Thousands LKR FC Research Analyst: Research Team ELPITIYA PLANTATIONS PLC SRI LANKA Initiating Coverage STRONG BUY ELPL.N0000 Current Price: LKR 18.0 Fair Value: LKR 27.0 Dec 2016 KEY DATA Share Price (LKR) 18.0 52w High/Low (LKR) 24.4/16.0 Average Daily Volume (Shares) Average Daily Turnover (LKR) 15,650 330,674 Issued Share Capital (Mn) 72.9 Market Capitalisation (LKR mn) 1,312 Price Performance (%) 1 mth 3 mths 12mths ELPL -7.3% -12.4% -14.1% ASPI -2.6% -4.4% -10.3% Major Shareholders as at 30th Sep 2016 Aitken spence plantation Mgt.PLC 61.6% Secretary to the treasury 21.4% Gulf east finance ltd 2.8% Sampath bank PLC/Dr T.Senthilverl 1.4% Seylan bank PLC/Dr T.Senthilverl 1.3% Estimated Free Float 17% Figure 1: ELPL share price performance 2000 1500 1000 500 0 Volume Disclaimer on Shareholding: Price 24.0 23.0 22.0 21.0 20.0 19.0 18.0 17.0 16.0 Source: CSE First Capital Equities (Pvt) Ltd and any of its affiliates do not hold shares in ELPL and will not trade in this share for the three trading days following the issue of this document. Firing up the Palm oil Engine P/E 31 March FY15 FY16 FY17E FY18E FY19E Revenue (LKR Mn) 2,606.1 2,444.4 2,913.0 3,077.9 3,266.0 YoY % Growth -6.5% -6.2% 19.2% 5.7% 6.1% Net Profit (LKR Mn) 359.7 196.2 344.4 354.6 499.9 EPS 4.9 2.7 4.7 4.9 6.9 YoY % Growth -3.7% -45.3% 75.1% 3.0% 41.0% Valuations PER (x) 4.1 7.4 4.2 4.1 2.9 PBV (x) 0.5 0.4 0.4 0.4 0.3 Divdend Yield (%) 3.8% 2.5% 3.5% 3.6% 5.1% NAVPS 43.4 46.4 50.6 54.8 60.9 DPS 0.8 0.5 0.7 0.7 1.0 Payout ratio 15.2% 18.6% 15.0% 15.0% 15.0% Elpitiya Plantations PLC (ELPL) is a listed regional plantation company engaged in Tea, Rubber and Palm oil cultivation. We initiate coverage on ELPL where we expect ELPL to grow its earnings at a CAGR of c.36% FY16-FY19E, to c. LKR 500Mn in FY19E. Earnings will grow on the back of Palm oil having segment margin improving and contribution to revenue portfolio increasing. FC Research expect ELPL to provide an annualized return of 46% with a fair value of LKR 27.0 by FY18E. STRONG BUY Palm oil to drive bottom line growth: ELPL s top line is expected to grow at a CAGR of c.10%yoy in FY16-FY19E. FC Research expect that performance will be on the back of earnings from Palm oil improving with a CAGR of c.28%yoy. As of FY16 Palm oil contributed 17% to ELPL s revenue portfolio which FC Research expect to increase to c.27% by FY18E. This growth is on the back of global Palm oil prices moving upward due to expectations of global shortages in supply matching demand and mature palm oil plantations hectarage of ELPL increasing by CAGR of c.13%. Multiplexing revenues through investments: ELPL has diversified from its principal activities to manufacturing specialty tea Hydro power generation, hotel and adventure park operations through its investments which will create additional revenue streams to ELPL. FC Research expects ELPL to benefit substantially from Elpitiya Dianhong Jin Ya Tea Company (Pvt) Ltd as it will provide an edge to acquire market share in China, 10th largest customer of Ceylon tea and a high growth market, and AEN Palm Oil processing (Pvt) Ltd will provide synergy to ELPL by boosting margins in the segment. ELPL to provide a return of 46% by FY18E: FC Research estimates ELPL s fair value at LKR 27.0 (DCF based LKR 30.5, PER based LKR 24.3) providing an annualized return of 46% in FY18E. Investment risk: Impact from government policy actions in estate worker wage hike and cap on land held by plantations Company is yet to be seen. ELPL is also exposed to the risks of key currency rates fluctuations and volatility of product prices.
