LaughsStrongBuydetailedfnls

8/8/2019 LaughsStrongBuydetailedfnls

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Summary

With very attractive headline and DCF valuations compared to a market in which mo

counters are significantly overvalued, we recommend investors subscribe aggressively t

the Laughs Gas Limited IPO.

Our primary valuation basis is a DCF of FCFE, taking into account cash flows from only

the LP Gas and Vehicle emissions testing business. As it is a valuation of future cash

flows, it is not impacted by accounting policy changes that boosted headline profits in

the last financial year.

To be conservative, our DCF valuation also does not take into account any value from it

investments in the hotel and serviced apartment sector.

Our DCF valuation for the Voting Share is Rs39 per share and taking a 40% discount, Rs23 f

the Non Voting share.

Though the regulatory and political environment for the company is much more favourab

than the experience faced historically by LIOC, the negative experience of LIOC in pricin

retail fuels could result in investors attaching a further discount to a DCF valuation to ta

into account regulatory and political risk.

We feel a 20% discount to the fundamental DCF valuation could be reasonable and as suc

we set an immediate target price of Rs31 for the voting share and Rs18 for the non-voti

share in the near term.

This is favourable in comparison with the valuation and outlook we have for most liste

counters and the market as a whole. As such, we have a Strong Buy recommendation of th

counter at its issue price.

CAPITAL ALLIANCE is the joint placement

Agent for the IPO

Laughs Group 2008-09 A 2009-10 A 2010-2011F 2011-12F 2012-

Revenue 4,541,495,965 5,592,255,679 8,440,843,623 9,940,628,829 11,800,6

Growth 23% 51% 18%

EBIT 489,924,643 773,149,429 1,214,843,796 1,682,472,150 2,013,8

Growth 58% 57% 38%

PAT 229,263,819 528,293,611 982,784,758 1,413,783,588 1,681,7

Growth 130% 86% 44%

EPS 3.12 6.77 2.54 3.65

DPS 0 0 0 0.63

Dividend Payout 0% 0% 25% 25%

LAUGFS GAS LIMITED 27TH October 201

Strong Buy/Subscribe

Aggressively

Recommendation

Strong Buy/Subscribe

Aggressively

IPO Price*

Voting Rs.23.00

Non-voting Rs15.00

Opening date of the

Offering

4th November 2010

Earliest Closing date

of the

Offering4th November 2010

Latest closing date of

the

Offering

25th November 2010

ASPI*

6,685.99

MPI*

7,270.80

*CSE DATA as at 21st October

2010


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The Issue

On the 4th

of November 2010, Laugfs Gas Ltd through its IPO will issue 75M

voting shares and 52Mn non-voting shares to the general public, thereby raising Rs 2,50

Mn. 10% of the shares will be allocated to employees of the company while a further 10

will be allocated to dealers & customers of the company. The cost of the Issue

estimated at Rs40Mn.

Number of Shares

to be issuedIssue price Amount raised

Ordinary Voting Shares 75,000,000 23.00 1,725,000,000

Ordinary Non Voting Shares 52,000,000 15.00 780,000,000

2,505,000,000

Share holding structure after the issue% of voting rights

after the issue

% of ownersh

the issu

Number of shares before the issue 260,000,086 77.61% 67.2%

Number of voting shares issued 75,000,000 22.39% 19.4%

Number of total voting shares 335,000,086 86.6%

Number of ordinary Non-Voting shares issued 52,000,000 13.4%

Total number of shares after issue 387,000,086 100.0%

Objectives of the Issue Investment % of the Investment

Expansion of Storage and filling capacities 425 17.0%

Expansion of the distribution network of LGL 40 1.6%

Introducing new LPG products 40 1.6%

Equity investment in LLL to build and operate 4 Star Hotel in Chilaw 500 20%

Equity investment in LPDL to develop Serviced Apartments/Motel at Havelock Road 425 17%

Equity investment in LEL to settel finacial facility obtained by LEL 225 9%

Settel finacial facility obtained by LGL 850 34%

2,505

20%to be invested onbusiness expansion ofLGL

34%to be spent tosettle financial liabilities

ofLGL

Therefore, 54%of thefunds raised are to be

allocated to LGL


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Laugfs Gas Ltd

The Structure

Structure of the operations of Laugfs Holding Limited

augfs Holdings, the parent

ompany of the Issuer has

everal other subsidiaries.

vestors should take note

hat only the following

perations will come under

he control of Laugfs Gas Ltd

ssuer)

LP Gas

Vehicle Emission Testing

Property Management Service

Hotel Management

Hotel Operations


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Laugfs Gas Ltd - The Company

In 2001, Laugfs Gas Ltd entered the LPG downstream business in the country

ending the monopoly market enjoyed by Shell Gas Ltd.

