Cargills (Ceylon) CARG – Rs.193.0 1 CT CLSA SECURITIES (PVT) LIMITED | A Member of the Colombo Stock Exchange Key Highlights 3Q18 Results Update 3Q18 recurring net profit of Rs.636mn (largely unchanged YoY), broadly in line with our expectations. Earnings are adjusted for CARG‟s proportion of the Rs.481mn capital gain received by associate Cargills Bank from disposal of subsidiary Colombo Trust Finance (CALF) CARG group net profit forecasts broadly maintained at Rs.2,535mn for FY18E (+20% YoY) and Rs.3,055mn for FY19E (+21% YoY), particularly driven by the Retail and Restaurants sectors. Retail sector to marginally overtake FMCG earnings contribution in FY19E given the significant expansion plans in the pipeline - targeting to double its retail network in the medium term On 01 Feb 2018, CARG announced a capitalisation of reserves amounting to Rs.6.4bn (out of reserves of Rs.9.4bn as at 30 Sep 2017), via the issuance of 32mn shares in the proportion of 01:07 at a consideration of Rs.200.0 per share; XC : 20 Mar 2018 The CARG share has outperformed the market rising +13% both during the past 3 months and 12 months (vs. the ASI‟s gains of +1% and +2% respectively during the same period) CARG is trading at PER multiples of 19.5X FY18E and 16.2X FY19E whilst offering ROEs of 17- 19% (up from low single digits in FY15) Our estimated Sum-of-the-parts (SOTP) valuation suggests that CARG is currently trading at a -19% discount to our estimated breakup NAV of Rs.238 per share CARG has demonstrated much greater resilience to its peers in the recent quarters. CARG‟s closest listed competitor, Ceylon Cold Stores (CCS) has been negatively impacted from the introduction of the “sugar tax”, given its exposure to carbonated soft drinks. The relative attractive multiples vs. other listed peers, coupled with the double digit growth expectations and the recent measure to improve share liquidity will likely find favour amongst investors, particularly given that the relatively illiquid nature of the share may be a deterrent. Moreover, medium to long term investors favouring the consumer driven story of Sri Lanka may find favour in the share, on the back of CARG‟s strong market positioning and brand equity FY15 FY16 FY17 FY18E FY19E Net Revenue (Rs mn) 61,631 71,017 84,191 89,916 103,750 Net Profit (Rs mn) 158 1,571 2,106 2,535 3,055 Earnings per Share (Rs) 0.6 6.1 8.2 9.9 11.9 Earnings per Share Growth (%) -79.7 >+100.0 34.0 20.4 20.5 Price / Earnings Ratio (X) 193.9 21.4 15.2 19.5 16.2 Price / Earnings Growth (X) -2.4 0.0 0.6 1.0 0.8 Gross Dividends per Share (Rs) 1.8 3.1 4.9 3.8 4.5 Gross Dividend Yield (%) 1.5 2.3 3.0 2.0 2.3 Net Book Value per Share (Rs) 49.0 55.2 54.5 60.7 68.1 Price / Book Value (X) 2.4 2.4 3.0 3.2 2.8 Return on Equity (%) 1.3 11.8 15.0 17.2 18.5 Market Price per Share (Rs) 119.9 131.3 164.5 192.6 193.0 Relative Share Price Movement (%) CARG ASPI CARG: Valuation Ratios Note: Valuations are based on recurring EPS, Adj. for Capital Issues (if any); Historic Ratios are based on Y/E MPS Adjusted for the 01:07 Capitalisation of Reserves – XC : 20 Mar 2018 Source: CARG, CT CLSA Chayanika Ranasinghe Email : [email protected]Phone : +94 77 2379731 Sri Lanka Beverage Food & Tobacco 10 April 2018 Key Trading Information Disclaimer: CT CLSA Securities (Pvt) Ltd is an associate of C T Holdings PLC, the parent of CARG CT CLSA SECURITIES (PVT) LIMITED | A Member of the Colombo Stock Exchange Shares in Issue (mn) 256.0 Market Cap (US$ mn) 318.1 Estimated Free Float (%) 18.7 3M Avg Daily Volume 38,024 3M Avg Daily Turnover (US$) 45,882 12M High / Low (Rs) 200.2 / 157.5 3M / 12M Price Change (%) 10.9 / 22.5 95 100 105 110 115 07-Apr-17 09-Oct-17 10-Apr-18
Transcript
Cargills (Ceylon)
CARG – Rs.193.0
1 CT CLSA SECURITIES (PVT) LIMITED | A Member of the Colombo Stock Exchange
Key Highlights