Figure 2: ELPL Revenue mix 1.0 Introduction and industry overview 1.1 Introduction to ELPL Elpitiya Plantations PLC setup as a Regional Plantation Company in 1992, engages in cultivation of Tea, Rubber, Palm Oil and other minor crops and consists of 13 estates spread across Up, Mid and Low country, and is managed by Aitken Spence Plantation Management PLC. Diversification: Company is taking the path of diversification from inception and currently have investments AEN Palm Oil processing (Pvt) Ltd in palm oil milling, Elpitiya Dianhong Jin ya Tea company (Pvt) Ltd engaging in Chinese specialty tea manufacturing, Venture Valley (Pvt) Ltd in Tourism and subsidiary Sheen in hydro power generation. Source: ELPL Annual Report Figure 3: ELPL Tea estates productivity per employee Capacity: ELPL holds 8,838 Ha of land in total under its management of which 2,186 Ha have Tea planted, 1,334 Ha have Rubber planted, 1,448 Ha have Palm oil planted and, minor crops and unutilized land amounting 1021Ha in total. ELPL annually produces 4.9Mn Kg of Tea, 780,000 Kg of Rubber and 11.4Mn Kg of Palm oil in average. SWOT analysis: 1,300.0 1,250.0 1,200.0 1,150.0 1,100.0 1,050.0 1,000.0 Strengths High margins in Palm Oil Synergy Diversified revenue Weaknesses Decreasing productivity in tea Tea and rubber segments making losses 1.2 Share price performance Opportunities New venture to Chinese market Investments in tourism Threats Government policy changes Erratic weather Currency fluctuations Source: ELPL Annual Reports Over the past 12 months ELPL has been outperforming the market where taking 22 Dec 2015 as the base point, ELPL has performed with an average of 99 points where ASPI only averaged 94 points. ELPL traded highest at LKR 24.4 and lowest at LKR 16.0 in the last 52 weeks. Figure 4: ELPL vs ASPI 115 110 105 100 95 90 85 80 ASPI ELPL.N Source: CSE 2
Figure 5: Major Products price movement (LKR per kg) 390.0 340.0 290.0 240.0 190.0 140.0 90.0 40.0 Tea Rubber Palm Oil Source: World Bank Figure 6: Tea product vice export value Source: CBSL Annual Report Figure 7: Export value by the product 1.3 Plantation sector overview First systematic cultivation in Sri Lanka started on early 1740 by Dutch, planting coffee. Since then the sector has evolved and reformed through centuries among different crops and currently major crops in Sri Lanka are Tea and Rubber, where Palm oil has been coming in to the major cluster in the recent years and crops like coconut, cinnamon, coffee, fruits have a minority stake. Labour intensive industries: Sector is governed heavily by the government and legislation system due to two factors, where first the cultivated land is leased to the regional plantations companies by the government and secondly because the Plantation sector depends on labour intensively. For an example in sector s major product tea, c.80% of the cost is labour cost. Therefore the sector is vulnerable to labour union activities. Sector experienced the highest level of labour strikes relative to other private sectors where in 2015 sector lost 70,697 labour hours due to the strikes where in all other private sector the total labour hours lost were just 11,597 which is c.84% lower compared to the plantation sector. Contribution to GDP c.23.6%: Agricultural exports account for c.23.6% of total export earnings of the nation, and generated USD 2.48Bn of revenue, with tea contributing 54%, in 