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Distilleries Co. of Sri Lanka

Distilleries Co. of Sri Lanka (DIST) 2Q16 Results Summary - 18 November 2015

2Q16 net profit of Rs.1,449mn (-22% YoY and –17% QoQ), below our expectations - the lowest quarterly net profit since 3Q13, attributable to below par performance in core beverage sector amid a sharp erosion in gross profit margin. 1H16 net profit -14% YoY to  Rs.3,205mn

Outlook & Valuations


§   Group net profit forecasts revised down by -7% to Rs.7,618mn for FY16E (+3% YoY) and by -3% Rs.8,953mn for FY17E (+18% YoY), amid a downward revision to beverage sector gross profit margins. Nevertheless, the core beverage sector continues  to remain the main driver to earnings, contributing over 80% of group PBT

§  Amid being identified as one of the top investment picks to benefit from the domestic consumption pickup in 2015, the DIST share has sharply outperformed the market in 2015YTD, rising +31% (vs. ASI’s decline of -4% during the same period)

§  Despite its recent share price gains and downward revision to core beverage sector earnings, the share trades at a 23% discount to the estimated break up Net Asset Value (NAV) of Rs.360.0, trading at forward PER multiples of 10.9X FY16E and 9.2X FY17E. DIST share warrants a valuation discount, given high political and regulatory risk and stiff industry competition

§  Recent developments of improved earnings visibility in the diversified sector – disclosure of financial services segmental earnings and significant reduction in exposure to equity investments, and sharp excise duty revisions on strong beer may however partly narrow the extent of the warranted valuation discount

§  Potential news of Pelwatte Sugar (SUGA) being returned to DIST or compensated for same under the new Government in the near term may be cheered by the investor community

§  The long term strategy of the group seems to be coming into better light, with group restructuring and potential listing of Melstacorp as a separate entity, which would enable investors to identify the full value of  DIST’s core beverage business, commanding market dominance, strong brand equity and high FCF generation. We have identified DIST as an investment pick amid it being one of the select and few stocks in the consumer space still trading at reasonable valuations whilst offering superior liquidity levels


Hemas Holdings

HHL - 2Q16 Results Summary - 18 November 2015 

2Q16 EPS of Rs.1.1 (+13% YoY on a recurring basis), in line with our expectations, core FMCG sector posted strong earnings growth amidst the improved consumer sentiment and higher disposable income. HHL reported a Net Profit (NP) of Rs.635mn for 2Q16 (+17% YoY on a recurring basis). Consequently, HHL reported a NP of Rs.1,050mn for 1H16 (+25% YoY)


    Outlook & Valuations

    FY16E group NP forecasts broadly maintained at Rs.2,279mn (+17% YoY). We have assumed that HHL will deploy the rights issue funds during 4Q16E. Due to lack of visibility on how the funds will be utilized, we have assumed it will be equally invested in the FMCG sector and Pharmaceutical segment at ROEs of 11-12%. FY17E NP also maintained at Rs.2,892mn (+27% YoY), to be driven by FMCG (~56% of total NP) and Healthcare (~50% of total NP) sectors

    HHL stated that its Super Gains Tax (SGT) liability is Rs.627mn. The company made the first of its three equal instalment payments on 30 October. The second and third instalments will be made on 30 November and 31 December 2015 respectively

    The HHL share has outperformed the market rising +19% YoY (vs. ASI’s decline of -7% YoY). During the last three months the share fell -5% (vs. market decline of -7%) falling from its all-time high of Rs.99.8 on 05 August 2015. Following its gains, the share is now trading 28% above its estimated break up Net Asset Value (NAV) of Rs.68.7 per share. On the back of EPS of Rs.4.0 for FY16E (+6% YoY) and Rs.5.1 for FY17E (+26% YoY) the share is trading at rich forward PER multiples of 21.7x FY16E and 17.2x FY17E, offering ROE of ~11% for both years

    We believe that the near term positives, including the utilization of rights issue funds, are priced in and short term further upside seems unlikely. However, medium to longer term investors are expected to still benefit from the EPS accretive nature of the anticipated new investments - from the deployment of rights issue funds into the dominant FMCG sector and Pharmaceutical segment in 2H16E - with the total impact of the returns to be fully witnessed from FY17E onwards


Nations Trust Bank

Nations Trust Bank (NTB) 3Q2015 Results Summary - 16 November

§  3Q2015 EPS of Rs.3.0 (-18% YoY and -11% QoQ), below our expectations, largely on account of marked to market losses on its Fixed Income Securities (FIS) portfolio

§  Net Interest Spread contracted QoQ amid increased price competition within the banking and financial sector

§  Uncertainty related to promoter dilution continues, amid likely participation of banks in ongoing sector consolidation initiatives. A near term acquisition/merger related to NTB may not materialise amid the flexible stance adopted by the Central Bank of Sri Lanka (CBSL)

