Event Updates

Event Update: Sri Lanka – Changes in Taxes and Levies – 28 November 2019

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  • Cabinet Co-spokesperson, Dr. Bandula Gunawardena, proposed sweeping tax cuts to spur economic growth on 27 November 2019
  • With the consumer confidence and private sector credit growth falling to single digits, proposals to increase disposable income of the middle class are anticipated to create a consumer drive prior to key parliamentary elections
  • Key consumer focused proposals include reduction of Value Added Taxes (excluding Financial VAT), removal of Nation Building Tax and Economic Service Charge, reduction of Voice Telco Levy whilst direct credit growth targeted proposals include removal of the Debt Repayment levy and increasing the tax free threshold for personal income tax
  • Whilst we expect a 2.6% incremental expenditure to GDP (based on 2018 Actual GDP) to be added on to the pre-determined deficits as a direct result of the proposed consumer and general reliefs, the incremental deficit is however not expected to increase from a similar amount owing to the anticipated higher GDP growth estimated on account of the improved disposable income levels
  • Whilst we do not anticipate any significant revenue proposals to be announced prior to the Parliamentary elections, we anticipate the Government to announce its 2020E complete fiscal plan upon the expiry of the currently passed vote on account which extends till end of 1Q2020E
  • We expect the overall positive impact of the aforementioned tax cuts to be felt by all economic participants resulting in a shift in the consumer sentiment and thereby positively contributing to real GDP growth and filtering through to the listed counters of the CSE in the near term

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Event Update: Tourist Arrivals -23% YoY in October 2019 – 13 November 2019

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  • Tourist arrivals to Sri Lanka have declined by -23% YoY to 118,743 in October 2019. Cumulative arrivals in Jan-Oct 2019 declined -21% YoY to 1,495,055 persons
  • Following the relaxation of travel bans issued by several countries, Sri Lanka’s Tourism Development Ministry previously indicated that they were expecting tourist arrivals to reach ~2.1mn in 2019E (-10% YoY). However, the authorities have recently revised their forecast to ~1.9mn persons (-17% YoY), indicating that the arrivals were lower than anticipated during the past few months
  • Tourist arrivals might witness a further slowdown in November 2019, due to the presidential elections scheduled to be held on 16 November 2019. Our tourist arrivals forecast is maintained at 1,849,344 persons for 2019E (-21% YoY), whilst 2020E tourist arrivals forecast is maintained at 2,195,151 persons (+19% YoY)

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Event Update: Ceylon Tobacco Company (CTC) Select Product Price Increases – 21 October 2019

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  • In the gazette dated 14 October 2019, the excise duty imposed on a batch of 1000 cigarettes measuring between 67mm – 72mm, were reduced to Rs.33,000 w.e.f 15 October 2019
  • Subsequently CTC has increased the per stick price of 67mm – 72mm cigarettes by Rs.10 (from Mar – Oct) to Rs.55 w.e.f 21 October 2019 (vs. an excise duty increase of Rs.10 from Mar – Oct to Rs.33.0 per stick)
  • CTC’s net profit forecast marginally revised down to Rs.18,090mn for 2019E (+6% YoY) and at Rs.19,567mn for 2020E (+8% YoY). YoY growth to be primarily driven by excise duty led price increases
  • The share has underperformed the broader market declining -19% and -24% over the past 3 months and 12 months respectively (vs. ASI rising +4% and +2% respectively during the same period)
  • CTC trades at historically attractive PER multiples of 10.9X for 2019E and 10.1X for 2020E. A partial valuation discount however remains warranted, given that earnings are highly susceptible to changes in government policies. Dividend payout of ~100% to continue – Gross dividend yield of 9-10%
  • We believe that the recent steep share price decline is mostly unwarranted given CTC’s track record of high value creation, especially amid the current challenging economic and political environment

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Consumer Sector Update – Consumer recovery to be strengthened by populist measures – 16 October 2019 