Being in the business for nearly ten years, Laugfs Gas Ltd currently claims a 28%

market share in the overall LPG business & aspires to increase this to 50% within the

next two years.

At present, Laugfs operations cover the entire range of the downstream

business of LP Gas; importation, storage, distribution and sale for both domestic,

industrial and auto gas sectors.

The LPG market consists of three specific subsectors:

Packed LPG sector

Industrial bulk sector

Auto Gas sector

Mkt SectorLaugf Gas

Mkt ShareDescription Competitive Drivers

- Switching cost

- Pricing

- Distribution network

- Filling capacity

- Brand name

Industrial

bulk sector65%

LPG as a feedstock for

manufacturing processes- Pricing

Auto Gas

sector90%

LPG is used as motor fuel in

this sector- Distribution network

Comprises of domestic(12.5Kg), commercial

(37.5Kg), and other pack sizes

such as 5Kg & 2Kg

Packed LPG

sector30%

Currently claims to have a

market share of28%n the LPG business

arket Sector

Laugfs

Mkt

Share

cked LPG 30%

dustrial bulk 65%

to Gas 90%


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Capacity

Procuring of LPG

Current Capacity Capacity Expansion Plans

Total LPG storage capacity

- based on the company's storage facility and it's filling plantsituated in Mabima, Sapugaskanda

Cylinder filling capacity 8,000 Cylinders per day 16,000 cylinders per day over the n

years

Apart from the above, plans are th

acquire a floating storage facility t

address the increasing demand, as

storage capacity improvements tak

considerable time

2,500MT 3,000MT@ the end of 2010

Laugfs Gas Ltd obtains its

required supply of LPG from

predominantly two sources:

International Market

The company obtains

approximately 70% of its

total requirement from

leading LPG traders &

producers in the region.

They supply on term

contracts & on spot basis

Ceylon Petroleum Corporation (CPC)

CPC provides the remaining requireme

of30%.

Laugfs Gas Ltd has secured exclusive

rights of procuring.


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LP GAS Industry

Distribution Chain

ep 1 Production

Gas is a result of Natural Gas

ocessing & Crude Oil refinery

ep 2

Transportation

eld Grade LP Gas is transported

om production sites to the

fineries as follows:

Crude Oil - by tankers or

pipelines

LP Gas - by large LP Gas

carriers, pipelines or trains

ep 3 Refining & Storage

he Crude oil transported is refined

rther to obtain butane &

opane, which make LP Gas.

ep 4 Transportation

he LP Gas is then delivered by

ain, road, coastal tanker or

peline to cylinder filling plants &

termediate-size storage areas.

ep 5 Bottling & Storage

hereafter, LP Gas is filled into

linders at the cylinder filling plant

bottling plant, which is then,ored in pressurized tanks in

termediary storage centers.

ep 6 Distribution

Gas can be transported either in

ulk or in cylinders. Distribution of

Gas from bottling plants to

tailers as well as private and

ofessional customers will be done

trucks. Small bulk trucks

stribute LP Gas from storage

nters to various consumers.

ep 7End Users

LP Gas is made available to end

users through cylinder sales

points such as commercial stores

or service stations in their

vicinity.

Customers who require larger

volumes of LP Gas can purchase it

in bulk. Source: World LP Gas Assoc


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The LP Gas Industry of Sri Lanka

In 2009, Sri Lankas total LPG consumption was 19,250MT. Approximately 65-75% of the total

LPG consumption is attributed to domestic (household) consumption.

The usage of LP gas as a cooking fuel is dependent on several factors. The most prominent

factors being the prices of fuels and appliances, the disposable income of households, the

availability of fuels and appliances and the level of urbanization.