3Q18 Results Update 3Q18 recurring net profit of Rs.636mn (largely unchanged YoY), broadly in line with our
expectations. Earnings are adjusted for CARG‟s proportion of the Rs.481mn capital gain received by associate Cargills Bank from disposal of subsidiary Colombo Trust Finance (CALF)
CARG group net profit forecasts broadly maintained at Rs.2,535mn for FY18E (+20% YoY) and Rs.3,055mn for FY19E (+21% YoY), particularly driven by the Retail and Restaurants sectors. Retail sector to marginally overtake FMCG earnings contribution in FY19E given the significant expansion plans in the pipeline - targeting to double its retail network in the medium term
On 01 Feb 2018, CARG announced a capitalisation of reserves amounting to Rs.6.4bn (out of reserves of Rs.9.4bn as at 30 Sep 2017), via the issuance of 32mn shares in the proportion of 01:07 at a consideration of Rs.200.0 per share; XC : 20 Mar 2018
The CARG share has outperformed the market rising +13% both during the past 3 months and 12 months (vs. the ASI‟s gains of +1% and +2% respectively during the same period)
CARG is trading at PER multiples of 19.5X FY18E and 16.2X FY19E whilst offering ROEs of 17-19% (up from low single digits in FY15)
Our estimated Sum-of-the-parts (SOTP) valuation suggests that CARG is currently trading at a -19% discount to our estimated breakup NAV of Rs.238 per share
CARG has demonstrated much greater resilience to its peers in the recent quarters. CARG‟s closest listed competitor, Ceylon Cold Stores (CCS) has been negatively impacted from the introduction of the “sugar tax”, given its exposure to carbonated soft drinks. The relative attractive multiples vs. other listed peers, coupled with the double digit growth expectations and the recent measure to improve share liquidity will likely find favour amongst investors, particularly given that the relatively illiquid nature of the share may be a deterrent. Moreover, medium to long term investors favouring the consumer driven story of Sri Lanka may find favour in the share, on the back of CARG‟s strong market positioning and brand equity
FY15 FY16 FY17 FY18E FY19E
Net Revenue (Rs mn) 61,631 71,017 84,191 89,916 103,750
Net Profit (Rs mn) 158 1,571 2,106 2,535 3,055
Earnings per Share (Rs) 0.6 6.1 8.2 9.9 11.9
Earnings per Share Growth (%) -79.7 >+100.0 34.0 20.4 20.5
Price / Earnings Ratio (X) 193.9 21.4 15.2 19.5 16.2
Price / Earnings Growth (X) -2.4 0.0 0.6 1.0 0.8
Gross Dividends per Share (Rs) 1.8 3.1 4.9 3.8 4.5
Gross Dividend Yield (%) 1.5 2.3 3.0 2.0 2.3
Net Book Value per Share (Rs) 49.0 55.2 54.5 60.7 68.1
Price / Book Value (X) 2.4 2.4 3.0 3.2 2.8
Return on Equity (%) 1.3 11.8 15.0 17.2 18.5
Market Price per Share (Rs) 119.9 131.3 164.5 192.6 193.0
Relative Share Price Movement (%)
CARG
ASPI
CARG: Valuation Ratios
Note: Valuations are based on recurring EPS, Adj. for Capital Issues (if any); Historic Ratios are based on Y/E MPS Adjusted for the 01:07 Capitalisation of Reserves – XC : 20 Mar 2018
Disclaimer: CT CLSA Securities (Pvt) Ltd is an associate of C T Holdings PLC, the parent of CARG
CT CLSA SECURITIES (PVT) LIMITED | A Member of the Colombo Stock Exchange
Shares in Issue (mn) 256.0
Market Cap (US$ mn) 318.1
Estimated Free Float (%) 18.7
3M Avg Daily Volume 38,024
3M Avg Daily Turnover (US$) 45,882
12M High / Low (Rs) 200.2 / 157.5
3M / 12M Price Change (%) 10.9 / 22.5
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EQUITY REPORT TITLE | Date EQUITY REPORT TITLE | Date A CT HOLDINGS GROUP AND CLSA GROUP COMPANY 2
The Business Cargills Ceylon (CARG), a 70% owned subsidiary of listed conglomerate, C T Holdings (CTHR), is one of the leading retail and food & beverage companies in Sri Lanka. The group primarily operates in three sectors – Retail, Fast Moving Consumer Goods (FMCG) and Restaurants, with exposure to banking through 40% associate, Cargills Bank, and property development through 22% associate, C T Properties.