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  • The Sri Lankan Consumer environment has gone through a difficult period in recent years, facing numerous challenges such as inclement weather, policy changes, currency volatility and political uncertainty. Consumer sentiment however witnessed a rebound in 1Q2019, and although the Easter Sunday attacks delayed a recovery, business and consumer confidence is now on an upward trend
  • The current monetary stimulus, Rs.2,500 salary increase for State sector employees and possible further consumption boost ahead of the upcoming elections are likely to lead to an upswing in consumer spending in 2020E, and we believe that consumer stocks would benefit from this improved environment
  • Earnings of main consumer stocks were improved significantly post 2015 elections and a growth in earnings is possible this time around as well (though to a lesser extent)

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John Keells Holdings (JKH) – Cinnamon opens a new property in Maldives – 07 October 2019 

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  • News articles indicated that Cinnamon (brand of JKH hotels and resorts) has opened a new resort property in Maldives, it’s 15th property, named ‘Cinnamon Velifushi Maldives’ (Velifushi)
  • The resort has 90 rooms in five room categories. The property is operated by Cinnamon Hotels & Resorts on behalf of Marco Mingoli, property developer, hotel-owner and investor in the Maldives.
  • This continues the asset light, low investment model adopted by JKH, with Cinnamon operating the hotels without owning the properties.
  • JKH is yet to disclose the potential ownership by JKH or KHL and expected contributions to revenues and earnings
  • With the pressure in Sri Lankan properties following the Easter Sunday terror attacks, we view the new addition is a positive for the Leisure sector and overall earnings of JKH

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Event Update

Ceylon Tobacco Company (CTC) share price down -27% in 2019YTD: 03 October 2019

The CTC share has declined -27% in 2019YTD (vs. the ASI’s decline of -7% over the same period). The CTC share price has declined steeply subsequent to a speculation of a price hike in early August 2019 – however the hike is yet to be implemented

CTC has always faced regular indirect tax hikes. However CTC is able to pass the tax hikes onto consumers with added margin and with limited negative impact on net revenue

CTC’s net profit forecast at Rs.18,288mn for 2019E (+7% YoY) and at Rs.19,657mn for 2020E (+8% YoY). YoY growth to be primarily driven by excise duty led price increases

CTC trades at historically attractive PER multiples of 10.8X for 2019E and 10.0X for 2020E. A partial valuation discount however remains warranted, given that earnings are highly susceptible to changes in government policies. Dividend payout of ~100% to continue, amid no material capex requirements – Gross dividend yield of 9-10%

We believe that recent foreign selling in CTC is more related to global market trends and/ or fund specific requirements, and not necessarily due to a negative view formed on CTC and the recent steep share price decline is mostly unwarranted

Based on a blended valuation, which takes an equal weightage between DCF and PE methodologies, we have derived a 12M target price of Rs.1,327.6 which indicates a ~26% upside potential to current price levels and recommend the share as a BUY

Event Update

John Keells Hotel (KHL) – Share Price Movement – 16 September 2019

KHL share has risen +15% during the period 02 September 2019 to 12 September 2019, outperforming the broader market which has declined -1% during the same period. The share had also outperformed the sector index during the period. The share has risen +29% and +14% during the past 3 month and 12 month period respectively (vs. the ASI’s rise of +8% and decline of -4% during the respective periods) – the share has touched a twelve month high of Rs.9.2 on 12 September 2019 with 12,059,070 shares being traded during the past week

Event Update

Chevron Lubricants Lanka (LLUB) – Potential impact on margins following the recent attacks on Saudi Government’s oil facilities : 16 September 2019

On 14 September 2019, two oil plants  in Saudi Arabia’s oil industry were attacked by Yemen’s Iran-aligned Houthi group.  According to a statement released by Saudi Arabia’s state-run oil company Saudi Aramco  the attacks will temporarily cut the kingdom’s output by 5.7mn barrels per day (bpd) (~5% of global oil supply)

Subsequent to the attack Brent crude oil prices have risen sharply by +9% to US$65.8 per barrel on 16 September 2019

We maintain our net profit forecasts at Rs.1,996mn (broadly unchanged YoY) and Rs.2,160mn (+8% YoY) for 2019E and 2020E respectively – with the GP margin forecast maintained at 35.4% for 2019E and at 34.9% for 2020E

