Navara Stock Watch October 2014 Textured Jersey Lanka PLC TJL.N0000 Rs.19.30 Annualized EPS P/E Sector P/E: Manufacturing NAPS Rs.1.64 11.77x 17.40x Rs.9.95 Company s key raw material Cotton, which accounts to more than 60% of production cost, has reached near five year low to 63.94 US cents per pound. This is a clear reduction by 43.5% YTD while 42% drop in cotton price to 63.94 US cents per pound from 90.90 US cents per pound was witnessed on June to October 2014. Hence the benefit of this reduction would clearly be evitable in coming 2014/15 2Q results of TJL with improved gross margins. The world s largest cotton consumer China is ending its stock piling program creating excess supply and thereby significantly reducing prices. Additionally the U.S. cotton crops are estimated to peak at 17.5 mn bales, highest production after 2007-08. On the surface, cotton prices would seem to be on downward trend while it is expected that the price to be at this range with no signal for upward revision. TJL continued to maintain its near debt free balance sheet as at 30th June 2014, with a strong net cash position of Rs.1.86bn, up 5% YoY. Additionally TJL is also considering the acquisition of an overseas production mill in long term. The technical service agreement with Ocean India would provide ample opportunity to discover possible acquisitions in the region. Currently USD 780,000 per annum is added to the bottom line with the agreement while the period of 2 years would end at October in 2015. With improvements in US demand and 10-12% recently added capacity coming on line during the coming quarters, combined with substantial savings from the multi fuel boiler plant, TJL would comfortably regain the growth momentum achieved in the periods prior to 1Q FY2014/15.
8% price correction from Sept 19th- to Oct 14 th. Overseas Reality PLC OSEA.N000 Rs.26.00 Annualized EPS P/E Sector P/E: Land & Property NAPS Rs.3.44 7.56x 13.70x Rs.29.76 The development of Havelock City project under City within the City concept is the single largest integrated mixed use property development project in the city of Colombo. This is being built on a land area of nearly 18 acres and once completed it will comprise 10 residential towers with a commercial complex. Construction of Phase 2 has been completed while Sale of Phase 2 apartments is in progress and Currently nearly 75-80% of Sales being accounted as Revenue, under the percentage completion method for in the Financial Statements for the period ended 30 th June 2014. Havelock City accounts to 19% gross profit margins. OSEA is currently engaged in the Phase 3 of the Havelock City project which comprises 304 apartments, in two towers. Phase 3 of the project is expected to be completed by 2017 and all four phases by end of 2020. The revenue generation from this phase would start from FY2015 and by FY2018 all the apartments are expected to be sold. Phase 2 Phase 3 Phase 4 Commercial Development 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
WTC contributes to 37% of the total turnover. More importantly it maintains average occupancy of 98% and average rental rates growth of 14.4%.The strong gross profit margins of WTC of 75% have supported OSEA to achieve an average operating profit margin of 49% for the nine months ended 30 th June 2014. We expect this to continue given the context of high demand for commercial properties and rapid development of properties in Colombo city. OSEA has maintained its historically low gearing level; with total debt balance of Rs. 2.1 bn as at 30 th Sept 2014. The low gearing would continue to support substantial growth to the bottom line. The Debt/Equity ratio stands 8% while interest cover is 83.61 times. Havelock City housing Project was funded through a shareholder loan of USD 40mn and as at 31th June 2014 OSEA has lonely utilized nearly USD 16mn. Additionally the profit from the sale of apartments would be reinvested in the company therefore the need to go for new borrowings would be low. Since 2009 to 2012, OSEA has maintained a regular dividend of LKR 0.30 per share and in 2013 it was increased to LKR 1.45 which includes a special dividend of LKR 1.00. OSEA with its sound working capital management and sufficient cash reserves would be able maintain regular dividend. More importantly, foreign investors have collected 7,175,720 shares of Overseas Reality at Rs.25.70 during the month of October to 30 th October indicating strong upside potential. This is the YTD highest foreign participation on the counter.