0%

5%

10

15

20

25

30

35

40

0

50,000

100,000

150,000

200,000

250,000

2001 2002 2003 2004 2005 2006 2007 2008 2009

Demand (MT) Growth in Price

0%

5%

10%

15%

20%

25%

30%

35%

40%

2001 2002 2003 2004 2005 2006 2007 2008 2009

% growth % Growth in Price

Year

Growth in Price Growth in DemandThere is a negative

relationship between the

growth in the price of LP Gas

and the demand for LP Gas

Main factors that determine

PG demand

Prices and cost of appliances

The disposable income of

households

The availability of fuels and

appliancesThe level of urbanization

Sri Lanka LP Gas Price Vs Demand

In 2008, when LP Gas Prices increased by 33% YOY, LP Gas

demand in Sri Lanka fell by 12% YOY.

The 10 Year CAGR

Growth in Demand is

2.9%


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Competition in the LP Gas Industry of Sri Lanka

Currently the leading players in the LP Gas industry are Shell Gas Lanka (the Sri Lankan arm of

the multinational, Royal Dutch Shell) with a market share of 72% and Laugfs Gas Ltd with a

market share of 28%.

At present, Shell Gas Lanka is 51% owned by Royal Dutch Shell whilst the remainder is held by

the Government of Sri Lanka. Shell originally acquired the firm as part of a privatization drive.

Shell is in the process of exiting from the downstream LPG market in Sri Lanka. According to

news reports, the Government of Sri Lanka is expecting to wrap up the purchase of Shell's Gas

unit in the island within a month. The Government is paying 63 million US dollars for a 51

percent stake in Shell Gas Lanka, in which it already owns 49 percent, and for a 100 percent

-

5

1

1

2

2

3

3

4

0

5

10

15

20

25

30

35

40

Western

Province

Central

Province

Southern

Province

Northern

Province

Eastern

Province

North

Western

Province

North Central

Province

Uva Province Sgamuwa

Province

%% LP Gas usage as main cooking Fuel Per Capita GDP

-10%

0%

10%

20%

30%

40%

50%

60%%LPG use % Urban Population %

Source : Department of Census and Statistics Sri Lanka,Census of Population and Housing 2001

sible Scenarios

arding Shell

Impact

overnment takes over

hell and manages it

Neutral

augfs taking over Very

Positive

overnment takes over

hell and gives it to the

rivate sector to manage

es it to Laugfs Positive

es it to a Competitor Negative

In Sri Lanka, there is a

significant discrepancy

between the Western

Province and otherProvinces with regard to

GDP per capita and the

Level of Urbanisation.

A similar discrepancy is

observed between the

Western Province and

other Provinces with

regard to LP gas usage as

the main cooking fuel.


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Page 9 of 22

stake in a storage terminal company. State banks and state-run Sri Lanka Insurance Corporation

will help finance the purchase.

The Government originally sold the then Colombo Gas Company to Shell as part of a

privatization exercise. According to Government statements, Shell Gas Sri Lanka had capital of

37.9 million US dollars and 65 million US dollars had been invested in the terminal. An

additional 24 million US dollars had been invested in building other infrastructure.

Laugfs Gas Ltd - Forecast and Financials

Revenue

LP Gas Demand in Sri Lanka

Currently available statistics seem to indicate that only 25 - 30% of households in Sri Lanka use

LPG as their main cooking fuel. The general trend in developing countries is that as per capita

GDP increases, the use of LP gas as the main fuel for cooking also increases.

Considering the likely growth of Per Capita Income, we believe there would be an increase in

the number of households using LP gas as their main cooking fuel.

Afganisthan

Bangladesh

Brazil

ChinaIndia

Indonesia

Malaysia

Maldives

Mexico

NepalPakistan

Sri Lanka

Thailand

0

20

40

60

80

100

120

- 1,000 2,000 3,000 4,000 5,000 6,000 7,000

%

ConsumptionofLP

G

forcooking

Per Capita GDP

Global Analysis

Source :

% Consumption of LPG : Nation Master,Per Capita GDP : World Bank

* Please note - Reference years vary ,eg :SL 2003


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Page 10 of 22

Further with the revival in the North and East, Laugfs will have opportunity to aggressively

expand into the Northern & Eastern markets.