We do not anticipate any margin erosion in 3Q2019E from the recent attacks on Saudi oil facilities and the subsequent increase in crude oil price, given that movements in crude oil are reflected in LLUB’s cost of sales with a 6-7 month lag

While there is a possibility of LLUB’s GP margin being lower than our current 2020E forecast of 34.9%, we are maintaining our forecast due to uncertainty on both crude oil prices and competitor reactions vis-à-vis pricing and market share

Event Update

Teejay Lanka (TJL)  – Upward revision to FY20E and FY21E forecasts following a softening in global cotton prices- 16 September 2019

Teejay Lanka (TJL)  – Upward revision to FY20E and FY21E forecasts following a softening in global cotton prices – 16 September 2019

Global cotton prices have witnessed a sharp decline over the past 15 months, falling -35% from a near 7-year high of US$ 0.85/lb recorded in early Jun 2018 to US$0.55/lb as at 16 Sep 2019

Owing to the greater than anticipated softening in global cotton prices witnessed in 2019YTD, we have revised down our average cotton price expectations to US$0.62/lb for FY20E from US$0.65/lb (-14% YoY), and to US$0.64/lb for FY21E from US$0.67/lb (+3% YoY)

TJL’s US$ net profit forecast revised up by +3% to US$15.4mn for FY20E (+38% YoY) and by +4% to US$18.1mn for FY21E (+17% YoY), owing to an upward revision to GP margins, stemming from the aforementioned downward revision to average cotton price expectations. Meanwhile, LKR net profit revised up by +3% to Rs.2,765mn for FY20E (+49% YoY) and by +4% to Rs.3,367mn for FY21E (+22% YoY), backed by faster YoY LKR depreciation

Event Update

Teejay Lanka (TJL)  – Diversification into Lace Production with Luen Fung Textiles (LFT) of China – 26 July 2019

On 25 Jul 2019, TJL announced that it has entered into a Memorandum of Understanding (MoU) with Luen Fung Textiles (LFT) of China to manufacture lace products, which is set to materially expand the company’s current product portfolio. TJL is initially set to purchase raw lace material from LFT, which will be subsequently converted to finished lace products at TJL’s manufacturing facilities

TJL is yet to disclose both the potential investment that will be made by the company and the expected timeline by which the lace production operations will commence

Given the lack of details currently available, we have at this point in time maintained TJL’s US$ net profit forecast at US$14.4mn for FY20E (+28% YoY) and US$16.7mn for FY21E (+16% YoY). Meanwhile, LKR net profit stand at Rs.2,569mn for FY20E (+38% YoY) and Rs.3,101mn for FY21E (+21% YoY)

We have forecast 1Q20E net profit forecast in the range of US$2.1-2.2mn (+15-20% YoY, -37 to -39% QoQ), driven by anticipated margin expansion, stemming from a softening in global cotton prices witnessed in early 2019 – movement in cotton prices are typically reflected in TJL’s COS with a 3-4 month lag. LKR net profit forecast in the range of Rs.355-370mn (+27-32% YoY, -39 to -41% QoQ), backed by faster YoY LKR depreciation

Event Update

Teejay Lanka (TJL)  – Diversification into Lace Production with Luen Fung Textiles (LFT) of China – 26 July 2019

On 25 Jul 2019, TJL announced that it has entered into a Memorandum of Understanding (MoU) with Luen Fung Textiles (LFT) of China to manufacture lace products, which is set to materially expand the company’s current product portfolio. TJL is initially set to purchase raw lace material from LFT, which will be subsequently converted to finished lace products at TJL’s manufacturing facilities

TJL is yet to disclose both the potential investment that will be made by the company and the expected timeline by which the lace production operations will commence

Given the lack of details currently available, we have at this point in time maintained TJL’s US$ net profit forecast at US$14.4mn for FY20E (+28% YoY) and US$16.7mn for FY21E (+16% YoY). Meanwhile, LKR net profit stand at Rs.2,569mn for FY20E (+38% YoY) and Rs.3,101mn for FY21E (+21% YoY)