The group was listed on the Colombo Stock Exchange (CSE) in 1946 and the Page family currently controls ~81% of the company.
CARG has evolved to become Sri Lanka‟s largest private retail chain with 351 outlets spread across the country. CARG owns and operates leading processed food brands under its FMCG umbrella, with its key product categories comprising dairy (ice cream, yoghurt, liquid milk forms, cheese), processed meat, agrifoods (fruit juices and nectars, jams, sauces, cordial, water and spices) and confectionery (biscuits). The group has operated the KFC franchise in Sri Lanka since 1996, which currently comprises 31 outlets, and a TGI Fridays‟ outlet under franchise operations since 2013.
Recent Financial Performance CARG posted a 3Q18 recurring net profit of Rs.636mn (largely unchanged YoY), broadly in line with our expectations. Quarterly earnings are adjusted for CARG‟s proportion of the Rs.481mn capital gain received by associate Cargills Bank from disposal of subsidiary Colombo Trust Finance (CALF). Consequently, 1-3Q18 recurring net profit amounted to Rs.1,912mn (-1% YoY)
Sectoral Analysis
Sectoral Information (Rs mn) 2Q14 2Q15 % YoY Composition (%)
Group EBIT 1,407 1,383 -1.7 4,269 4,473 4.8 100.0 100.0
Retail 738 665 -9.9 2,323 2,328 0.3 52.5 48.1
FMCG 576 584 1.4 1,713 1,782 4.0 40.9 42.2
Restaurants 86 131 53.1 209 350 67.7 6.1 9.5
Others* 8 3 -64.4 24.4 13.0 -46.6 0.5 0.2
Note: Earnings and valuations on a recurring basis 3Q18 earnings adjusted for a Rs.481mn capital gain (Rs.191mn for CARG’s effective~40% holding) received by Cargills Bank from divesture of its subsidiary Colombo Trust Finance (CALF) ; 2Q18 earnings excluding Rs.1,010mn capital gain from disposal of investment properties
DIST’s quarterly interims only report the cumulative sectoral earnings, thus quarterly sectoral earnings are derived and may be subject to change subsequent to restatements of accounts
Source : CARG & CT CLSA
*1-3Q18 earnings adjusted for Rs.1.0bn capital gain from disposal of investment properties in 2Q18. Sector earnings assumed to primarily comprise rental income – previously accounted for under Retail sector Note: Earnings from banking & property development accounted for under Associates
EQUITY REPORT TITLE | Date EQUITY REPORT TITLE | Date CT CLSA SECURITIES (PVT) LIMITED | A Member of the Colombo Stock Exchange 3
Retail Sector
3Q18 EBIT of Rs.665mn (-10% YoY, 48% of group EBIT), below our expectations, amid erosion in margins due to increased promotional activities in the tight consumer environment. 1-3Q18 EBIT of Rs.2,328mn (up marginally YoY)
Retail sector earnings comprise those from the retail businesses and the holding company, which also includes contribution from Associates
Since opening its first „Food City‟ supermarket in 1983 in Colombo, CARG has evolved to become Sri Lanka‟s largest modern retailer (in terms of market share), with a wide retail network of 351 outlets across the country. CARG positions itself via its offering of “higher value for the lowest price” and holds an estimated modern retail market share of ~40%. Most fresh food sold at CARG outlets are directly sourced from farmers through its collection centres across Sri Lanka and has gained international recognition
3Q18 sectoral revenue, accounting for 79% of group revenue, rose +4% YoY, attributable to a combination of same store sales growth and added contribution from newly opened stores. CARG has added 36 new outlets since 31 Mar 2017, increasing the total number of outlets to the current 351 (338 as at 31 Dec 2018). 13 more outlets were opened post-quarter end
Sectoral EBIT margin eroded to 3.6% in 3Q18 (vs. 4.2% in 3Q17 and 4.4% in 2Q18), likely due to increased promotional activities in the tight consumer environment, particularly amid the relatively high inflationary pressures. Further, margins may have been partly impacted by increased expansion driven expenses. CARG indicated that the group continued to drive measures to control overall operating costs
Retail sector net profit forecasts revised down by -9% to Rs.1,110mn for FY18E (+15% YoY on a recurring basis, 44% of group net profit) and by -7% to Rs.1,385mn for FY19E (+25% YoY, 45% of group net profit), due to the downgrade in EBIT margin forecasts for the aforementioned factors and lower than anticipated new store openings for FY18E. Meanwhile, YoY growth driven by same store sales coupled with added contribution from newly opened stores. Despite weak domestic consumerism amid tightening fiscal policy, CARG has demonstrated greater resilience given its operating model of offering relatively more competitive prices versus other retailers and the traditional stores