Outlook & Valuations


§  We have revised down our 2015E NP forecast by -8% to Rs.2,543mn (unchanged YoY), largely due to downward revision in interest spreads. Whilst the quarterly and cumulative earnings were affected by trading losses, a slight reversal is expected in 4Q2015E due to declining interest environment (following 30 Sep 2015). Meanwhile, 2016E NP forecast revised down marginally to Rs.3,165mn (+24% YoY off a low base) due to downward revision in both Net Interest and Non-Interest Income

§  Share currently trades at a discount to the sector on PERs of 8.4X in 2015E (however in line with sector on PBVs – 1.4X) and 6.7X in 2016E (PBV – 1.2X), providing attractive ROEs of 18-19%

§  With the recent declines in share prices (-12% in last three months), there appears to be a lower downside for NTB. However, material share price gains may be limited in the near term, given the anticipated pressure on margins and slowdown in vehicle leasing market (25% of loan book). Further, it appears that more compelling value exists in other banking sector stocks. Nevertheless, the share may find favour amongst medium to longer term growth-oriented investors given NTB’s superior ROEs and greater potential for growth in the local banking sector


Ceylon Tobacco Company

Ceylon Tobacco Company (CTC) 3Q2015 Results Summary - 12 November 2015

All-time high quarterly net profit of Rs.3,292mn for 3Q2015 (+57% YoY and +9% QoQ), above our expectations, amid a robust growth in volumes, attributable to both rise in disposable income and higher consumer demand prior to the excise duty led price increase, which came into effect on 03 Oct 2015. Consequently, 1-3Q2015 net profit +33% YoY to Rs.8,801mn

Outlook & Valuations


§  CTC’s net profit forecasts revised up by +5% to`212 Rs.10,557mn for 2015E (+23% YoY), mainly on account of higher volume expectations and by +3% to Rs.11,442mn (+8% YoY), amid the upward revision to the average product price led by the slightly higher than anticipated excise duty led price revision in Oct 2015

§  80% pictorial health warning labels on cigarette packs implemented w.e.f 01 Jun 2015

§  CTC’s Super Gain Tax (SGT) liability determined at Rs.3.8bn. The first of three instalments was paid on 30 Oct 2015 with the balance Rs.2.5bn due in two equal instalments in end Nov and Dec

§  The share has outperformed the market in the past three months, rising +4% vs. the ASI’s decline of -6%, given its defensive characteristics coupled with improved financial performance. The share is however still down -30% from its record high of Rs.1,400.5 reached in Aug 2013

§  CTC is trading at comparatively attractive valuations of 17.5X 2015E and 16.1X 2016E, at a discount to recent historic levels and vs. most regional peers. Further, forecast gross dividend yield of 6.2% for 2016E, makes CTC once again amongst the top dividend plays on the Colombo Stock Exchange (CSE)

§  Overall limitations for volume growth in the local tobacco market persist, potentially impacting the sustainability of profit growth over the long term. Nevertheless, the near term revival in volumes led by improved consumer sentiment coupled with relatively favourable valuations, exceptional ROEs of >100%, superior business model, robust cashflows and ~100% dividend payout enable CTC to be identified as an investment pick for the near term


Nestle Lanka

Nestlé Lanka (NEST) 3Q2015 Results Summary - 09 November 2015

3Q2015 net profit of Rs.1,026mn (-6% YoY and -21% QoQ – off a high base), below our expectations, amid higher than anticipated Marketing, Selling and Distribution (MSD) expenses during the quarter, negating benefit from strong expansion of the GP margin to a record high.    1-3Q2015 net profit +10% YoY to Rs.3,484mn

Outlook & Valuations


§  Despite 3Q2015 earnings being below our expectations, due to record high MSD expenses, we broadly maintain our NEST net profit forecasts at Rs.4,587mn for 2015E (+21% YoY) and Rs.5,155mn for 2016E (+12% YoY), amid upward revision to the GP margin compensating for the higher opex

§  The Super Gain Tax (SGT) liability for NEST is Rs.638mn. Despite the SGT impact, given its strong balance sheet and high free cashflow (FCF) generation, NEST seems capable to manage cashflows, leverage as necessary and maintain its ~97% historic dividend payout for 2015E

§  The defensive share has outperformed the market during the past three months, rising +4.0% vs. the ASI’s decline of -4.9%

§  NEST is trading at PERs of 24.6x 2015E and 21.9x 2016E, at a discount to NEST’s historic levels and its global peers. Though multiples still seem relatively rich to select local consumer plays, they are largely justified by NEST’s strong brand equity, superior ROEs of >100% and gross dividend yield of ~4%

§  Further, medium to long term investors favouring the consumer driven story in frontier markets and those seeking retirement stocks may accumulate the NEST share, which remains best-in class in the industry and one of the few fundamentally strong “buy and forget” shares on the Colombo Stock Exchange (CSE)


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