Royal Ceramics Lanka PLC

Transcription

1 LKR Royal Ceramics Lanka PLC Interim Update Q FY 14/15 Equity Research Quarterly revenue increased by 1% compared to corresponding previous quarter while gross margin slightly increased to 3% from 31%. 88% increase in net profits could be attributed to reduction in finance expenses (3%) and increase in profits (144%) of the associate company (LB Finance). Investment Considerations Sri Lanka s tile and ceramic exports increased by 5% resulting in an increase to US$ 37.8 million in comparison to US$36 million in 13. RCL enjoyed a growth rate of 7% in exports to countries like the Australia, Maldives and India. Government has taken measures to put new provisions for products including cement, ceramic and porcelain wall and floor tiles, marble floor tiles, granite and quartz tiles, wash basins, bidets and sanitary fittings, to be placed on the negative list of BOI concessions, meaning that these items can be imported only on condition that their equivalent is not available on the local market. This situation augurs well for RCL's top-line growth. In 14, RCL continued to incur capital expenditure worth around LKR 5Mn on efficiency increasing investments (A high tech casting machine at the Rocell Bathware-Homagama, a ball mill at the factory-eheliyagoda, a new extended warehouse facility- Meegoda and a new polishing plant at the Royal Porcelain factory in Horana). RCL added six new showrooms around the island covering Pelmadulla, Monaragala, Chilaw,Trincomalee, Jaffna and Dambulla. New showrooms are underway to open in Kadawatha and Batticaloa. RCL incorporated a new company in Australia, Rocell Pty. Ltd., to engage in wholesale and retail business in floor tiles and wall tiles as well as bathware in that country. RCL has announced that physical entry into Australia involves a proposed initial investment of AUD 55, (Rs million). ROE has started to recover and recorded 17% in the latest quarter after recording 11% following CERA acquisition. Subsequent to the acquisition of CERA, the gearing ratio of RCL increased from 5% to 164% making the entity highly geared. However during the last three quarters RCL has been able to bring down the ratio to 13% reducing the finance cost as well. RCL is trading at a trailing PE is at 7.6X and PBV is at 1.3X, comparatively attractive to the respective sector multiples at 17.6X and.3x. Valuation RCL has taken satisfactory measures to bring down operating cost margins while bringing down its gearing ratio. Even though it could take several years for RCL to lift up the profit margins to the level it enjoyed in 11 and 1, 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 reiterate our forecast cash flows in line with the positive growth signs of the company. Our FCFE model values the counter at LKR 139.7, taking a cost of equity of 14%. We revise our recommendation to BUY. 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) 1,84 Issued Quantity (Mn) day avg T/O (LKR Mn) 3.4 Beta (6 months) 1.33 Quarter Financial Summary LKR Bn FY 14 Q3 FY 14 Q4 FY 15 Q1 FY 15 Q Revenue Net Profit S/H's Equity Total Assets ROA ROE Price Multiples PE (X) 7.66 PBV (X) 1.4 Price to Sales (X).6 Divdend Yield (%) 1.73 Price Behavior Per Share Details as at (LKR) Earnings per share (trailing 1m) 15.5 Net Asset Value per share 94.3 Sales per share (trailing 1m) Dividend Per Share (trailing 1m). Shareholder Details Vallibel One Limited 51% Employee Provident Fund Srilanka 1% Weerasinghe Amarakoon 6% Shareholders below 5% 33% Analyst (s) Damith Wasantha LKR LKR % High 7 1/18/13 3/18/14 6/18/14 9/18/14 RCL Share Price ASI movement (adjusted to RCL base price), LOSEC Research damithwasa7@gmail.com 18 December 14 Recommendation Guidance, Important Disclosures and Analyst Certification: Page 7