o Based on discussions with CARG management, the company is expected to open 60-70 new outlets per year in the near term, with a medium to longer term target to double its retail network to around 600 outlets. We forecast sector capex at Rs.2.7bn for FY18E (vs. Rs.1.7bn in FY17) and Rs.4.7bn for FY19E
o According to Nielsen, modern retail penetration in Sri Lanka is only ~18-20%, with the relatively low penetration largely attributable to the majority of the supermarkets being situated within the Western Province. Just two of the larger players, namely „Food City‟ and state-owned Lak Sathosa have a noticeable presence outside of the Western province
o Competition among retailers, particularly in Greater Colombo, is stiffening with the main players, particularly John Keells Holdings‟ (JKH) listed subsidiary Ceylon Cold Stores (CCS), expanding aggressively - 72 outlets as at 31 Dec 2017. In early-Apr 2018, international retail chain SPAR opened its first outlet in Sri Lanka through a JV with local player, Ceylon Biscuits Ltd (CBL), and announced plans to open 20 outlets within a five year period. Further, press articles reported that UK retailer, Sainsbury’s is also believed be exploring to enter Sri Lanka partnering with a local conglomerate
o Sector EBIT margin forecasts revised down by 20bps to 4.1% for FY18E (vs. 4.3% in FY17) and 4.0% for FY19E. The erosion in margins in FY19E is on the back of higher operational costs from the new outlets under the group’s aggressive expansion plans, particularly outside of the Western Province. Nevertheless, the overall impact from the rise in costs is anticipated to be better absorbed given that the group benefits from greater economies of scale
o The International Finance Corporation (IFC) acquired an 8% stake in CARG‟s retail business in 4Q15 at a total consideration of Rs.2.6bn, valuing the retail business at ~Rs.32.5bn. The investment has an embedded put option, exercisable between 2020 and Feb 2021
Source: Ministry of Finance, Central Bank of Sri Lanka, CT CLSA Source: Central Bank of Sri Lanka Note: 2002 base taken due to unavailability of data
2014 Per Capita GDP – Provincial (Rs’000) Per Capita GDP (US $)
Key Listed Players : No. of Supermarkets
Cargills (Ceylon)
2,700
3,200
3,700
4,200
2011 2012 2013 2014 2015 2016E2017E
Source: CARG, CCS, RICH
300 400 500 600 700 800
WesternCentral
SouthernNorthern
EasternNorth Western
North CentralUva
Sabara-Gamuwa
Source: CARG Annual Reports, CT CLSA
Retail Sector : Revenue and Capex (Rs bn) Retail Sector : NP & Contribution to Group
1.0
1.5
2.0
2.5
3.0
35
40
45
50
55
60
65
70
75
FY13 FY14 FY15 FY16 FY17E FY18E
Revenue Capex - RHS
-20
0
20
40
60
80
-200
0
200
400
600
800
1,000
1,200
1,400
FY13 FY14 FY15 FY16 FY17EFY18E
NP (Rs mn) % of Group NP - RHS
Retail : Net Profit (Rs mn) and as a % of Group NP
EQUITY REPORT TITLE | Date EQUITY REPORT TITLE | Date A CT HOLDINGS GROUP AND CLSA GROUP COMPANY 4
FMCG Sector
3Q18 sectoral EBIT up +1% YoY to Rs.584mn (42% of group EBIT), broadly in line with our expectations, driven by topline growth though partly negated by the YoY erosion in profit margins. 1-3Q18 EBIT of Rs.1,782mn (+4% YoY)
Sector comprises Dairy (ice cream, yoghurt products, cheese, ultra-high temperature (UHT) and pasteurised milk under „Kotmale‟ and „Magic‟ brand names), Agrifood (juices, nectars, jams, sauces and cordials under „Kist‟ brand), Processed Meats, Confectionary (biscuits) and Import Distribution (under Millers). Dairy and Agrifoods are assumed to contribute over 70% of sector earnings
As per CARG, it is the market leader in ice cream with a market share of ~40-45%. „Magic‟ is believed to be the market leader in the impulse ice cream category whilst „Kotmale‟ and „Magic‟ collectively command a leading presence in the take home category. The other significant player in ice cream manufacturing is CCS
Kotmale has a growing presence in liquid milk offerings under pasteurised milk, UHT, Ready to Drink (RTD) forms, and in yoghurt and cheese. CARG group‟s full dairy requirements are fulfilled locally and CARG is amongst the largest private collectors of fresh milk
3Q18 revenue grew +4% YoY, attributable to higher volumes and value contribution across all key segments, with the dairy segment in particular having performed well. CARG implemented price increases for select products, partly to pass on the VAT hike and higher input costs
FMCG product portfolio has been expanded, with the launches of Drinking Yoghurt, three variants of Stirred Yoghurt, three new ice creams under the impulse category and two new juices. Furthermore, CARG stated that the FMCG business continued to gain market share through these initiatives. Meanwhile, competition continued to stiffen with several players, including dairy giant, Fonterra too entering the drinking yoghurt segment