Pricing

The pricing formula for domestic Laugf LPG Cylinders (12.5KG) is based on the agreement

between Laugfs Gas (Pvt) Ltd and the Consumer Affairs Authority of Sri Lanka. The parties

agree that the pricing formula for domestic LP gas cylinders (12.5 KG) shall be based on

landed cost plus margin.

The Landed cost include price which Laugfs purchases LPG based on Saudi Aramco

Contract Price the rate of , freight charges and all applicable taxes converted at

applicable exchange rate.

According the company is entitled to a margin of 30% on landed cost and the price revision

is subjected to a lead time of 3 months.

Termination of the pricing formula contract

a) By mutual consent of both parties to the agreement; or

b) On the delisting of LP gas from the specified goods list by the Minister of Trade,

Marketing Development, Co-operatives and Consumer services OR any Minister holding the

portfolio responsible for listing goods and services as specified goods.

mpany MarginLanding Cost

+30%

Price revision is subjected to a lead-ime of 3 months

Therefore, any increase/decrease in

anded cost would affect the selling

price after 3 months.


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Laugfs purchases approximately 30% of its sales requirement from CPC, to which the

company would not have to pay Terminal Fee or Port Authority Levy. According to the

Group, to arrive at the sales price of a Laugfs 12.5Kg cylinder, the company averages out the

Landing cost by including the purchases from CPC into the formula thus reducing the sales

price by around 2% of the agreed formula price. The company claims that they use this

practice to price their product at a lower price in the price sensitive market.

In the past, the main competitive strategy of Laugfs was its pricing strategy. As a new

entrant, this strategy did not prove to be entirely successful because of the switching cost to

the customer. An empty 12.5Kg cylinder deposit at Shell is Rs 4,600 whilst at Laugfs it is Rs

3,600.00; therefore the deposit required for a Laugfs cylinder is 27.7% lower than that of

Shell. However, as the life span of a LP Gas cylinder is estimated to be around 10-20 years,

an existing customer would only switch from Shell to Laugfs if there was a significant price

advantage in the LPG retail price. However at current price levels, Laugfs has only a 3.7%

price advantage compared to Shell.

However, as new customers enter the market with the increase in disposable income and

expansion into new markets (North and East), Laugfs will have an edge over its competitors

with the price difference and expected expansion of its distribution network.

-5.00

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Current

Price

PricPrice Difference KgLPG Price comparison Price Differnce

Shell Price per KG

Laugfs Price per Kg

Deposit required for a

Laugfs cylinder is

27.7%lower

An empty 12.5Kg cylinder

deposit for Shell is Rs 4,600whilst at Laugfs it is Rs

3,600.


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Page 12 of 22

Therefore after taking into account growth in LPG demand in Sri Lanka, growth in Laugfs

market share and the price of LPG gas, our revenue growth forecast for Laugfs for FY

2010/2011 is 47% and a CAGR of 16% for the next four years.

Forecast Snap Shot

Laugfs Eco Sri (Pvt) Ltd

Industry

Sri Lanka initiated measures for the control of air pollution under the Clean

Air 2000 Action Plan, developed under the Metropolitan Environment Improvement

Program (MEIP) of the World Bank

The Commissioner of Motor Traffic is responsible for the enforcement of

mobile air emission standards through authorization of accredited entities for the

purpose of testing and certifying air emission levels of any motor vehicles.

The Commissioner of Motor Traffic made it compulsory to certify emission

levels from the 17th

of November 2008 onwards and commenced the program

initially in the Western Province.

Thereafter it was extended to the Southern, Central and North Central

provinces on the 22nd of June 2009 and to the provinces of North Western,

Sabaragamuwa and Uva from the 15th

of December 2009. However, the program is

Laughs Gas Ltd 2008-09 A 2009-10 A 2010-2011F 2011-12F 2012-13F

Rs.

Revenue 4,477,117,017 5,305,017,600 7,829,492,233 9,134,453,121 10,885,617,1

Growth 18% 48% 17% 1

EBIT 523,065,715 710,494,237 1,022,066,418 1,344,415,152 1,636,191,5

Growth 36% 44% 32% 2

PAT 290,984,854 524,400,305 808,717,184 1,080,936,394 1,309,312,1

Growth 80% 54% 34% 2


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Page 13 of 22

yet to be implemented in the Northern and Eastern Provinces.