2015 however this is an 11.2% decrease in revenue from 2014. Sri Lanka exports c.300mn Kg of tea annually worth annual earnings of c. USD 1.2Bn where Rubber exports amounts annually c.89mn Kg with a value of USD 24Mn. Palm Oil is the new entrant to the major product cluster of Sri Lankan plantation sector where global demand for palm oil is expected to grow at a CAGR of 7.3% to 128Mn tn by 2022. Figure 8: Land portfolio of top 5 companies with the highest cultivated extent 5,000 4,000 250 200 150 100 50 0 350 300 250 200 150 100 50 0 3,000 2,000 1,000 0 [Ha] Tea Rubber Oil palm Other Cultivations Source: Companies Annual Reports Tea Quantity (mn kg) Rubber Quantity (mn kg) Tea Value (LKR Bn) RubberValue (LKR Bn) Source: CBSL Annual Report 3
Millions Kg. FC Research Figure 9: Land Portfolio fluctuations of ELPL 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Figure 10: Palm Oil GP margin of ELPL 85% 80% 75% 70% 65% 60% 55% 50% 45% 40% Tea Rubber Oil Palm Source: ELPL Annual Reports Source: Company data and FC research Source: Company data 2.0 Palm Oil to drive bottom line growth Palm oil is the fastest growing and most profitable segment within ELPL. In comparison to the 1HFY16, revenue from Palm oil increased by 37% and gross profit increased by 59% in 1HFY17. Total share of revenue from Palm oil to the total segments revenue has increased in 2QFY17 to c.27% from 21% in 2QFY16 making Palm oil the second highest contributor to the revenue portfolio of ELPL as of Sep 2016, after Tea. ELPL is consistently converting portions of its rubber plantations and other plantations to palm oil, increasing the Palm oil plantations hectarage by c.8% annually. Though Tea and rubber segments are incurring gross losses, Palm oil segment is covering those losses and boosting the gross margins of ELPL to be 15% in 2QFY17. Given ELPL s strategic focus shifting to Palm oil, High margins in Palm Oil, Increasing prices and increasing crop, FC Research expects Palm Oil to be major revenue driver to ELPL in to the future boosting its profitability. 2.1 High GP margins: Palm oil segment of ELPL has posted GP margins of c.67% in average. For FY16 it posted a GP margin of c.65% and posted c.73% in 2QFY17 which has improved from c.61% in 2QFY16. Palm oil has high GP margins due to being a comparatively less labour intensive cultivation and ELPL having operational synergies. Compared to other cultivations per hectare tea requires 4 workers, rubber requires 1 worker and palm oil requires only 0.1 workers. ELPL s investment in joint venture AEN Palm Oil processing (Pvt) Ltd provides synergy to ELPL vertically in the value chain where we estimate that it enables ELPL to have comparatively less cost of sales among its peers. FC Research estimate the GP margins of ELPL to continue at current level considering the recent wage hike for estate workers and increasing competition from peer companies specially Watawala Plantations and Namunukula Plantations, restricting ELPL enjoying abnormal profit margins in to the future. Figure 12: Palm oil Cost of sales comparison with peer companies Figure 11: Palm Oil production 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 WATA ELPL KOTA AGAL NAMU (LKR per Kg.) Source: ELPL Annual Report Source: Companies Annual Report 4