Quarterly EBIT margin meanwhile eased to 15.4% (vs. 15.8% in 3Q17 though up from 14.5% in 2Q18), particularly due to the increase in prices of key raw materials
FMCG sector NP forecasts maintained at Rs.1,158mn for FY18E (+16% YoY, 46% of group NP) and Rs.1,361mn for FY19E (+18% YoY, 45% of group NP)
o Whilst local consumer spending is anticipated to remain subdued in the near term, the impact on players such as CARG is expected to be limited given that most of the segments in which CARG operates are considered to be relatively underpenetrated. Demand for food items is expected to be on the rise in the medium to longer term driven by the overall growth in disposable income levels. Management indicated that it is eyeing to differentiate products whilst innovating and expanding its portfolio to keep current with the changing consumption patterns and demand
o EBIT margins forecast at 15.0% for FY18E (vs. 14.6% in FY17) and 15.4% for FY19E. Sector margin improvement aided by the growth in revenue coupled with cost rationalisation efforts, with the group embarking on several cost saving measures at the back end of operations. Furthermore, the biscuits segment has turned profitable subsequent to its acquisition in 2010
o Prices of fresh milk sourced locally remain politically sensitive, given its impact on farmer disposable incomed. Farmgate prices for local liquid milk were last revised up by +17% per litre in Jul 2015 and by +20% in Oct 2014. The industry as a whole is expected to pass on any significant cost hikes to consumers by way of price increases to cushion margins
o We forecast sector capex at Rs.1.2bn for FY18E-19E (vs. Rs.1.5bn in FY17), mainly for the expansion of the cheese manufacturing facilities, which are currently operating at full capacity and given the potential growth upside for lower priced locally manufactured cheese products. FY17 capex was primarily attributable to the expansion of the ice cream manufacturing facilities and the setting up of an operation for the production of milk powder for internal requirements and to stabilise raw material inputs. The new Kotmale Integrated Dairy Plant was opened in Apr 2017 at a total investment of Rs.3bn
o In anticipation of the significant opportunities in the local F&B sector going forward, several players have entered the dairy segment particularly and expanded their product portfolios. Direct competitor, CCS announced new investments for its ice cream plant of ~Rs.3.8bn with operations expected to start from mid-2018
National Budget 2018 Proposals and Potential Impact
To grant tax concessions on imported capital goods during the construction period for large scale investments in the dairy industry, which may benefit CARG
Introduce an Excise duty of Rs. 12/ltr or Rs.0.50/gram of sugar contained in beverages - water based non alcoholic drinks excluding fruit or vegetable juices w.e.f 10 Nov 2017
o The FMCG portfolio of CARG does not feature soft drinks though we cannot rule out the possibility that the sugar tax (for added sugar content) may be extended to encompass fruit or dairy beverages. Meanwhile, we expect CARG to continue exploring new product development with healthier options
Cargills (Ceylon)
FMCG
Dairy (Magic, Kotmale )
Processed Meat (Goldi, Sams)
Agrifoods (Kist ) Confectionary
(Kist)
Import Distribution
(Millers)
FMCG : Net Profit (Rs mn) and as a % of Group NP
FMCG : EBIT Margin (%)
Sri Lanka Food & Bev Growth (%)
Source : Nielsen Sri Lanka
6
8
10
12
14
16
FY15 FY16 FY17 FY18E FY19E
6.3
11.0
6.8 8.6 8.0
1.3 2.6
1.4
-3.0 -4
0
4
8
12
4Q
201
5
1Q
201
6
2Q
201
6
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201
6
4Q
201
6
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201
7
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201
7
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201
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201
7
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Price Change
Overall growth
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400
800
1,200
1,600
FY15 FY17 FY19E
NP (Rs mn)% of Group NP - RHS
EQUITY REPORT TITLE | Date EQUITY REPORT TITLE | Date A CT HOLDINGS GROUP AND CLSA GROUP COMPANY 5
Restaurants
3Q18 sectoral EBIT of Rs.131mn (+53% YoY; 9% of group EBIT), above our expectations, amid continued strong contribution from the KFC franchise. 1-3Q18 EBIT of Rs.350mn (+68% YoY)
Restaurants sector includes franchise operations for KFC, launched in 1996 and currently comprising 31 outlets – with the addition of another outlet in 3Q18, and TGI Fridays – one outlet, opened in 2013.