The Company

Total investment made by LEL is approximately LKR 500 million.

LEL is currently operating within a duopoly market.

Laugfs Eco Sri and Clean Co Lanka are the only companies with a five-year

license to carry out annual emission tests for over 2.2 Million vehicles in Sri Lanka.

Clean Co Lanka operates in a similar capacity to Laugfs Eco Sri.

The Laugfs Eco Sri (Pvt) Ltd now operates with 19 fixed testing centres, 37

semi fixed centres and 51 mobile centres throughout the country.

Further the company is entitled to a five year tax holiday from the date the

company records profits.

Laugfs Eco Sri Ltd- Forecast and Financials

Revenue

Revenue is calculated based on the total number of Vehicle Emission Tests (VET

carried out within the year. In addition to the VET service, Laugfs Eco Sri provide

Value added services.

Revenue Growth

The vehicle population in the country is the main driver of revenue levels for Laug

Eco Sri. As per the conditions of the agreement, the operators are entitled to a

annual price increase in the tariff rate based on the Colombo Consumer price index.


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Motor Vehicle Growth

With the tax rates declining from 30th

of June 2010, a comparison is illustrated above

of the vehicles purchased during the month of July. Total vehicles purchased increased

by 74%YoY, with Buses and Motor Cars having increased by 337%YoY and 209%YoY

respectively.

With the new tax rates in effect from the 30th

of June, a comparison is illustrated

above of the immediate impact after the new tax rates were imposed. Buses, Motor

cars and Dual-purpose vehicles increased by 86%MoM, 141%Mom and 25%MoM

respectively. Motor Cycles saw a decline because of the increase on tax rates imposed

on motor cycles.

0

200

400

600

800

1000

1200

1400

1600

Buses Mot or Cars Dual Pur pose Land Vehicles

Jul-09 Jul-10

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

Motor Cylces Three Wheelers

0

200

400

600

800

1000

1200

1400

1600

1800

2000

Buses Motor Cars Dual Purpose Land Vehicles

Jun-10

Jul-10

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

Motor Cylces Three Wheelers


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Page 15 of 22

Tariff Rates

As per the conditions of the agreement, the operators are entitled to an annual pric

increase based on the Colombo Consumer price index. In May 2010, a 21% increas

was granted which was due for 2009 and another increase is anticipated in Novembe

2010 for the current year.

Revenue Forecast

Revenue growth in LEL will be based on the growth in the total vehicle population a

well as the tariff rates, which increases based on the CCPI index.

-

100

200

300

400

500

600

700

800

900

2008-09 A 2009-10 A 2010-2011F 2011-12F 2012-13F

Millions

Revenue


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Page 16 of 22

In our forecast we expect a significant increase in LELs revenue in the next two yea

due to the reduction in Vehicle import Tax and the subsequent increase in ne

vehicles.

Further, the company intends to pay off the Rs 225 Mn debt from the funds raise

from the IPO. Therefore, LELs finance cost would also come down significantly durin

this FY.

Laugfs Leisure Ltd & Laugfs Property Developers (Pvt) Ltd

The Company- Laugfs Leisure Ltd

LLL has been in the Hotel management business since 2008, managing:

- Temple Tree Resort & Spa: A 10 room boutique hotel situated in Induruwafor a three year period, commencing 1

stSeptember 2008.

-

Emerald Bay Hotel: A 50 room hotel situated in Induruwa fora three yearperiod, commencing 15

thSeptember 2008.

LLL is to construct a 100 room four-star hotel in Chilaw by FY2012/13

The investment will be phased out, with Rs 500 million (20% of the issue) set aside for the

Leisure sector.

The management indicates that it will initially build 72rooms. Though the cost per room is

less than other industry estimates, the management of the leisure sector believes it can

build these rooms at a significantly lower cost than estimates quoted by other players in the

Laugf Eco Sri Ltd 2008-09 A 2009-10 A 2010-2011F 2011-12F 2012-13

Revenue 64,378,948 287,238,079 556,640,911 751,465,229 852,161

Growth 346% 94% 35%

EBIT (33,141,072) 62,655,192 181,265,984 326,516,392 361,913

Growth -289% 189% 80%

PAT (61,721,035) 3,893,306 162,932,045 321,682,452 357,079

Growth -106% 4085% 97%

Laugfs Leisure is to

construct a 100 room 4

star hotel in Chilaw.