(USD/t) Figure 13: Palm Oil price forecast 900 850 800 750 700 650 600 Figure 14: Vegetable oil and Fuel oil production forecast 200.0 150.0 100.0 50.0 0.0 Source: World Bank 2.2 Increasing price: Global palm oil prices moved upward from c. USD 584.19 per ton in Jul 2016 to c. USD 692.41 per ton in Sep 2016. According to World Bank estimates palm oil price will move to USD 713 per ton by 2020. Price increase in the commodity in to the future is due to the expectations of global shortages in supply matching demand. Palm Oil is used in the production of vegetable oil of which 40% consists of Palm oil. Palm oil is also utilized in producing Bio fuel, specifically Bio diesel which is having an increasing demand and consumption given the current global focus shifting to reduce crude oil consumption. Global vegetable oil and bio fuel production conjointly is expected to increase by a CAGR of c.7.9% from 2016 to 2025. Meanwhile due to El-Nino conditions last year production in largest palm oil producing countries Malaysia, Indonesia and Thailand is expected to drop by c.6mn tons. It is expected that supply of palm oil will not meet the demand in coming years, pushing up the price as forecasted. Global price increase will push up the local palm oil price in correlation which will boost the bottom line of ELPL further. 2.3 Increasing production: ELPL from FY13 to FY16 has planting 238 ha. of palm oil which is c.16% of total current palm oil plantations. Palm oil trees starts to produce crop only 3 years after planting, yield increase from 3 rd year to 7 th year by almost a quadruple. ELPL also transferred LKR 206Mn worth plantations from immature to mature plantations in FY16. It can be reasonably expected that new plantations of Palm Oil and maturing of the existing trees will boost ELPL s crop in the coming years. Therefore FC Research expects that the Palm Oil crop of ELPL will increase with a CAGR c.24% in FY16-FY19. As of 2016 Sri Lanka is importing 160Mt of Palm oil therefore we expect that the ELPL will have adequate demand for the increments in its production. Figure 15: Palm oil imports to Sri Lanka Vegetable Oil Biofuel Source: OECD/FAO (2016) (1000 MT) 350 300 250 200 150 100 50 0 Source: United States Department of Agriculture 5
Figure 16: Growth of tea exports to China (Kg 000) 7,500 6,500 5,500 4,500 3,500 2,500 1,500 2011 2012 2013 2014 2015 Source: CBSL Figure 17: Contribution of profit from JVs to PBT of ELPL 800 600 400 200 0 (Mn) FY13 FY14 FY15 FY16 Profit from JV Profit from JV/PBT PBT Figure 18: Tourists arrivals to Sri Lanka 50% 40% 30% 20% 10% 0% Source: ELPL Annual Report Source: SLTDA 3.0 Multiplexing revenues through investments 3.1 xxxxxx ELPL is diversifying through its investments in subsidiaries and joint ventures 3.0 xxxxxxx: WATA xxxxxx to provide a return of 19% and have invested in sectors such as hydro power generation, tourism, Palm oil milling, specialty tea manufacturing etc. FC Research expects these investments to provide positive impact to ELPL s bottom line and to minimize P/E 31 March FY15 FY16 FY17E FY18E FY19E risk by diversification of revenue streams. Revenue (LKR Mn) 2,606.1 2,444.4 2,913.0 3,077.9 3,266.0 3.1 Net Joint Profit ventures (LKR Mn) providing 359.7 Synergy: 196.2 AEN Palm Oil 344.4 processing 354.6 (Pvt) Ltd 499.9 (AEN) and 3.2 EPS Elpitiya xxxxx Dianhong Jin Ya 4.9 Tea Company 2.7 (Pvt) Ltd 4.7 (EDJY) the 4.9 main two joint 6.9 ventures of ELPL provides synergy for ELPL where AEN is a major contributor YoY % Growth -3.7% -45.3% 