The international franchise chains compete closely, with most having evolved their respective menus to include customised offerings catering to the local palate. KFC stands apart from the competition, with its specialty in chicken, which is more widely consumed in Sri Lanka
Given the continued strong performance in 3Q18, sectoral Net Profit forecasts revised up by +18% to Rs.267mn in FY18E (+65% YoY, 11% of group net profit) and by +21% Rs.309mn in FY19E (+16% YoY, 10% of group net profit)
Overall sector growth in the medium term to be mainly driven by expansion plans coupled with the anticipated rise in disposable income levels. CARG management indicated that there is potential for adding KFC outlets, especially in areas outside of the Western province, which are underpenetrated by eating-out options
Others
3Q18 sectoral EBIT of Rs.3mn (-64% YoY) resulting in 1-3Q18 sectoral recurring EBIT of Rs.13mn (-47% YoY). Earnings anticipated to comprise rental income earned by the parent company, previously accounted for under the Retail sector
1-3Q18 earnings adjusted for the Rs.1,012mn capital gain in 2Q18 from the disposal of CARG‟s two investment properties at Dawson Street and Vauxhall Street, with a total land extent of ~334 perches on 29 Sep 2017 for a total consideration of Rs.4.2bn. Given the lack of details available, we have continued to maintain the rental income earned under the Retail sector
Associates
Recurring loss on share of associates of -Rs.9mn in 3Q18 (vs. –Rs.7mn in 3Q17) below our expectations, likely attributable to higher collective impairment charges from Cargills Bank Ltd (~40% stake). Earnings also comprise contribution from C T Properties Ltd (~22% stake) which is incurring losses as it currently does not have any ongoing property development projects
Quarterly earnings are adjusted for a Rs.481mn capital gain (Rs.191mn for CARG‟s effective ~40% holding) received by Cargills Bank from divesture of its 80.3% stake in Colombo Trust Finance (CALF) to Dialog Axiata (DIAL) for a consideration of Rs.1,072mn. Proceeds from the divesture would likely be utilised to support growth and strengthen the balance sheet
CARG invested a total estimated Rs.3.9bn Cargills Bank in 2016 (total investment at Rs.5.2bn), primarily via a rights issue to be in line with the Central Bank‟s minimum capital requirement of Rs.10bn (stated capital of Rs.4.7bn as at 31 Mar 2016). Consequently, promoters CARG and CTHR increased the combined stake to 65%
Latest Central Bank directive requires LCBs to increase the minimum capital requirements from the current Rs.10bn to Rs.20bn by end-2020. Potential listing of the bank is in the pipeline though no exact details and timelines have yet been disclosed
Cargills Bank, currently with 17 branches, of which seven are “instore” branches, is expected to face stiff competition as the newest addition to an already crowded sector. Funding costs are expected to be on the high side for the bank, while providing amongst the highest rates among LCBs to grow its funding base
The bank is expected to utilise CARG’s retail network to drive low cost expansion beyond traditional branch banking. In Aug 2017, the bank introduced Sri Lanka‟a first ever chip, pin and contactless debit card with MasterCard and launched its own credit card in Mar 2018 offering more competitive rates than its competitors
On 01 Jan 2018, Mr. Rajendra Theagarajah was appointed as the bank‟s CEO, who had served as its Non-Executive Joint Deputy Chairman since Dec 2016. Mr. Theagarajah is a veteran banker and prior to joining Cargills Bank, he functioned as the CEO of National Development Bank (NDB) from 2013 – 2016 and of Hatton National Bank (HNB) from 2004 – 2013.