Rs 500 million (20% of

the issue) set aside for

the Leisure sector.


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Page 17 of 22

tourism sector.

Laugfs Property Developers (Pvt) Ltd

The company is to construct and operate a fully fledged serviced apartment complex,

consisting of 74 apartments on 8 floors.

The target market is leisure and business travellers, looking for an alternative to hotel

accommodation.

Given the limited supply of rooms in the Colombo city and the demand from business

travellers looking for accommodation in the city, this concept is well positioned to benefit.

Rs 425 million (or 17% of the issue) has been set aside for the Property Development arm.

Construction of the basement has been completed to date, whilst the complex is expected

to be fully complete by 2012.

Leisure Sector Outlook

With tourist arrivals picking up significantly post war and a global recovery, the Government

has set an ambitious target to attract 2.5 million tourists by 2016. This would require

approximately 26,000 rooms versus the existing 14,723 rooms. Therefore, an estimated

11,200 rooms need to be constructed to cater to the forecasted demand.

However, dampening factors for the sector include the following:

Not so competitive room rates

According to recent studies and research undertaken, Sri Lankas rate structure does not

appear to be very competitive in comparison with competitor markets such as Indonesia,

Thailand and Vietnam. This could pose a threat to pricing power in the leisure sector

particularly given the appreciating path of the currency.

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

The sh

area depict

upward tre

tourist arr

to Sri L

post war.

Laugfs Property Developers isto construct & operate a

serviced apartment complex

Rs 425 million (or 17% of

the issue) has been set

aside for the Property

Development arm


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Page 18 of 22

DCF Valuation does not take into account any value from hotel and serviced apartment

sector.

Amidst these concerns, our DCF valuation also does not take into account any value from its

investments in the hotel and serviced apartment sector . This is also in line with our view on

the tourism sector in which we have a strongly underweight recommendation and Sell

recommendation on all hotel stocks in our coverage universe.

Group Forecast Snapshot

33

3941

50

56

0

10

20

30

40

50

60

Vietnam Indonesia Thailand Kenya Sri Lanka

Comparison of Average room rate in 4 star hotels in competitor markets

Source: Neckermann brochure

Laugfs Group 2008-09 A 2009-10 A 2010-2011F 2011-12F 2012-

Revenue 4,541,495,965 5,592,255,679 8,440,843,623 9,940,628,829 11,800,6

Growth 23% 51% 18%

EBIT 489,924,643 773,149,429 1,214,843,796 1,682,472,150 2,013,8

Growth 58% 57% 38%

PAT 229,263,819 528,293,611 982,784,758 1,413,783,588 1,681,7

Growth 130% 86% 44%

EPS 3.12 6.77 2.54 3.65

DPS 0 0 0 0.63

Dividend Payout R 0% 0% 25% 25%

Dampening factors forthe Leisure sector:

Not so competitive

room rates

Appreciation of the

Exchange rate


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Page 19 of 22

VALUATION

To derive a value for the Laugfs group, we valued each company of the grou

separately. We have taken a zero value for the Hotel and Property project in ouconservative valuation. The main valuation method we used to value Laugfs is th

Free Cash Flow to Equity (FCFE) method. Our base case cost of equity is 16%, whils

the terminal growth rate for the company after 5 years is 5%.

During the FY2009/2010, Laugfs made several changes to their accounting policie

The main adjustments were the changing of its depreciation policy by increasing th

useful life of its assets, differing part of the cost of sale of 12.5 Kg cylinders an

reducing the recognition time period of differed income. All these changes hav

significantly increased the recorded profit of the company for the FY2009/2010.

As FCFE is being used as the valuation method, the impact of the above mentione

events are irrelevant, as FCFE only concentrates on the cash flows generated.