75.1% 3.0% 41.0% to improve the GP margins of ELPL s Palm oil segment where in 2QFY17 xxxxx:xxxxxx margins Valuations stood at c.73%. EDJY provides ELPL with competitive advantage to acquire PER (x) market share in China 4.1 which has 7.4 a substantial 4.2 potential 4.1 as China 2.9is the PBV 10 (x) th largest customer for 0.5Ceylon tea 0.4 and also a 0.4 high growing 0.4 market with 0.3 a Divdend CAGR of Yield c.18.7%. (%) It is our 3.8% expectation 2.5% that these 3.5% will, contribute 3.6% to keep 5.1% the margins NAVPS of Palm oil segment 43.4 current level 46.4 and increase 50.6 cash 54.8 inflows. 60.9 3.2 DPS Substantial contributions 0.8 to bottom 0.5 line provided 0.7 by the 0.7 investments: 1.0 In Payout ratio 15.2% 18.6% 15.0% 15.0% 15.0% FY16 share of profit from two joint ventures AEN and EDJY Contributed 41% of profit before tax of ELPL which we expect to continue in to the future at same level. NP margins of the AEN are low at 5.9% but we estimate that this WATA earnings CAGR of c.6% FY16-19E: xxxxxxxx. is only due to AEN mainly catering to internal company requirements of ELPL, providing the aforementioned synergy. However EDJY has high margins of 63.0% contributing positively to ELPL s growth. Therefore FC Research 4.1 Total return of xx% in FY18E expects that this will continue to impact positively to the bottom line and margins Capital gain of ELPL of xx% in to and the a future. dividend yield of xx%: FC Research xxxxxxx 3.3 Diversifying leading to minimized risks to cash inflows: With a target to attract 4.5Mn tourists by Sri Lanka, more emphasis has been given to promote novel experience for tourists. Entities such as Ceylon Tea Tours, Tea Trails are already catering to this requirement by tapping in to the unexplored market of Tea based tourism. Therefore FC Research expects ELPL s expansion in to this sector via Tea Country Homes (Pvt) Ltd and Water Villas (Pvt) Ltd, will generate substantial revenue streams in to the future. Investment in EPP Hydro Power Company will also provide substantial returns in to the future as Sri Lanka is moving towards a deficit in power generation Expected value FY18E requirement and available capacity in 2017 to 2030 where it will create excess demand DCF based for valuation private sector power generators 30.5 like EPP. ELPL s new cultivations like PER passion based valuation fruit, herbal plant and king 24.3coconut will utilize immature rubber plantations Average target and price uncultivated land held 27.4 by ELPL. FC Research expects that these will create additional revenue streams and also improve the margins in current Return segments (LKR) like Rubber through FY18E optimized use of resources. Target Price 27.4 Current Price 20.0 Capital gain 7.4 Dividend 0.7 Capital gain % 37% Dividend yield % 7% Total Return 44% Annualized Return 34% 6
4.0 ELPL to provide a return of 46% P/E 31 March FY15 FY16 FY17E FY18E FY19E Revenue (LKR Mn) 2,606.1 2,444.4 2,913.0 3,077.9 3,266.0 YoY % Growth -6.5% -6.2% 19.2% 5.7% 6.1% Net Profit (LKR Mn) 359.7 196.2 344.4 354.6 499.9 EPS 4.9 2.7 4.7 4.9 6.9 YoY % Growth -3.7% -45.3% 75.1% 3.0% 41.0% Valuations PER (x) 3.6 6.7 3.8 3.7 2.6 PBV (x) 0.4 0.4 0.4 0.3 0.3 Divdend Yield (%) 4.2% 2.8% 3.9% 4.1% 5.7% NAVPS 43.4 46.4 50.6 54.8 60.9 DPS 0.8 0.5 0.7 0.7 1.0 Payout ratio 15.2% 18.6% 15.0% 15.0% 15.0% ELPL earnings CAGR of c.31% FY16-19E: We expect ELPL s revenues to grow to LKR 3.2Bn in FY19E from current level of LKR 2.4Bn. ELPL s net income is expected to grow to LKR 500.0Mn in FY19E from the current level of LKR 196.2Mn. ELPL recorded a net income of LKR 138.6Mn in the first half of FY17. 