2 Tiles Sanitaryware Paints Plantation Packing Material Tiles Sanitaryware Paints Plantation Packing Material Finance Other LKR Mn LKR Mn FY 11 Q1 FY11 Q FY11Q3 FY11 Q4 FY 1 Q1 FY1 Q FY1 Q3 FY1 Q4 FY13 Q1 FY13 Q3 FY13 Q4 FY14 Q1 FY 11 Q1 FY11 Q FY11Q3 FY11 Q4 FY 1 Q1 FY1 Q FY1 Q3 FY1 Q4 FY13 Q1 FY13 Q3 FY13 Q4 FY14 Q1 FY 11 Q1 FY11 Q FY11Q3 FY11 Q4 FY 1 Q1 FY1 Q FY1 Q3 FY1 Q4 FY13 Q1 FY13 Q3 FY13 Q4 FY14 Q1 FY 11 Q1 FY11 Q FY11Q3 FY11 Q4 FY 1 Q1 FY1 Q FY1 Q3 FY1 Q4 FY13 Q1 FY13 Q3 FY13 Q4 FY14 Q1 LKR Mn Interim Update: Royal Ceramics Lanka PLC 18 December 14 Graph 1: Quarterly Revenue and Profit Graph : Quarterly GP margin 7, 6, 5, 4, 3,, 1, Revenue started to increase in FY13Q with the acquisition of CERA. However, the acquisition weighed on profits and RCL is trying to recover with synergistic effects. 6% 5% 4% 3% % 1% GP margin dropped from 4% levels to 5% with the CERA take over while for FY 14 Q, GP margin recovered to 3%. % -1, Graph 3: ROA and ROE Source: Bloomberg Graph 4: Debt to Equity Source: Bloomberg 4% 35% 3% 5% % 15% 1% 5% % ROE recorded 17% compared to the lowest figure of 11% in FY13Q3. 18% 16% 14% 1% 1% 8% 6% 4% % % With the acquisition gearing ratio climbed to 147% in FY 13Q1 from 5% in FY13 Q4. RCL has managed to bring down the ratio to 13% in. ROE ROA Source: Bloomberg Source: Bloomberg Graph 5: Segmental Revenue Graph 4: Segmental Profit 5, 4, 3,, 1, Contribution from LB finance appears under finance sector as profits from associate -1 Source: Interim Financials Source: Interim Financials LOLC Securities Limited

3 Valuation We have taken into account a cost of equity of 14% and a free cash flow terminal growth of 5%. We expect country's construction sector to a grow at 5 year CAGR of %. Hence we have conservatively taken a mid-term growth of 1%. Our FCFE model values the counter at LKR At the current share price, RCL is trading at forward PE of 9.45X and a forward PBV of 1.1X. 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 1% 13% 14% 15% 16% 3% % % % % , LOSEC Research Table : 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) 47 n.a 3.1 n.a 9.93 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 18 December 14 Table 3: Return comparison Graph 8: Share Price Movement 3,,,5,,, 1,5, 1,, 5, % RCL ASI Index S&P SL Index LWL 3 months months YTD year Volume RSI (14) 5 5 1/19/11 6/19/1 1/19/1 6/19/13 1/19/13 6/19/14 Price SMAVG (5) SMAVG (1) Graph 8: PE Chart /19/11 6/19/1 1/19/1 6/19/13 1/19/13 6/19/14 PE ratio Highest Average Lowest Graph 1: Price per Sales /19/11 6/19/1 1/19/1 6/19/13 1/19/13 6/19/14 Price to Sales ratio Highest Average Lowest Graph 1: CSE PE Chart /19/11 6/19/1 1/19/1 6/19/13 1/19/13 6/19/14 ASI PE ratio Highest Average Lowest Graph 9: PBV Chart /19/11 6/19/1 1/19/1 6/19/13 1/19/13 6/19/14 PBV ratio Highest Average Lowest Graph 11: Dividend Yield /19/11 6/19/1 1/19/1 6/19/13 1/19/13 6/19/14 RCL dividend yield Highest Average Lowest Graph 13: CSE PBV Chart /19/11 6/19/1 1/19/1 6/19/13 1/19/13 6/19/14 ASI PBV ratio Highest Average Lowest 4 LOLC Securities Limited