We have forecast 1Q20E net profit forecast in the range of US$2.1-2.2mn (+15-20% YoY, -37 to -39% QoQ), driven by anticipated margin expansion, stemming from a softening in global cotton prices witnessed in early 2019 – movement in cotton prices are typically reflected in TJL’s COS with a 3-4 month lag. LKR net profit forecast in the range of Rs.355-370mn (+27-32% YoY, -39 to -41% QoQ), backed by faster YoY LKR depreciation

Event Update

Tourist Arrivals -63% YoY in May – June 2019 – 08 July 2019

Tourist arrivals to Sri Lanka declined -57% YoY to 63,072 persons in June 2019 and -71% YoY in May 2019, due to a decline in tourist arrivals from all the countries, following the Easter Sunday terror attacks on 21 April 2019. Cumulative arrivals in Jan-Jun 2019 declined -13% YoY 1,008,449 persons

Tourist arrivals forecast is revised down by -9% to 1,849,344 persons for 2019E (-21 % YoY), whilst 2020E tourist arrivals forecast  is revised down by -10% to 2,195,151 persons (+19% YoY)

Update

Sri Lanka Strategy Report – June 2019

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GDP growth is forecast at an average of +4.0% p.a. for 2019E – 2020E – below its potential levels of ~6-7%, given Sri Lanka’s Investment to GDP ratio of ~37%

The current political situation in Sri Lanka remains highly unpredictable, with post-Easter Sunday incidents contributing towards further instability

The next Presidential election is expected to be held by 07 December 2019, with General/ Parliamentary elections to follow by March 2020E – an anticipated improvement in political stability arising from these elections is likely to be viewed favourably by investors over the medium term

The stock market is expected to be boosted in the near term owing to the downward movement in interest rates, on the back of the Central Bank of Sri Lanka (CBSL) adopting a loose monetary policy in order to stimulate economic activity

The LKR is expected to be under pressure in the near term, at levels above the average annual depreciation rate of the past decade (though at a lower level than witnessed during the latter part of 2018)

The Sri Lankan stock market has witnessed a decline in 2019YTD, with the ASPI declining -12% to 5,311 points, whilst the more liquid S&P SL20 has fallen -21% to 2,470 points (vs. declines of -5% and -15% respectively in 2018)

Forward market valuation of 9.2X for 2019E is at a discount to a majority of regional peers, on the back of an expected earnings growth of +7% YoY

Select key stocks, particularly in banking, consumer and export-related sectors offer relatively attractive valuations

*** All valuations and market data in this report are as at 31 May 2019***

Update

John Keells Holdings (JKH) – Impact from Easter Sunday Attack – 25 April 2019

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Cinnamon Grand, a luxury hotel operated by JKH subsidiary, Asian Hotels and Properties (AHPL) was one of the targets of Easter Sunday Attacks in Sri Lanka

Leisure sector will be largely impacted in the near term whilst Property and Financial services sectors would also see a slight impact

JKH FY20E provisional Net Profit forecasts revised down by -5%; SOTP estimates at Rs.164 (at a 17% discount)

Whilst the share appears to be trading at a discount, degree of the recovery in the near term would be limited. We expect the share price to recover over time, however extent and timing will depend on the confidence instilled by authorities

Update

Sampath Bank (SAMP) – Refuelling for Growth – 29 March 2019

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Growing industry facing higher capital needs

The banking industry can be viewed as an indirect play on the Sri Lankan economy, which has grown swiftly over the years. Local LCBs are also placed attractively amongst regional peers. However, the industry is facing increased capital requirements whilst 2018 saw higher impairment provisions and increased taxes

SAMP gained a significant presence within three decades

SAMP has gained a sizable market share since its incorporation in 1986. The bank has aggressively increased its position, reaching a 9% deposit and advance market share by end of 2018. SAMP also has improved physical and electronic infrastructure in par with its larger peers

Short term dip in ROE with capital raising

SAMP has consistently delivered above industry average returns. However, overall returns are expected to be under pressure in the near term with the recently proposed Rs.12.1bn rights issue. Returns are subsequently expected to improve over the medium term with continuous income growth and higher efficiencies