Recurring profits on share of associates forecasts revised down to Rs.40mn for FY18E vs. Rs.75mn previously (Rs.22mn in FY17) and Rs.50mn for FY19E vs. Rs.85mn previously (+25% YoY) primarily comprising contributions from the bank
Cargills (Ceylon)
Restaurant Franchisee Commencement in Sri
Lanka Outlets
Pizza Hut Gamma Pizzakraft Overseas (Pvt) Ltd 1993 37
Restaurant Sector Revenue and Capex (Rs mn) Restaurant Sector : NP & Contribution to Group
Source: CARG Annual Reports, CT CLSA
-80
-60
-40
-20
0
20
40
-150
-100
-50
0
50
100
150
200
FY13 FY14 FY15 FY16 FY17E FY18E
NP (Rs mn) % of Group NP - RHS
0
100
200
300
400
500
1,000
2,000
3,000
4,000
FY13 FY14 FY15 FY16E FY17E FY18E
Revenue Capex - RHS
Restaurants : Net Profit (Rs mn) and as a % of Group NP
-80
-60
-40
-20
0
20
-150
-50
50
150
250
350
FY15 FY17 FY19E
NP (Rs mn)
% of Group NP - RHS
Recurring PAT 1-3Q18 Rs.46mn
Total Assets Rs.32bn
Total Loans Rs.18bn
Total Deposits Rs.20bn
Total Capital Rs.10bn
Gross NPA 2.7%
Net Interest Margin 6.6%
Return on Assets 0.8%
Return on Equity 0.8% Source : Cargills Bank
Cargills Bank Key Metrics & Ratios : As at 30 Sep 2018
EQUITY REPORT TITLE | Date EQUITY REPORT TITLE | Date A CT HOLDINGS GROUP AND CLSA GROUP COMPANY 6
Group Financial Review Group net debt fell -12% YoY (whilst +5% QoQ) to Rs.9,247mn, resulting in a net debt : equity
of 54.3%. YoY decline attributable to the receipt of Rs.4.2bn proceeds from the divestment of investment properties on 29 Sep 2017
Consequently, net finance costs decreased -14% YoY and -30% QoQ to Rs.268mn in 3Q18 – its lowest level since 1Q17. The Group’s debt profile comprises entirely of short term maturities
Quarterly capex amounted to Rs.1,362mn (-3% YoY) and 1-3Q18 capex of Rs.3,502mn (+19% YoY), primarily for expansion in the retail network and some building capacity in FMCG. FY17 capex amounted to Rs.4,507mn
Capitalisation of Reserves
On 01 Feb 2018, CARG announced a capitalisation of reserves amounting to Rs.6.4bn (out of reserves of Rs.9.4bn as at 30 Sep 2017), via the issuance of 32mn shares in the proportion of 01:07 shares at a consideration of Rs.200.0 per share; XC : 20 Mar 2018. Consequently, CARG‟s total number of shares increased from 224.0mn to 256.0mn, with the new shares being listed on 28 Mar 2018
2
6
10
14
18
22
Cargills (Ceylon)
CARG: Net Debt (Rs bn) & Net Debt to Equity (%)
Source: CARG Annual Reports, CT CLSA
Sectoral Revenue Composition (%) Sectoral Net Profit Composition (%)
Total Capex (Rs mn) and Capex Growth (%) Sectoral Capex Composition (%)
FY16 FY17 FY18E % YoY FY19E % YoY
Retail 663 966 1,110 14.9 1,385 24.8
Share of Associates -26 22 40 83.7 50 25.0
FMCG 858 995 1,158 16.4 1,361 17.5
Restaurants 62 162 267 64.5 309 16.0
Group Net Profit 1,571 2,106 2,535 20.4 3,055 20.5
Source : CT CLSA
CARG: Sectoral Net Profit Forecasts (Rs mn)
-60
-40
-20
0
20
40
60
1,500
2,500
3,500
4,500
5,500
FY15 FY16 FY17 FY18E FY19E
Capex YoY Growth - RHS
71%
21% 8%
84%
11% 5%
Retail
FMCG
Restaurants
FY19E
FY15
50
70
90
110
6
8
10
12
14
3Q
15
1Q
16
3Q
16
1Q
17
3Q
17
1Q
18
3Q
18
Net DebtNet Debt : Equity - RHS
42%
54%
4%
45%
45%
10%
Retail
FMCG
Restaurants
FY19E
FY16
78%
18%
4%
80%
16%
4%
Retail
FMCG
Restaurants
FY19E
FY16
Note: Retail net profit also comprises earnings from Associates
EQUITY REPORT TITLE | Date EQUITY REPORT TITLE | Date A CT HOLDINGS GROUP AND CLSA GROUP COMPANY 7
FY16 FY17E FY18E
Retail 663 1,155 1,417
FMCG 858 1,140 1,371
Restaurant 62 150 174
Total 1,583 2,444 2,962
Outlook and Valuations CARG group net profit forecasts broadly maintained at Rs.2,535mn for FY18E (+20%
YoY) and Rs.3,055mn for FY19E (+21% YoY), driven across all key sectors. Retail sector to marginally overtake FMCG earnings contribution in FY19E given the significant expansion plans in the pipeline - targeting to double its retail network in the medium to longer term
On 02 Aug 2017, CARG announced that it has entered into an agreement with the Bank of China Limited to promote cooperation and strengthen business ties between the two entities. The most likely area of cooperation within the two entities would be in the banking space, involving Cargills Bank. Bank of China commenced operations as a commercial bank in Sri Lanka on 28 Mar 2018, likely primarily to fund large infrastructure development projects such as the Colombo Port City
