sales per share (trailing 12m) Dividend Per Share (trailing 12m) 4.1 Shareholder Details Valuation RCL has performed well in FY15 with 9% YoY PAT growth for equity holders while bringing down operating cost margins and gearing. We believe the energy cost reduction and favorable industry prospects would augur well for the company, particularly considering its monopolistic position in the domestic tile industry. We have revised our forecast upward mainly on LB Finance positive credit growth outlook and maintain our position in growth outlook for tile industry. On the revised growth estimates of the company and reduced hurdle rate, we revise our valuation upward to LKR 167.1, taking a cost of equity of 13.34%. We maintain our recommendation BUY. 24 June 15 Recommendation Guidance, Important Disclosures and Analyst Certification: Page 7 Vallibel One Limited 51% Employee Provident Fund Srilanka 15% Grandeur Peak Global Advisors Ll 5% Shareholders below 5% 34%, LOSEC Research Analyst (s) Gayan Rajakaruna gayanraj@lolcsecurities.com

2 Graph 1: Revenue and Profit LKR Mn 25, 2, 15, 1, 5, - Revenue started to increase in FY13 with the acquisition of CERA. By FY15, RCL has been able to gradually realize higher profits generated through synergistic effects of the acquisition Revenue Gross Profit Graph 2: GP margin 5% 45% 4% 35% 3% 25% 2% GP margin dropped significantly with CERA acquisition ans stabilized at 33% in FY Graph 3: ROA and ROE Source: Bloomberg Graph 4: Debt to Equity Source: Bloomberg 35% 3% 25% 2% 15% 1% 5% % ROE has stood up to 18% in FY15 compared to 11% ROE in FY ROE ROA 15% 1% 5% % With the acquisition, gearing ration climed up to 131% in FY14. However, RCL has managed to bring down the ration to 14% in FY Source: Bloomberg Source: Bloomberg Graph 5: Segmental Revenue Graph 4: Segmental Profit 2, 15, 1, 5, LKR Mn 2,5 2, 1,5 1, 5-5 LKR Mn Contribution from LB Finance appears under finance sector as profits from associates Source: Interim Financials Source: Interim Financials 2 LOLC Securities Limited

3 Valuation We have taken into account a cost of equity of 13.34% and a free cash flow terminal growth of 5%. We have revised our risk free rate to 7.34% from 8.34% considering low interest outlook prevailing in the country. We expect country's GDP to a grow at 5 year CAGR of 7%. Hence we have taken a mid-term growth of 7%. Our FCFE model values the counter at LKR At the current share price, RCL is trading at forward PE of 8.8X and a forward PBV of 1.32X. RCL's trailing multiples are attractive compared to domestic manufacturing sector's and regional peer companies' multiples. Table 1: Valuation Sensitivity Matrix Terminal Growth Rate Share price in LKR Cost of Equity 12% 13% 13.34% 14% 15% 3% % % % % , LOSEC Research Table 2: Peer Comparison Name Market Cap (USD Mn) PE (x) PBV (X) Dividend ROE % Yield % Royal Ceramics Lanka Plc (Sri Lanka) Lanka Walltile Plc (Sri Lanka) * Lanka Tiles Plc (Sri Lanka) * White Horse Bhd (Malaysia) Royal Ceramic Industry Pcl (Thailand) 55 n.a 3. n.a.75 Somany Ceramics Ltd (India) * Lanka Walltile PLC and Lanka Tiles PLC are subsidiaries of RCL, LOSEC Research 3 LOLC Securities Limited

4 Volume Rs Interim Update: Royal Ceramics Lanka PLC 24 June 15 Table 3: Return comparison Graph 8: Share Price Movement 3,, 2,5, 2,, 1,5, 1,, 5, % RCL ASI Index S&P SL 2 Index LWL 3 months months YTD year Volume Price SMAVG (5) SMAVG (1) RSI (14) Graph 8: PE Chart PE ratio Highest Average Lowest Graph 1: Price per Sales Price to Sales ratio Highest Average Lowest Graph 12: CSE PE Chart ASI PE ratio Highest Average Lowest Graph 9: PBV Chart PBV ratio Highest Average Lowest Graph 11: Dividend Yield RCL dividend yield Highest Average Lowest Graph 13: CSE PBV Chart ASI PBV ratio Highest Average Lowest 4 LOLC Securities Limited