Access Engineering PLC AEL.N0000 Rs.31.50 Annualized EPS P/E Sector P/E: Construction & Engineering NAPS Rs.2.82 11.17x 20.90x Rs.15.46 AEL s project portfolio consists of a strong and healthy mix of large scale infrastructure development projects covering almost the entire range of civil engineering. Company offer investors a proxy to Sri Lanka s infrastructure boom amongst the construction and engineering companies listed on the Colombo Stock Exchange, with exposure to capitalize on the infrastructure boom in Sri Lanka, given both its liquidity and fundamental growth potential. Group revenue and net profit at 5-yr CAGRs (FY09-14) stands at 37% and 27% respectively. The Government expenditure on public investment for Road & Bridges continued to increase while as at 30 th September 2014 GOSL has spent Rs.106 bn which is a 4.9% growth compared to 2013.Additionly Construction sector outperformed the other industries in Sri Lanka and recorded an annual growth rate of 27% in 2013. Access expanded its operations overseas; securing port development project in Papau New Guinea. Moreover company engaged in harbour and marine work locally while Access would be a likely beneficiary of the upcoming expansion projects of the Sri Lanka Ports Authority (SLPA). Strategic expansion through backward integration, leading to several key raw materials being sourced from own plants, thereby efficiently controlling the supply chain and expanding margins; GP margin of 24.0% in 1QFY14 (vs. 22.7% in 1QFY13) Company has competitive edge over peers in the industry as a result of its strong track record and relationships with international principal contractors. Company has also been able to continue to get subcontracts from China Harbour Engineering Company. China is Sri Lanka s principal funder for infrastructure projects (35% in 9M to end 2014) Access Towers with 12 storey office complex in Colombo (200,000 sq ft floor area) maintains 100% occupancy and it has 70% net profit margins. However it contributes to 5% to total profit after tax. In end-jan 2014, Company commenced construction of a 28 storey office complex (Access Tower 2, as an extension) at an investment of Rs.2.5bn and scheduled to complete in FY17E. Growth in Sathosa Motors (SMOT) to be driven by expansion of product portfolio, by obtaining dealership for heavy construction equipment through SANY brands Franchise for Isuzu; entered luxury motor segment in FY14, under a JV to be the distributor for Land Rover; SMOT contributed 11% to total PAT in FY14 (vs. 9% in FY13) Company also provides synergies to AEL group. Access has a Strong balance sheet with net cash position of Rs.3.1bn as at 30 th September 2014.
MTD Walkers PLC KAPI.N000 Rs.56.00 Annualized EPS P/E Sector P/E: Construction & Engineering NAPS Rs.5.23 10.70x 20.90x Rs.47.84 KAPI could be categorized as a key beneficiary of increased public infrastructure spending, given KAPI s major presence in Government funded projects in Civil engineering. This segment contributes to 80% to group revenue and earnings. In addition group has changed it approach of project mix with 90% of group s projects been funded projects mainly by Asian Development Bank and other international financial Institutions. This will clearly reduce the inherent risks of construction companies mainly the risks associated with longer working capital cycle and higher receivables. Project Completion Project Completion Power Projects Railway Development Projects Norochcholai Coal Power Plant Signaling & Telecommunication System 2015 Phase 2 : unit 2 2014 Phase 1: Mata - Beliatta 2016 Phase 3: unit 3 2014 Port Development Projects Uma Oya Hydro power plant 2015 East Container Terminal 2014 Sampur Coal Power Plant 2017 Magam Ruhunupura MR Port Road Development Projects Phase 2 2015 Outer Circular highway Bandaranaike International Airport 2017 Expansion Project Phase 2 2015 Phase 3 2017
Piling industry is dominated by four main players (Nawaloka, Access, Sanken and KAPI) while KAPI is expected to be a direct beneficiary of piling industry given the scale and capacity of the other services offered by the group. Company owns three asphalts plants and queries in six locations around the country. Therefore have higher ability to control production costs by eliminating its dependency on external suppliers. Additionally, KAPI plans to setup five mobile asphalt and quarry plants to meet increasing demand in the asphalt market. 30MW thermal power subsidiary, North Power Company (Pvt) Ltd was set up as an Independent Power Producer (IPP) in 2008 and is the largest power producer in the North, with demand growing amid high infrastructure development. The Power Purchasing Agreement (PPA) with Ceylon Electricity Board (CEB) would valid till 2023. KAPI expanded its operations into the marine engineering sector (under Combo Engineering Services Ltd) in 2013 and currently setting up a floating dock ship repair facility with the focus of expanding the capacity. On August 2014 the Company decided to acquire 100% equity stake of Wincon Development Ceylon (Pvt) Limited a local unit of a Malaysian property development company at a consideration of Rs. 2.174 Bn. On 10th October 2014 company declared a right issue at Rs.45.00 per share to fund the acquisition of the company and to enhance working capital requirements. For the period ended 30 th June 2014 the group recorded a revenue of Rs. 3.3 Bn an increase of 76.1% compared with the same quarter previous year while during FY 2013/14 the group generated a revenue in excess of Rs. 10 Bn which was a 36.6% increased compared with the previous FY. The groups profits for the quarter increased by over 95% to Rs. 369. 