Buying opportunity with share overreaction

We value SAMP using blended PBV and residual income methodologies at Rs.216.0 (+18% upside potential). We view the recent drop in share price as too steep and recommend to accumulate the share. Near term weakness is however expected until the conclusion of proposed rights issue

Sector Report

Paradise In-sight (Sri Lanka Tourism Sector Report) – 29 March 2019

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Since the conclusion of the civil conflict in May 2009, tourist arrivals to Sri Lanka have increased at a CAGR of 18% during the past ten years to 2.3mn visitors in 2018

Revenue from tourism increased at a CAGR of 39% during 2008-2018 to an estimated US$4.4bn in 2018, i.e. 4.9% of GDP

The tourism industry boom though has not extended to the listed Hotels and Travels (HT) sector on the Colombo Stock Exchange (CSE). After an initial rally, the HT sector has tumbled -54% from its 2010 highs amid poor liquidity

HT sector returns have disappointed with overall profits falling sharply in recent years, with the sector generating ROEs of under 2% and still trading on premium TTM PERs of over 25X

Following steep share price declines, pockets of value appear to exist among a few of the smaller HT sectors, but the sector in general suffers from poor share liquidity

Takeover options in the HT sector likely to pick up in the medium term amid sharp discounts to book and new entrants into sector nursing large losses, albeit with liquidity caveat

More liquid conglomerates such as John Keells Holdings (JKH) and Aitken Spence (SPEN) also provide exposure to tourism sector through their hotel investments (also extending to Maldives and other Asian markets), and may be the preferred option for investors looking to ride the Sri Lanka tourism wave

Event Update

Ceylon Tobacco Company (CTC) Excise Duty Led Price Increases – 18 March 2019

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In the 2019 National Budget, it was proposed to increase Excise Duty (excluding 15% VAT and NBT) for the 60mm and above stick length categories by +12% w.e.f 06 March 2019. Consequently, CTC increased its product prices for 60mm and above stick length categories

Net revenue : gross revenue forecast revised up to 23.4% for 2019E (vs. 23.1% previously and 22.7% in 2018), given that the price increase was higher than the excise duty increase

CTC’s net profit forecast revised up by +3% to Rs.17,921mn for 2019E (+5% YoY – off a high base). Meanwhile 2020E net profit forecast at Rs.19,433mn (+8% YoY)

The defensive share has outperformed the market, rising +35% over the past 12 months (vs. ASI’s decline of -13% during the same period) – reaching an all time high of Rs.1,500 on 18 Dec 2018, although down -10% subsequently

On our  revised estimates CTC trades at PER multiples of 14.1X for 2019E and 13.1X for 2020E – a partial valuation discount however remains warranted given that it is susceptible for government policies

Although further near term material share price gains are likely limited, given recent share price increases and possible short term sales volume dips, we believe that the share may continue to be favoured by investors at current valuations given CTC’s track record of high value creation, especially amid the current challenging economic and political environment

Event Update

Sri Lanka National Budget 2019 – Impact Analysis – 08 March 2019

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The National Budget 2019 Proposals focus on driving growth via consumption and investments – providing financial aids to government workers and lower income families, whilst fast tracking the national infrastructure drive

The GoSL is expecting a fiscal deficit of 4.4% for 2019E, with a key shift in deficit financing to local sources

The GoSL is expected to continue its fiscal consolidation program, with no major changes being proposed to tax policies implemented in 2018

We are of the view that there may be some shortfall in GoSL revenue generation and an overshoot of expenditure. However, we expect some scaling back in public expenditure in such a scenario. Accordingly, we forecast a 2019E fiscal deficit of 4.9% of GDP

The final reading of and the approval of the Budget is expected on 05 Apr 2019

We have highlighted the key proposals of the Budget, including the potential impact on key sectors and selected listed companies

Event Update

Sri Lanka National Budget 2019 Highlights – 05 March 2019

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The Minister of Finance and Mass Media of Sri Lanka, Mr. Mangala Samaraweera, presented Sri Lanka’s National Budget for 2019 in Parliament on 05 March 2019

The Government of Sri Lanka (GoSL) expects to reach a fiscal deficit of 4.4% to GDP for 2019E (lowest since 1977, vs. 5.3% provisional in 2018E)