5 Table 4: Forecast Financial Statements Figures in LKR Mn FY 211/12 FY 212/13 FY 213/14 FY 214/15 FY 215/16 (F) FY 216/17 (F) Income Statement Revenue 6,956 7,611 19,749 22,379 24,617 27,79 Cost of Revenue -3,663-4,27-13,41-15,71-16,247-17,61 Gross Profit 3,293 3,342 3,5 7,38 8,37 9,478 Operating Expenses -1,13-1,339-1,557-3,287-3,77-4,147 Operating Income 2,258 1,793 3,282 3,782 4,468 5,162 Share of Associates Profit Net Non-Operating Gains (Losses) , Pretax Income 1,297 1,739 2,294 3,643 4,549 5,621 Income Tax Expense Income Before XO Items 1,243 1,636 1,975 3,67 3,829 4,731 Net Profit att. to shareholders 1,243 1,67 1,126 2,134 2,665 3,512 Balance Sheet Cash & Near Cash Items ,329 1,388 1,47 Accounts & Notes Receivable ,95 2,755 3,22 3,315 Inventories 1,917 2,18 6,842 7,127 7,683 8,31 Total Current Assets 3,694 4,29 11,377 12,68 12,95 13,52 Total Long-Term Assets 7,762 9,327 21,954 23,29 2,57 19,166 Total Assets 11,456 13,617 33,332 35,97 33,519 32,685 Accounts Payable ,66 2,95 2,252 2,433 Other Short-Term Liabilities 2,947 3,158 8,267 7,167 5,6 3,6 Total Current Liabilities 3,133 3,431 9,333 9,261 7,257 5,438 Total Long-Term Liabilities 1,785 1,784 8,47 7,825 5,986 3,986 Total Liabilities 4,918 5,216 17,74 17,86 13,243 9,424 Share Capital 1,369 1,369 1,369 1,369 1,369 1,369 Retained Earnings & Other Equity 5,17 7,33 9,26 1,56 12,771 15,757 Total Equity 6,539 8,41 15,592 18,11 2,276 23,261 Total Liabilities & Equity 11,456 13,617 33,332 35,97 33,519 32,685 Cash Flow Statement Net Income 1,243 1,67 1,126 2,135 2,665 3,512 Depreciation & Amortization ,9 1,167 3,772 3,44 Changes in Non-Cash Capital , Cash From Operations 1,197 1,293 1,796 4,492 5,771 6,186 Capital Expenditures ,149-2,414-1,39-1, -2, Increase in Investments -1 Cash From Investing Activities -2, ,658-1,488-1, -2, Dividends Paid Change in Long-Term Borrowings ,361-1,698-4, -4, Cash from Financing Activities ,193-2,365-4,4-4,527 Net Changes in Cash , LOSEC Research 5 LOLC Securities Limited

6 Table 5: Forecast Ratios FY 211/12 FY 212/13 FY 213/14 FY 214/15 FY 215/16 (F) FY 216/17 (F) Profitability Ratios GP Margin (%) 47% 44% 32% 33% 34% 35% NP Margin (%) 18% 22% 6% 1% 11% 13% ROE (%) 19% 2% 11% 18% 19% 21% ROA (%) 11% 12% 3% 6% 8% 11% Earnings per share (LKR) Dividend per Share (LKR) Credit Ratios Debt/Equity Ratio (%) 63% 5% 131% 14% 59% 25% Interest Coverage (X) Total Assets/Equity (X) Net Debt/EBIT (X) Liquidity Ratios Current Ratio (X) Quick Ratio (X) Asset Turnover Ratio (X) Net Asset Value per share (LKR) Growth Ratios Revenue Growth YOY% 21% 9% 159% 13% 1% 1% Earnings growth YOY% -14% 34% -33% 9% 25% 32% Total Assets YOY% 35% 19% 145% 5% -4% -2% Total Debt YOY% 66% 2% 228% -1% -33% -48% Investment Ratios PE Ratio (X) Price to Book Value (X) Dividend Yield (%) 3.55% 1.97% 1.26% 3.49% 2.16% 2.85%, LOSEC Research 6 LOLC Securities Limited