5 Table 4: Forecast Financial Statements Figures in LKR Mn FY 1/13 FY 13/14 FY 14/15 6m FY 14/15 (F) FY 15/16 (F) FY 16/17 (F) Income Statement Revenue 7,611 19,749 9,79,558,614 4,875 Cost of Revenue -4,7-13,41-6,74-13,774-14,95-16,169 Gross Profit 3,34 6,338 3,5 6,784 7,689 8,76 Operating Expenses -1,557-3,63 1,71-3,57-3,879-4,67 Operating Income 1,793 3,73 1,49 3,416 3,967 4,597 Net Non-Operating Gains (Losses) Pretax Income 1,739,94 1,64,86 3,516 4,31 Income Tax Expense ,88 Income Before XO Items 1,636 1, ,138,68 3,3 Net Profit att. to shareholders 1,67 1, ,35 1,66,35 Balance Sheet Cash & Near Cash Items ,44,8 Accounts & Notes Receivable 866,95 3,16 3,71 3,369 3,695 Inventories,18 6,84 7,398 7,31 7,619 8,3 Total Current Assets 4,9 11,377 11,731 11,959 13,599 15,36 Total Long-Term Assets 9,37 1,954,359,341 1,983 1,644 Total Assets 13,617 33,33 34,9 34,3 35,58 37,6 Accounts Payable 74 1,66,187 1,95 1,184 1,79 Other Short-Term Liabilities 3,158 8,67 6,81 8,1 7,97 7,8 Total Current Liabilities 3,431 9,333 9,55 9,15 9,153 9,98 Total Long-Term Liabilities 1,784 8,47 8,13 8,54 8,14 7,954 Total Liabilities 5,16 17,74 17,763 17,468 17,57 17,5 Share Capital 1,369 1,369 1,369 1,369 1,369 1,369 Retained Earnings & Other Equity 7,33 9,6 9,534 1,65 11,759 13,388 Total Equity 8,41 15,59 16,37 16,831 18,36 19,954 Total Liabilities & Equity 13,617 33,33 34,9 34,3 35,58 37,6 Cash Flow Statement Net Income 1,67 1, ,35 1,66,35 Depreciation & Amortization 461 1, Changes in Non-Cash Capital , Cash From Operations 1,93 1,796 1,411 1,883 1,71,31 Capital Expenditures -1,149 -, , -5-5 Increase in Investments -1 - Cash From Investing Activities , , -5-5 Dividends Paid Change in Short-Term Borrowings Cash from Financing Activities Net Changes in Cash , LOSEC Research 5 LOLC Securities Limited

6 Table 5: Forecast Ratios FY 1/13 FY 13/14 FY 13/14 6m FY 14/15 (F) FY 15/16 (F) FY 16/17 (F) Profitability Ratios GP Margin (%) 44% 3% 31% 33% 34% 35% NP Margin (%) % 6% 6% 7% 7% 8% ROE (%) % 11% 1% 1% 13% 14% ROA (%) 1% 3% 5% 4% 5% 6% Earnings per share (LKR) Dividend per Share (LKR) Credit Ratios Debt/Equity Ratio (%) 5% 131% 13% 115% 99% 86% 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% 9% 159% 5% 4% 1% 1% Earnings growth YOY% 34% -33% 18X % 3% 3% Total Assets YOY% 19% 145% 8% 3% 4% 4% Total Debt YOY% % 8% 4% -% -% -% Investment Ratios PE Ratio (X) Price to Book Value (X) Dividend Yield (%) 1.78% 1.% 1.73%.87% 1.3% 3.19%, 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 5% - 5% monthly. Low: Maximum price volatility to be up or down less than 5% 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 Dinusha Gomes Assistant Manager International Sales / dinushago@ 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 Damith Wasantha Senior Research Analyst / damithwa@ 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 4, 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