The GoSL expects to increase Total Revenue and Grants to 15.8% of GDP in 2019E (vs. 14.1% in 2018E), whilst GoSL estimates total expenditure at 20.2% of GDP for 2019E (vs. 19.4% in 2018E)

The GoSL expects GDP to increase at 3.5% in 2019E

2019E deficit is expected to be financed largely via domestic sources, which is also aiming at reducing the total outflows

The report has highlighted the main proposals of the Budget 2019, including the key affected listed companies. A detailed review analysing the implications of Budget 2019 will be released soon

Event Update

Sampath Bank (SAMP) – Event Update – Rights Issue – 01 March 2019

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Sampath Bank announced that it is going for an Rs.12.1bn Rights Issue to boost its Tier 1 Capital to comply with Basel III requirements

Expect to issue 89mn ordinary voting shares in the ratio of 07 new ordinary voting share for 23 shares held at an issue price of Rs.136.0 per share (discount of 41% to share price as at 28 Feb 2019)

With the announcement of rights issue, SAMP share came down below the theoretical ex-rights price of Rs.209.6 (-17% to Rs.193 from previous close at the time of the report)

Despite the expected recovery in earnings and decent fundamentals, the proposed capital raising would act as an overhang for the share. Further, the discount for the rights issue price of Rs.136.0 is viewed too steep and share is expected to remain weak in the near term until the rights issue is finalized

Event Update

Tokyo Cement Company (Lanka) – Cement Price Revision -18 February 2019

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Cement prices for 50kg bags have been increased by Rs.100 (+10%) to Rs.1,095 w.e.f 17 February 2019. The price revision was approved by the Consumer Affairs Authority following the successful lobbying efforts of local cement players. Total price increase within the last 12 months amounts to Rs.165 per 50kg bag (+18%)

We broadly maintain our FY19E revenue forecast at Rs.36,880mn (+4% YoY), and revise up our FY20E revenue forecast by +2% to Rs.41,010 (+11% YoY), amid the price increase in February 2019. Though prices have increased +10%, we have revised up our FY20E revenue forecast by +2% given lower volume expectations

The voting share underperformed the broader market declining -12% and -63% over the past 3M and 12M respectively (vs. ASI’s performance of -1% and -10% over the last 3M and 12M respectively). The non-voting share declined -12% and -59% during the last 3M and 12M respectively

Whilst an increase in the share price in the short-term is expected, medium to long term prospects of the share will continue to be affected by competition from imported cement, subdued demand by the retail segment, and the expected entrance of a Chinese cement manufacturer in 2020E. A re-rating of the share will depend on a meaningful recovery in local cement consumption – a possible catalyst being the conclusion of Provincial Council elections in 2019E and a revival of GoSL-led construction projects

Event Update

Chevron Lubricants Lanka – Wins three state lubricant tenders – 08 February 2019

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Chevron Lubricants Lanka (LLUB) has won three tenders to supply lubricants to state-owned power stations and transport services

We have revised up our 2019E volume forecast by +5% to 29.3 litres (+9% YoY), amid LLUB regaining the previously lost contracts. Meanwhile, 2020E local sales volume forecast at 30.5mn litres (+3% YoY)

LLUB’s net profit forecast revised up by +1% to Rs.2,434mn for 2019E (+9% YoY – off a low base) and 2020E net profit forecast at Rs.2,485mn (+2% YoY)

The LLUB share has declined -34% over the past 12 months (vs. the ASI’s decline of -9%). However, we expect LLUB’s gross dividend yield of 12% to limit any further near term material share price decline. On our current estimates, LLUB trades at PER of and 7.4X for 2019E and 7.2X for 2020E

Near term pressure on earnings to remain due to currency depreciation coupled with the volatility in crude oil prices, together with stiff industry competition

Whilst we view LLUB gaining the three state lubricant tenders as positive, a potential re-rating of the share would likely depend upon LLUB regaining volumes in a more higher margin retail segment

Event Update

Distilleries Co. of Sri Lanka – Product Price Revisions – 28 January 2019

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Distilleries Co. of Sri Lanka (DIST), Sri Lanka’s market leader in the (legal) hard alcohol segment, issued a statement indicating that it has revised alcohol prices w.e.f 28 January 2019, in response to escalating costs of production