7 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 Sri Lanka. Risk Level Evaluation High: Maximum price volatility to be up or down more than 5% monthly Medium: Maximum price volatility to be up or down between 25% - 5% monthly. Low: Maximum price volatility to be up or down less than 25% monthly. Risk Level is calculated taking the historical standard deviation measures. Financial Glossary EPS = Earnings per Share ROA = Return on Assets (adjusted net profit/average total assets) ROE = Return on Equity (adjusted net profit/average total equity) CAGR = Compound Annual Growth Rate ((End Value/Start Value) ^ (1/number of years) -1) GP= Gross Profit EBITDA= Earnings before interest, tax, depreciation and amortization PBT= Profit before tax PAT= Profit after tax NP= Net Profit PBV= Price to book value ratio PE= Price to earnings ratio Analyst certification: The Analyst(s) who is/are responsible for compiling or co-compiling this research and whose names appear as the analyst(s) of the research certify that the views expressed in this research accurately reflect the personal view of the analyst(s) about the subject securities and issuers and/or other subject matter as appropriate and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. No part of the compensation received by the analyst(s) was, is or will be directly or indirectly related to specific inclusion of specific recommendation or views in this research. On a general basis analyst s performance appraisal may be influenced by quality of the content and efficacy of the research. The analyst(s) who is/are responsible for compiling or co-compiling this research and whose names appear as the analyst(s) receive compensation based on overall revenues of LOLC Securities Limited and its holding company (Lanka ORIX Company PLC LOLC Group), which may include brokerage revenue from transactions involved with the securities mentioned in this research. General Disclaimer: LOLC Securities Limited is a company incorporated in Sri Lanka and licensed by the Securities and Exchange Commission of Sri Lanka to operate as a stockbroker/stock dealer in Sri Lanka. LOLC Securities Limited is a trading member of Colombo Stock Exchange. This research 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 research, 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 research 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. Investing in securities has inherent risks with no guaranteed return and price may be subjected to significant volatilities. No part of this report should be considered as a solicitation to buy or sell any security or product or to engage in or refrain from engaging in any transaction. LOLC Securities Limited or its employees may or may not hold positions in the securities discussed in the research and the information provided in the research should not be construed as a buy or sell instruction for any securities mentioned in the research, Unless otherwise specifically mentioned. This research is intended for general use for clients of LOLC Securities Limited and must not be copied in whole or in part or distributed to any third party for commercial use without permission from LOLC Securities Limited. If the reader is not the intended recipient please inform LOLC Securities Limited immediately by return to research@lolcsecurities.com. LOLC Securities Limited s other staff including sales people, traders and other professionals may provide oral or written market commentaries or trading strategies to our clients which reflect opinions which are contrary to the opinions expressed in this research which may be influenced by different circumstances. 7 LOLC Securities Limited

8 LOLC Securities Limited 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 Sri Lankan 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. General Line: General info@ lolcsecurities.com Research research@ lolcsecurities.com Website: SALES Head Office Sriyan Gurusinghe Managing Director / CEO / sriyang@ lolcsecurities.com Maniesh Rodrigo Assistant General Manager / manieshr@ lolcsecurities.com Samadhi Jayasinghe Manager Institutional Sales / samadhij@ lolcsecurities.com Imesh Fernando 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 Rehan Ariyaratne Business Development Associate / rehana@ lolcsecurities.com RESEARCH Shehan Bartholomeuz Head of Research / shehanb@ lolcsecurities.com Gayan Rajakaruna Senior Research Analyst / gayanraj@lolcsecurities.com Hiruni Perera Associate Research Analyst / hirunipe@ lolcsecurities.com Head Office Kurunegala Branch Galle Branch Matara Branch LOLC Securities Limited No 6, 1st Floor, No 18, 1st floor, Level 18, West Tower, Union Assurance Building, Sri Dewamitta Mawatha, E.H. Cooray Towers, World Trade Center Rajapilla Mawatha Galle No 24, Anagarika Dharmapala Mawatha, Colombo 1 Kurunegala, Sri Lanka Matara Sri Lanka Sri Lanka Tel : Sri Lanka Tel: Tel: Tel: Fax: Fax: LOLC SEC Research Reports are also available at Bloomberg LOLC <GO> 8 LOLC Securities Limited