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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

 

Financial Outlook:

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

 

Aitken Spence

SPEN – Rs.110.60 - 1Q15 Results Summary - 8 October 2014

 

1Q15 reported EPS of Rs.1.8 (+12% YoY). Recurring 1Q15 net profit of Rs.606mn (-9% YoY), below our expectations amid below par performance in key tourism sector due to exceptional circumstances facing the Maldives segment, though partly compensated by strong contribution from the strategic investments sector. Recurring earnings exclude the balance insurance income under the tourism sector amounting to ~Rs.200mn, received by subsidiary Aitken Spence Hotel Holdings (AHUN) for the Adaaran Hudhurunfushi resort in the Maldives, which was partly damaged by a fire in July 2013, and adjusted for the estimated foregone profit from damaged villas of Rs.7mn

 

Outlook & Valuations:

 

  • Group recurring net profit forecasts revised down by ~2% for both FY15E and FY16E to Rs.3,937mn (+5% YoY) and Rs.4,524mn (+15% YoY) respectively, with earnings driven by key sectors, tourism (~75% of total PAT) and maritime cargo logistics sector (~13% of total PAT)
  • SPEN trades at a relative discount to its historic levels and to the hotel sector (sector TTM PER of 23.5X), and also to its leisure subsidiary AHUN, whilst offering superior liquidity levels. An approximate sum-of-the-parts (SOTP) valuation for SPEN suggests that the share is trading at a ~4% premium to its estimated break up NAV, with the bulk of SPEN’s SOTP valuations arising from its tourism sector (~76% of SPEN’s estimated total value)
  • Despite the relatively reasonable valuations, SPEN currently lacks an immediate catalyst to re-rate the share, with near term EPS growth expectations also remaining relatively modest on account of pressures on revenue growth in key tourism markets and the potential non-renewal of the Power Purchase Agreement (PPA) of Ace Power Embilipitya (APE) being an overhang. In addition, poor sectoral earnings visibility amid lack of detailed information to develop robust sectoral forecasts (excluding tourism) and over-reliance on tourism, which is vulnerable to shocks are potential investment risks to be factored

 

 

Hemas Holdings

HHL - Rs.60.70 - Event Update - 02 October 2014 

·         Hemas Holdings’ (HHL) 57% owned Leisure subsidiary, Serendib Hotels (SHOT) announced that its major shareholders, i.e. HHL and Minor International PCL (MINT), have made a proposal to the Board of Directors (BOD) of SHOT, with a view to consolidate the multiple Sri Lankan hotel property investments of SHOT and the two major shareholders under SHOT

·         The proposal has been considered by the BOD of SHOT and an independent valuer has been appointed to carry out valuations pertaining to the investments relevant to the proposal

·         During FY11 – FY14, HHL’s Leisure sector contributed a four year average of 6% to group revenue, 14% to PAT, 8% to Net Profit (NP) and ~38% to total group capex

·         Sector ROE’s are only ~4% and the sector’s contribution to HHL is constrained by the high minority interest component. The effective minority interest in HHL’s Leisure sector was an average ~52% during the period of FY11-FY14

·         We believe this proposal is aimed at reducing the high minority interest and increase Leisure sector contribution to HHL’s group NP. As a result, there could be a potential de-listing of non-voting shares in the near term. Furthermore, SHOT may look to increase its stakes in STAF and HSIG

·         SHOT voting and non-voting shares outperformed the broader All Share Price Index (ASPI +27% YoY), rising +32% YoY and +62% YoY respectively. SHOT-N TTM PER valuations are at 19.0X and SHOT-X is at 12.8X. (SHOT-N – Rs.37.0 and SHOT-X – Rs.25.0)

 

 

 

 

 

 

 

Hemas Holdings

HHL - Rs.60.70 - Event Update - 02 October 2014 

·         Hemas Holdings’ (HHL) 57% owned Leisure subsidiary, Serendib Hotels (SHOT) announced that its major shareholders, i.e. HHL and Minor International PCL (MINT), have made a proposal to the Board of Directors (BOD) of SHOT, with a view to consolidate the multiple Sri Lankan hotel property investments of SHOT and the two major shareholders under SHOT

·         The proposal has been considered by the BOD of SHOT and an independent valuer has been appointed to carry out valuations pertaining to the investments relevant to the proposal

·         During FY11 – FY14, HHL’s Leisure sector contributed a four year average of 6% to group revenue, 14% to PAT, 8% to Net Profit (NP) and ~38% to total group capex

·         Sector ROE’s are only ~4% and the sector’s contribution to HHL is constrained by the high minority interest component. The effective minority interest in HHL’s Leisure sector was an average ~52% during the period of FY11-FY14

·         We believe this proposal is aimed at reducing the high minority interest and increase Leisure sector contribution to HHL’s group NP. As a result, there could be a potential de-listing of non-voting shares in the near term. Furthermore, SHOT may look to increase its stakes in STAF and HSIG

·         SHOT voting and non-voting shares outperformed the broader All Share Price Index (ASPI +27% YoY), rising +32% YoY and +62% YoY respectively. SHOT-N TTM PER valuations are at 19.0X and SHOT-X is at 12.8X. (SHOT-N – Rs.37.0 and SHOT-X – Rs.25.0)

 

 

 

 

 

 

 

Sampath Bank

SAMP - Rs 241.80 - 2Q 2014 Results Summary - 30 September 2014

 

2Q2014 EPS of Rs.9.2 (up 139% YoY), above our expectations, due to impairment reversals, offsetting negative loan growth and deterioration in NIS

§  SAMP reduced provisions to its pawning portfolio to Rs.0.9bn as at 30 Jun 2014 from Rs.2.1bn as at 31 Jun 2013 resulting in an impairment reversal of Rs.920mn in 2Q2014 (covers ~3% of total gold portfolio); an overall impairment reversal of Rs.804mn is expected for 2014E amidst reduction in pawning portfolio

Outlook & Valuations

 

  • We revise up our SAMP NP forecast by 26% to Rs.4,956mn for 2014E (up 36% YoY) driven by impairment reversals coupled with the growth in Non II, despite a deteriorating NIS. 2015E NP forecast revised up by 18% to Rs.5,384mn (up 9% YoY) driven by an expected pick up in private sector credit appetite

 

  • SAMP currently trades at a discount to the sector at PER multiples of 8.2X in 2014E (PBV – 1.1X) and 7.5X in 2015E (PBV – 1.0X), providing ROEs of ~15% and ~14% for 2014E and 2015E

 

  • With the volatility in earnings, high funding cost and slow core business growth, a discount is warranted for SAMP. However, the current discount appears to be too steep given the earnings growth expectations. The relatively inexpensive share would also find favour amongst value oriented investors in the medium term

 

 
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