4.1 Total return of 46% in FY18E Capital gain of 52% and a dividend yield of 8%: FC Research estimates ELPL s fair value to be LKR 27.0 in FY18E. The company would yield a capital gain of 52% in FY18E. We expect ELPL to maintain its dividend payout ratios at 15% in FY17E and FY18E. The total annualized return stands at 46%. Expected value FY18E DCF based valuation 31 PER based valuation 24 Average target price 27 Return (LKR) FY18E Target Price 27.4 Current Price 18.0 Capital gain 9.4 Dividend 0.7 Capital gain % 52% Dividend yield % 8% Total Return 60% Annualized Return 46% 7
WACC Ke 19.1% Kd 15.6% Terminal growth 3.0% WACC 18.5% 4.2 Discounted Cash Flow valuation DCF value of LKR 31.0: FC Research estimates ELPL to have a DCF value of LKR 31.0 based on an equity value of LKR 2.2Bn. Valuations (LKR Mn) FY18E FCFF 3,802 Debt -1,576 Equity value 2,226 Number of shares(mn) 73 Value per share 31 Cost of equity Rf 10.1% Rm 14.1% 2.3 Rm-Rf 4.0% R f + (R m -R f ) 19.1% Terminal Growth Rate WACC 31 15% 17% 19% 21% 23% 1% 38 31 25 20 17 2% 42 33 27 22 18 3% 46 36 29 23 19 4% 51 40 32 25 21 5% 56 44 34 27 22 4.3 PER based valuation Average PER of 5x: FC Research estimates an average PER of 5x for ELPL based on the historical performance, giving a PER valuation of LKR 24.0 per share. 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 2 4 6 8 10 Price FY18E Earnings (LKR Mn) 398 No of shares (Mn) 73 EPS 5 Expected PER 5x Price per share 24 8
5.0 Investment risks 5.1 Policy risk Budgetary proposal to cap land held by RPC s: Budgetary proposals for 2017 will have a significant impact on ELPL if the proposal of 5000 acres ceiling for land held, is implemented. Currently ELPL holds 21,829 acres under and if the proposal is implemented, government might take back 77% of the land. Whether the proposal will be implemented and if so how it will be executed is yet to be seen. 5.2 Wage Hike Estate worker daily salary increase: Following the strikes by estate workers government hard handed Regional Plantations Companies to increase estate worker salary levels with effect from 1 st of November 2016. Daily salary of an estate worker will increase by LKR 110 and this will have a substantial impact on cost of sales of Tea given this is c. 17.7% increase from previous level of LKR 620 per day. Exact impact from the wage hike on the tea segments performance is yet to be seen. 5.3 Price risk Volatility in tea prices: Tea contributes c.65% of ELPL s revenue and the segment is at currently at loss. At present the loss is reduced by the improvement in GP margin given the high prices seen in the market for tea which was increased only due to lower supply levels in the market. If the tea prices drop back to previous year FY16 levels when the supply increase in the market, the loss from tea could approximately double which could reduce the bottom line of ELPL by c.30%. 5.4 Exchange rate risk Exposed to key currency fluctuations: Yuan has depreciated against LKR during the last one year and if this trend continue to the future, it might impact ELPL adversely since Elpitiya Dianhong Jin Ya Tea Company is directly engaged in manufacturing and exporting specialty to China and it s products might become expensive to the Chinese market. Also any weakening in key currencies like Ruble will impact negatively to the export market of ELPL and Sri-Lankan export market as a whole. 9