The CARG share has outperformed the market rising +13% both during the past 3 months and 12 months (vs. the ASI‟s gains of +1% and +2% respectively during the same period)
The CARG share is trading at PER multiples of 19.5X FY18E and 16.2X FY19E whilst offering ROEs of 17-19% (up from low single digits in FY15). The current multiples to near term earnings are lower than the regional valuations and to listed peer, CCS, which trades at multiples of 28.9X FY19E though whilst offering ROEs of 22%. CCS has been negatively impacted from the introduction of the “sugar tax”, given its exposure to carbonated soft drinks
Our estimated Sum-of-the-parts (SOTP) valuation suggests that CARG is currently trading at a -19% discount to our estimated breakup NAV of Rs.238 per share
CARG has demonstrated much greater resilience to its peers in the recent quarters. The relatively attractive multiples vs. other listed peers, coupled with the double digit growth expectations and the recent measure to improve share liquidity will likely find favour amongst investors, particularly given that the relatively illiquid nature of the share may be a deterrent. Moreover, medium to long term investors favouring the consumer driven story of Sri Lanka may find favour in the share, on the back of CARG‟s strong market positioning and brand equity.
Cargills (Ceylon)
CARG : Net Debt (Rs bn) and Net Debt to(Rs mn) CARG : Revenue and NP (Rs bn)
Source: CARG Annual Reports, CT CLSA
CARG : NP Breakdown (Rs mn)
Note: Retail sector includes Associate contribution
0
1
2
3
40
50
60
70
80
90
FY13 FY14 FY15 FY16 FY17E FY18E
Revenue Recurring Net Profit - RHS
540
740
940
1,140
1,340
6.0
8.0
10.0
12.0
14.0
16.0
FY13 FY14 FY15 FY16 FY17EFY18E
Net Debt Finance cost - RHS
CARG CCS NEST
MPS (Rs) 193.0 930.0 1,730.0
Earnings per Share (Rs) 11.9 32.8 79.8
EPS Growth (%) 20.5 17.0 17.9
Price / Earnings Ratio (X) 16.2 28.3 21.7
Price / Earnings Growth (X) 0.8 1.7 1.2
Return on Equity (%) 18.5 22.3 76.4
CCS: Ceylon Cold Stores, NEST: Nestle Lanka
Local Peer Analysis – FY19E Relative Valuations
CARG: Sum-of-the-parts (SOTP) Valuation
Sector Fair Value (Rs mn) Main Valuation Basis
Retail 22,505 18X FY19E Net Profit (excl. Share of Associates)
FMCG 23,138 17X FY19E Net Profit
Restaurants 4,018 13X FY19E Net Profit
Other 11,170 Investment Property & Investments in Associates
Disclaimer : This document has been prepared and issued by CT CLSA Securities (Pvt) Ltd. on the basis of publicly available information, internally developed data and other sources, believed to be reliable. Whilst all reasonable care has been taken to ensure that the facts stated are accurate and the opinions given are fair and reasonable, neither CT CLSA Securities (Pvt) Ltd. nor any director, officer or employee, shall in any way be responsible for the contents. CT CLSA Securities (Pvt) Ltd. may act as a Broker in the investments which are the subject of this document or in related investments and may have acted upon or used the information contained in this document, or the research or analysis on which it is based, before its publication. CT CLSA Securities (Pvt) Ltd., its directors, officers or employees may also have a position or be otherwise interested in the investments referred to in this document. This is not an offer to buy or sell the investments referred to in this document. It is not intended to provide professional, investment or any other type of advice or recommendation and does not take into account the particular investment objectives, financial situation or needs of individual recipients. Before acting on any information in this publication/communication, you should consider whether it is suitable for your particular circumstances and, if appropriate, seek your own professional advice, including tax advice. The markets in which CT CLSA Securities (Pvt) Ltd. operates may not have regulation governing conflict of interest over preparation and publication of research reports (including but not limited to disclosure of perceived or actual conflict of interest) as may be found in more developed markets. Please contact your investment advisor / analyst should you require further information over the relevant regulation and particular disclosure over perceived or actual conflict of interest.