3 Mn from which approx. 102% was generated by the Engineering sector while the power generation sector contributed by 10.8% and the Investments generated a negative contribution of 13.1% towards the overall profits. Company targets to achieve Rs.20 Bn top line and 15% net profit margin by year 2016. Sub Sector* Revenue Contribution Profit Contribution Civil Engineering 79.02% 103.29% Power Generation 15.49% 15.52% Engineering Services 3.79% 8.70% Investments & Services 0.53% (29.44%) *As at 31 st June 2014
People s Leasing & Finance PLC PLC.N000 Rs.22.00 Annualized EPS P/E Sector P/E: Bank Finance & Insurance NAPS Rs.2.45 8.98x 12.70x Rs.13.26 Reduction of Motor vehicle import tax from budget 2015 and lower rates regime would support the motor sector. Leasing & higher purchase accounts to 76% of the group turnover while 68% contributing to bottom line. Sri Lanka s new motor vehicles registration for the period of nine months ended September 2014 compared to 2013 same period has increased by 10% to 269,550 vehicles while importation of vehicle has increased by 34% to 314,635 vehicles. More importantly the highest volume growth has stemmed from importation of Buses with 51% growth. For FY2015 GOSL has allocated funds for 500 new buses to import while has given incentives to private bus owners to encourage new investments in buses via a 6% interest rate credit scheme granted. We believe highest beneficiary of this initiative for leasing would come to PLC in FY2015. Fast growing insurance subsidiary People s Insurance is benefited from significant captive in-house business (Period ended 30 th September 2014 Insurance segment contributed to 9.9% to profit while Net earned premium was Rs.3.5bn up 42% YoY)
With Government support, PLC has the potential to take advantage of opportunities in SME sector as largest finance company in SL with a strong branch network. (85 branches, 109 window offices) PLC trades at relatively undervalued prices, with strong ROEs of 17.8% for 2014. The Dividend payout stands at 63% while dividend yield is 5.6% for FY2014. The construction work of the commercial complex (Land value of Rs.178.5 mn) of People s Leasing Havelock properties LTD is due to be completed by June 2015, we expect the bottom line to improve further with commercial operations of the complex launching in October 2015. For the six months ended 30 th September 2014 the group recorded an Interest Income of Rs. 10.04 Bn an increase of 3.6% compared with the same period previous year while during FY 2013/14 the group generated an Interest Income in excess of Rs. 20.05 Bn which was a 14.7% increased compared with the previous FY. Net Interest Income for the same period increased by over 20% to Rs. 4.9 Bn largely due to the decrease in Interest expenditure for the period. While other Operating Income increased significantly to Rs. 262 Mn for the six months ended 30th September 2014. The groups profits for the same period increased by over 38.8% to Rs. 1.87 Bn from which approx. 67.7% was generated by the Leasing & Hire Purchases sub-sector while the Loans sub-sector contributed by 17.7% and the Insurance sub-sector generated a contribution of 9.9% towards the overall profits. During the year the Company achieved total assets of Rs.113.8 Bn being the first NBFI to reach the Total Asset level of over Rs. 100 Bn. Sub Sector Revenue Contribution Profit Contribution Leasing & Hire-purchases 76.0% 67.7% Loans 15.8% 17.7% Islamic Finance 3.9% 4.4% Insurance 1.5% 9.9% *As at 30 th September 2014
Research Jayangi Abeywardana Jayangi@navaracapital.lk Harindi Hettigamage harindi@navarasecurities.lk Sales & Marketing Nadun Jayatilleke (CEO) Mob: +94 712 769090 nadunjayatillake@gmail.com Warana Sumanasena Ruwan Rodrigo Dilshan Kumarage Mob: 071-9553617/ 071-4488558 Mob: +94 71-1045071 Mob: 077-7540200/ 0719553618 warana@navarasecurities.lk ruwan@navarasecurities.lk Dilshan@navarasecurities.lk DISCLAIMER: This document is a research report prepared by NAVARA Securities (Pvt) Ltd. The information contained in the document has been compiled from sources that we believe to be reliable. However, we do not hold ourselves responsible for its completeness or accuracy. All opinions and estimates included in this report constitute of our judgment to this date and are subject to change without notice. Information contained in this document is not and should not be construed as an offer, or a solicitation of an offer, to buy or sell any security or other financial instruments. Navara Securities (Pvt) Ltd, or its affiliates and/ or its directors, officers and employees shall not be in any way be responsible or liable for loss or damage which any per-son or party may sustain or incur by relying on the content of this document.