Appendix I: Recommendation criteria Categorization Company Category Strong Buy Buy Hold Sell Grade A S&P SL20 T.Bill + 10% T.Bill + 5% & T.Bill + 1% & Below T.Bill Companies & Above Above Above + 1% Grade B Rest of the T.Bill + 13% T.Bill + 8% & T.Bill + 3% & Below T.Bill Companies & Above Above Above + 3% Grade C Companies less T.Bill + 16% T.Bill + 11% T.Bill + 6% & Below T.Bill than LKR 1Bn & Above & Above Above + 6% Market Cap *1 year T-bill rate as at 09-12-2016 10.10% Appendix II: Income Statement LKR (Mn) FY15 FY16 FY17E FY18E FY19E Revenue 2,606.1 2,444.4 2,913.0 3,077.9 3,266.0 Cost of sales -2,199.5-2,269.1-2,297.1-2,466.2-2,464.9 Gross profit 406.7 175.3 615.9 611.7 801.1 Gains on fair value of biological assets 59.7 43.9 47.5 49.2 51.0 Other income 147.8 309.4 143.3 137.7 134.4 Administrative expenses -182.8-285.2-346.1-348.0-366.5 Management fee and workers profit -63.3-35.9-63.9-63.5-83.7 Finance expenses -84.1-76.9-105.0-89.8-82.0 Finance income 0.2 0.5 0.3-0.1-0.2 Share of profit from joint ventures 105.4 89.5 95.1 101.2 107.6 Profit before taxation 389.5 220.5 387.0 398.4 561.7 Income tax expense -29.9-24.3-42.6-43.8-61.8 Net profit for the year 359.7 196.2 344.4 354.6 499.9 Attributabe to: Equity holders of the parent 359.8 196.6 345.0 355.2 500.8 Non-controlling interest -0.2-0.4-0.6-0.6-0.9 Profit for the year 359.7 196.2 344.4 354.6 499.9 Earnings per share 4.9 2.7 4.7 4.9 6.9 Dividend per share 0.8 0.5 0.7 0.7 1.0 Source: Annual Reports and FC Research Estimate 10
Appendix III: Balance Sheet (LKR Mn) FY15 FY16 FY17E FY18E FY19E ASSETS Non-current assets Freehold PPE 1,024.5 1,051.1 965.7 883.5 796.2 Bearer & Consumable biological assets 3,569.4 3,745.6 3,915.2 4,095.2 4,286.5 Investments & Other non current assets 158.3 257.6 352.7 453.9 561.5 Total non-current assets 4,752.3 5,054.3 5,233.6 5,432.7 5,644.2 Current assets Inventories 290.0 217.6 272.3 287.6 318.4 Trade and other receivables 189.1 204.8 187.3 188.3 197.7 Amounts due from related parties 15.3 18.1 18.1 18.1 18.1 Cash and cash equivalents 35.1 32.5-11.8-22.5 103.6 Total current assets 529.6 473.0 466.0 471.7 637.9 Total assets 5,281.9 5,527.3 5,699.6 5,904.3 6,282.0 EQUITY AND LIABILITIES Equity Stated capital 694.2 694.2 694.2 694.2 694.2 Timber reserve 725.7 756.8 756.8 756.8 756.8 Retained earnings 1,744.2 1,934.8 2,243.4 2,546.9 2,994.5 Total equity attributable to owners 3,164.2 3,385.9 3,694.5 3,998.0 4,445.5 Non-controlling interest -3.5-3.9-4.5-5.1-6.0 Total equity 3,160.7 3,382.0 3,690.0 3,992.8 4,439.5 Non-current liabilities Interest bearing borrowings 259.1 331.1 203.8 121.5 46.9 Liability to make lease payment 175.5 172.3 168.8 165.3 161.6 Retirement benefit obligations 623.1 583.7 629.1 663.4 702.4 Deferred liabilities 255.6 389.7 367.8 345.8 323.8 Total non-current liabilities 1,313.3 1,476.7 1,369.5 1,296.0 1,234.8 Current liabilities Interest bearing borrowings 399.6 353.3 318.0 273.1 265.4 Liability to make lease payments 3.1 3.3 3.4 3.6 3.7 Payables 402.1 309.0 315.7 335.9 335.8 Income tax liabilities 3.1 2.9 2.9 2.9 2.9 Total current liabilities 807.9 668.5 640.0 615.5 607.8 Total equity and liabilities 5,281.9 5,527.3 5,699.6 5,904.3 6,282.0 Source: Annual Reports and FC Research Estimate 11
