Ceylon Tobacco Company
CTC – Rs.1,147.0 - Event Update - 10 October 2014
Ceylon Tobacco Company (CTC - Rs.1,147.00), the sole legal manufacturer and distributor of cigarettes in Sri Lanka, increased prices of its cigarettes by Rs.1.00 - 2.00 per stick w.e.f 10 October 2014, subsequent to an excise duty revision by the Government of Sri Lanka (GoSL).
· The latest excise duty led price revision was implemented a couple of months later than we had previously anticipated (early-4Q2014E vs. our original projection of mid-3Q2014). Further, the extent of the price increase is lower than we had forecast (+9% YoY for an average price per stick vs. forecast +13% YoY). No further price increases are expected for 2014E
o The relatively delayed and moderate price revision likely reflects the GoSL’s efforts of reconsidering the close proximity and sharp extent of excise duty led price revisions in order to prevent a counterproductive effect on Government levies earned
We currently maintain our net profit forecasts for CTC at Rs.10,293mn for 2014E (+13% YoY; 1H2014 net profit +6% YoY to Rs.4,537mn) and Rs.11,643mn for 2015E (+13% YoY).
· We will however revisit our forecast assumptions in greater detail subsequent to the release of the official excise duty data from the Ministry of Finance and Planning and CTC's 3Q2014 earnings, and follow up with a more in depth analysis in our 3Q2014 Results Summary (expected to be released in early-November 2014)
Share Price Performance & Valuations
· The CTC share has sharply underperformed the market both YoY and 2014YTD, as expected from the defensive share in the current market conditions and likely due to a slowdown in financial performance resulting in relatively fair near term valuations
· Despite slowing near term EPS growth expectations, CTC offers exceptional ROEs of >100% and a superior business model that is expected to deliver a steady mix of earnings and dividend growth, which will be favoured by medium to long term institutional investors seeking exposure to defensive and relatively stable stocks