Laugfs Gas Ltd-Valuation

Laugfs Eco Sri Ltd-Valuation

33.01 14% 15% 16% 18% 20% 2

2% 32 29 27 23 20

4% 38 34 31 25 22

5% 42 37 33 27 23

7% 52 45 39 31 26

10% 89 70 57 42 32

11% 117 86 68 47 36

Sensitivity of DCF Valuation

Terminalgrowthrate

Ke

6.07 14% 15% 16% 18% 20% 2

2% 6.0 5.4 5.0 4.3 3.8

4% 6.9 6.2 5.7 4.8 4.1

5% 7.5 6.7 6.1 5.1 4.3

7% 9.4 8.1 7.2 5.8 4.8

10% 15.5 12.3 10.2 7.5 5.9

11% 20.3 15.1 12.0 8.5 6.5

Sensitivity of DCF Valuation

Terminalgrowthrate

Ke


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Page 20 of 22

Valuation Summary

Voting Non-voting

LGL-Company 33 20

LEL6 4

FCFE VALUE-Group 39 23

IPO Price 23 15

Discount 70% 56%

We feel a 20% discount to the fundamental DCF valuation could be reasonable and

as such, we set an immediate target price of Rs 31 for the voting share and Rs 18 for

the non-voting share in the near term.


21/21

The analyst responsible for producing the report does not work for Capital Alliance Securities (Private) Ltd. This report has been produced as part of an

outsourced research relationship with Frontier Research (Pvt0 Ltd a specialized research company engaged by Capital Alliance Securities (Private) Ltd. This

document has been prepared and issued on the basis of publicly available information, internally developed data and other sources, believed to be reliable. Capital

Alliance Securities (Private) Limited however does not warrant its completeness or accuracy. Opinions and estimates given constitute a judgment as of the date of

the material and are subject to change without notice. This report is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The

recipient of this report must make their own independent decision regarding any securities, investments or financial instruments mentioned herein. Securities or

financial instruments mentioned may not be suitable to all investors. Capital Alliance Securities (Private) Limited its directors, officers, consultants, employees,

outsourced research providers associates or business partner, will not be responsible, for any claims damages, compensation, suits, damages, loss, costs,

charges, expenses, outgoing or payments including attorneys fees which recipients of the reports suffers or incurs directly or indirectly arising out actions taken as

a result of this report. This report is for the use of the intended recipient only. Access, disclosure, copying, distribution or reliance on any of it by anyone else is

prohibited and may be a criminal offence.

Equity

CEO - SecuritiesHarinlal Aturupane: +94 11 231 7760

Colombo Jaffna

Dilruk A. Fernando +94 777 721 483 B. Mugundan: +94 21 459 1111

Janaka Palapathwala: +94 770 592 243

Lakshan Algama Perera: +94 777 447 407 Negombo

Chanaka Sanoj: +94 773 850 227 T. Dananjaya: +94 773 593 016

Milanka Induruwage: +94 777 261 893 Nihal Fernando: +94 773 286 895

Buddhenia Narangoda: +94 777 453 640

Ifadh Marikar: +94 772 962 567 Kurunegala

Thanuja de Silva: +94 770 556 577 Indunil Pradeep: +94 773 741 552

P. R. Chandrasena: +94 773 837 325

Matara

Inok Wijesuriya: +94 41 439 0610 Galle

Mahi Liyanage: +94 772 962 557 Isuru Jayawardena: +94 773 576092

Viraj Nanawatte: +94 772 962 541

Kithsiri Jayasinghe: +94 777 790 657

Government Securities

K. H. R. Thilakarathna: +94 11 231 7752

W. A. Susantha: +94 11 231 7757

Dumindu Silva: +94 11 231 7753

Research

Dimantha Mathew: +94 777 345 679

Head Office Branches

5th Floor, Millennium House, Matara Jaffna Kurunegala

No.46/58, Nawam Mawatha, No.38, Station Road, No.356B, Laxan Plaza, 1st Floor, Union Assurance Building,

Colombo 2, Sri Lanka Matara Kasthuriar Road, Jaffna No.6, Rajapihilla Road, Kurunegala

General: +94 11 2317777 Tel: +94 41 4390610 Tel: +94 21 4591111 Tel: +94 37 2222034

Fax: +94 11 2317788 Fax: +94 41 4390611 Fax: +94 21 4591111 Fax: +94 37 2222035

Email: [email protected]

Website: www.capitalalliance.lk Negombo Galle

No.142, Jude City Building, No.30, Sri Devamitta Mawatha,

Greens Road, Negombo GalleTel: +94 31 2227843/4 Tel: +94 91 2227631/2

Fax: +94 31 2227843 Fax: +94 91 2227632

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