Appendix IV: Cash Flow Statement Cash Flow Statement (LKR Mn) FY15 FY16 FY17E FY18E FY19E Cash flows from operating activities Profit before tax 389.5 220.5 387.0 398.4 561.7 Adjustments for Depreciation and amortization 139.1 152.1 195.4 208.5 222.2 Provision for defined benefit plans 85.2 94.9 99.2 88.1 92.9 net items written off -3.9-0.3 0.0 0.0 0.0 net finance expense 83.8 76.4 104.7 89.9 82.2 Gain on biological assets -59.7-43.9-47.5-49.2-51.0 Deferred income from operating & sub lease -6.0-6.4-12.3-12.3-10.0 profit from sale of Timber & other Trees -55.1-170.5-60.0-55.5-53.1 Provision for doubtful receivable and slow stock 8.0 1.2 1.0 1.0 1.0 Share of profit of joint venture -105.4-89.5-95.1-101.2-107.6 net (gain)/loss on assets and disposals -8.4-40.4 0.0 0.0 0.0 Operating profit before WC changes 467.3 194.2 572.5 567.7 735.9 (Increase)/decrease in inventories -33.4 72.4-54.8-15.3-30.8 (Increase)/decrease in receivables -21.5-17.9 16.5-2.1-10.3 (Increase)/decrease in receivables from related parties 8.3-13.1 0.0 0.0 0.0 Increase/(decrease) in payables 23.5-9.6 10.9 20.3-0.2 Increase/ (decrease) in libility to related parties 37.7-17.9-4.3 0.0 0.0 Cash generated from operating activities 481.8 208.2 540.9 570.6 694.6 Cash received from sublease of land 3.0 2.6 2.0 2.0 2.0 Cash received from sale of trees 74.9 183.2 79.0 75.2 73.5 Net finance expense -50.4-42.1-69.9-53.9-44.8 Retirement benefit obligations paid -63.1-39.6-53.8-53.8-53.8 Tax paid -7.4-4.2-42.6-43.8-61.8 Grants received 0.8 26.9 0.0 0.0 0.0 Net cash flow from operating activities 439.6 335.0 455.5 496.3 609.7 Cash flows from investing activities Field development expenditure -232.4-227.5-241.9-258.3-275.9 Net proceeds from PPE -91.0-112.0-21.0-30.2-31.2 Return from investments (dividends, sale of shares) 102.9 68.3 0.0 0.0 0.0 Net cash flow from investing activities -220.5-271.1-262.9-288.5-307.1 Net cash flow before financing activities 219.1 63.9 192.7 207.8 302.6 Cash flows from financing activities Payment of government and other lease rentals -43.9-43.9-38.9-39.5-40.9 Net proceeds from loans -238.5 45.8-161.7-127.2-82.3 Dividend paid -54.6-54.6-36.4-51.8-53.3 Net cash used in financing activities -337.0-52.8-237.0-218.5-176.5 Net increase in cash and cash equivalents -117.8 11.1-44.3-10.7 126.1 Cash & Cash equivalent Beginning of the year -51.5-169.4-158.2-202.6-213.3 End of the year -169.4-158.2-202.6-213.3-87.2 Cash & cash equivalents at the beginning of the year Cash and bank balances 29.9 35.1 32.5-11.8-22.5 Bank overdrafts -81.4-204.5-190.8-190.8-190.8-51.5-169.4-158.2-202.6-213.3 Cash & cash equivalents at the end of the year Cash and bank balances 35.1 32.5-11.8-22.5 103.6 Bank overdrafts -204.5-190.8-190.8-190.8-190.8-169.4-158.2-202.6-213.3-87.2 Source: Annual Reports and FC Research Estimate 12
Appendix V: Key ratios P/E 31st Mar FY15 FY16 FY17E FY18E FY19E Growth Margins Gearing Revenue -6% -6% 19% 6% 6% Cost of Sales -4% 3% 1% 7% 0% Gross Profit -20% -57% 251% -1% 31% EBIT -18% -44% 91% -2% 39% Net Profit -4% -45% 75% 3% 41% GP Margin 16% 7% 21% 20% 25% EBIT Margin 14% 8% 14% 13% 16% NP Margin 14% 8% 12% 12% 15% Debt/Equity 21% 20% 14% 10% 7% Debt/Debt+Equity 17% 17% 12% 9% 7% Debt/Total assets 12% 12% 9% 7% 5% Source: Annual Reports and FC Research Estimate 13
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