Upward price revisions (especially in the higher margin quarter bottle segment) are expected to somewhat offset near term margin pressure due to higher imported raw material costs, stemming from continued currency depreciation

Full and Quarter bottle sales are however likely to face further volume pressure from the soft alcohol segment, consequent to excise-duty led price reductions of “strong” beer in Nov 2017

DIST’s current net profit forecast stands at Rs.4,946mn for FY19E (EPS Rs.1.1, +14% YoY) and at Rs.5,751mn for FY20E (EPS Rs.1.3, +16% YoY), primarily driven by GP margin expansion, stemming from a higher local spirit mix. Given the significant difference in price revisions on different product categories, and the lack of visibility with respect to the sales volume breakdown between ‘Extra Special’ full, half and quarter bottles, we will need to seek further clarification from DIST management prior to revising our volume and price per proof litre assumptions

The DIST share has underperformed the broader market since its re-listing on 03 Apr 2018, declining -36% (vs. the ASI’s decline of -7%), and trades at PER multiples of 14.9X for FY19E and 12.8X for FY20E

Any medium term re-rating of valuations is likely to depend upon measures taken by the Government of Sri Lanka (GoSL) to increase points of access of licit alcohol, especially in rural areas, and an improvement in current share liquidity levels – current estimated public float of DIST stands at ~3.3%, and the company has been provided a 20-month grace period (w.e.f July 2018) by the CSE to meet minimum public holding listing requirements of 7.5%

Event Update

Chevron Lubricants Lanka (LLUB – Rs.73.4) Market share falls to 37% in 3Q2018 – 23 January 2019

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As per the Public Utilities Commission of Sri Lanka (PUCSL), the shadow regulator for Sri Lanka’s lubricant industry, overall lubricant market volumes declined -3% YoY in 3Q2018. Consequently 1-3Q2018 market volumes grew +5% YoY to 50mn litres

LLUB’s volumes declined -6% YoY in 3Q2018, resulting in its 1-3Q2018 volumes growing +1% YoY. Meanwhile, LLUB’s market share declined to ~37% in 3Q2018 (vs. ~38% in 3Q2017), amid intense industry competition on the back of price pressure by competitors. Consequently, LLUB’s market share declined to ~39% in 1-3Q2018 (vs. ~40% in 1-3Q2017), with ExxonMobil’s market share increasing to ~8% in 1-3Q2018 (vs ~6% in 1-3Q2017)

LLUB’s local market share forecasts remain broadly unchanged at ~39-40% for both 2019E and 2020E

Our current 2019E and 2020E net profit forecasts for LLUB are Rs.2,407mn (+8% YoY growth – off a low base) and Rs.2,432mn (+1% YoY) respectively

The LLUB share has risen +13% subsequent to falling to a nine-year low of Rs.65.0 on 28 September 2018 (vs. the ASI’s gain of +2% over the same period). However, the share price to be supported by a high gross dividend yield of 12%

Given the recent share price increase, we believe that benefits stemming from ongoing commodity price fluctuations have partly been factored in. Meanwhile, more sustainable growth in core earnings is likely to depend upon any strategies taken by LLUB’s management to regain a material portion of its previously lost market share

Outlook 2019

Sri Lanka Outlook 2019 – 10 January 2019

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The stock market is expected to face near term pressure from the anticipated upward movement in interest rates

Forward market valuation of 9.5X for 2019E is at a discount to a majority of regional peers, on the back of an expected earnings growth of +12% YoY. Select key stocks, particularly in banking, consumer and export-related sectors offer relatively attractive valuations, backed by strong earnings growth prospects

Given the current uneasy co-existence between political leaders and the major political parties, political risk continues to remain at elevated levels

Whilst the overall market performance is likely to remain subdued in 1H2019E, opportunities for possible M & A plays cannot be ruled out in the near term

A relative improvement in political stability in 2H2019E or 1H2020E would result in a clearer economic outlook over the medium term acting as a catalyst for attracting investments, and thereby would help re-rate market valuations