Research Report

ANNEXURE VII – Research Report

Melstacorp Limited

Research Report As at 23rd September 2016

Prepared By:

CT CLSA Capital (Pvt) Ltd A CT Holdings Group and CLSA Group Company The preparer of the research report possesses the requisite expertise to prepare research report to determine business valuations of this nature involving a company quoted under Consumer Staples Sector

LIST OF ABBREVIATIONS

BBH : Browns Beach Hotel PLC BN : Billion BPL : Balangoda Plantations PLC CIL : Continental Insurance Lanka Limited CSE : Colombo Stock Exchange CTC : Ceylon Tobacco Company PLC DCF : Discounted Cash Flow DIST : Distilleries Company of Sri Lanka PLC EBITDA : Earnings before Interest, Tax, Depreciation and Amortization EV : Enterprise Value Ke : Cost of Equity LBL : Lanka Bell Limited LION : Lion Brewery Ceylon PLC LKR : Sri Lankan Rupees LTE : Long Term Evolution Ltr : Liters MADU : Madulsima Plantations PLC MCRP : Melstacorp Limited MERF : Melsta Regal Finance Limited MHL : Milford Holdings (Pvt) Limited NATA : National Authority on Tobacco and Alcohol NBT : Nation Building Tax NSA : National Sales Average PCEYL : Periceyl (Pvt) Ltd PBT : Profit Before Tax PBV : Price to Book Value PER : Price to Earnings PPE : Property, Plant and Equipment PSIP : Pelwatte Sugar Industries PLC Group ROE : Return on Equity SLIC : Sri Lanka Insurance Corporation SOTP Sum of the Parts SPEN : Aitken Spence PLC VAT : Value Added Tax VWASP : Volume Weighted Average Share Price YoY : Year over Year

TABLE OF CONTENTS

Table of Contents OBJECTIVE OF THE REPORT ...... 4 1.0 THE COMPANY: MELSTACORP LIMITED...... 5 1.1 Overview ...... 5 1.2 Objective of the Restructure ...... 5 1.3 Restructure: Sequence of Events ...... 5 1.4 Group Structure Post-Restructure1 ...... 6 1.5 MCRP: Group Operations ...... 7 2.0 DIST GROUP: HISTORICAL ANALYSIS OF POST-RESTRUCTURE MCRP GROUP FINANCIALS ...... 8 2.1 Income Statement Analysis ...... 9 2.2 DIST Group: Quarterly Financial Analysis of Post-Restructure MCRP Group Financials ...... 15 2.3 Melstacorp Group (Prior to Restructure): Financial Analysis...... 16 3.0 BUSINESS SEGMENTS ...... 17 3.1 Beverage Sector ...... 17 3.2 Plantation Sector ...... 20 3.3 Telecommunication Sector ...... 23 3.4 Financial Services Sector ...... 25 3.5 Diversified Sector ...... 26 3.6 MCRP: Diversified Sector Analysis ...... 28 3.7 Other Key Events ...... 30 4.0 MCRP GROUP: FORECASTS AND OUTLOOK POST-RESTRUCTURE ...... 31 5.0 VALUATION ...... 40 5.1 Relative Price to Earnings Method (PE) ...... 41 5.2 Market Price Method (Sub Division of Shares) ...... 42 5.3 Relative Price to Book Value Method (PBV) ...... 43 5.4 Sum of the Parts Method (SOTP) ...... 44 6.0 RESEARCH TEAM - CT CLSA CAPITAL (PVT) LTD ...... 49 APPENDIX ...... 50

OBJECTIVE OF THE REPORT

The Distilleries Company of Sri Lanka PLC (DIST) made an announcement on 01st August 2016 of an Arrangement in terms of Section X of the Companies Act No. 7 of 2007 to restructure the Group, making Melstacorp Limited (MCRP), which is currently a 100% subsidiary of DIST, the parent company of the DIST Group. As such, DIST shares would be suspended from trading from 30th September 2016. Shareholders of DIST Group as at 30th September 2016 will be issued 1,200 Mn shares in MCRP in a ratio of 4:1 (4 shares of MCRP for each share in DIST) and 100% ownership of DIST will be transferred to MCRP. Subsequently, it is proposed for MCRP to list 1,165 Mn shares on the Colombo Stock Exchange (CSE) via an introduction. In this regard, the objective of this research report is to derive a Reference Price for the introduction of MCRP in terms of Section 3.4.8 of the Listing Rules of the CSE.

1.0 THE COMPANY: MELSTACORP LIMITED

1.1 Overview

Melstacorp Limited (MCRP) is a diversified conglomerate domiciled in Sri Lanka with its business interests spanning Beverage, Plantations, Telecommunication, Financial Services and Other Diversified Sectors. The Distilleries Company of Sri Lanka PLC (DIST Alcohol Company), market leader in the hard alcohol segment in the country, Balangoda Plantations PLC (BPL) and Browns Beach Hotel PLC (BBH) are subsidiaries of the MCRP Group, and are all listed on the Colombo Stock Exchange (CSE). Furthermore, CSE listed conglomerate Aitken Spence PLC (SPEN) and Madulsima Plantations PLC (MADU) are associate companies of MCRP. The Group employs a staff cadre of approximately 12,700.

1.2 Objective of the Restructure

The Distilleries Company of Sri Lanka PLC (DIST Group) commenced operations as a distiller, manufacturer and distributor of liquor products. Although it diversified its operations across a range of sectors over the years and as such has changed its nature of business, the name of the holding company remained unchanged. With the introduction of National Authority on Tobacco and Alcohol Act No. 27 of 2006 (NATA), using DIST as a corporate brand name was made illegal. Branding for the Group came at a significant cost due to the need to market each brand name independently. As a result, the DIST Group has decided to rebrand the Group under a common brand, namely ‘MELSTA’. Furthermore, management believes that through the restructure, there would be a value unlocking for DIST Company as a stand-alone listed entity by offering more visibility to the legacy beverage business.

1.3 Restructure: Sequence of Events

As part of the restructure process, Melstacorp Limited (MCRP), which is a fully owned subsidiary of DIST Group, will become the ultimate parent of the Group through an Arrangement as per Part X of the Companies Act No. 7 of 2007. As a result, DIST Alcohol Company would become a subsidiary of MCRP focusing purely on the legacy beverage business.

The sequence of events for the Arrangement is as follows:

 MCRP settling a sum of LKR 1,816,079,400 owing to DIST (out of an intercompany balance of LKR 1,816,079,570) through the issue of 10,089,330 shares of MCRP to DIST at an issue price of LKR 180 per share, representing the book value of MRCP at the time, which the Board of MCRP perceives is fair and reasonable to MCRP and its sole shareholder, DIST  MCRP to issue 138,128,726 shares to DIST at an issue price of LKR 180 per share for a total consideration of LKR 24,863,170,680. DIST to issue Promissory Notes to MCRP for the total consideration (Promissory Notes will carry interest rate at the six months AWPLR of Licensed Commercial Banks of Sri Lanka plus 100bps)  Prior to the above, DIST held 265,450,000 shares in MCRP and post the issue of 148,218,056 shares mentioned above, DIST would own a total of 413,668,056 shares of MCRP. These shares were consolidated into 1,000 ordinary shares

 100% ownership of DIST Company1 to be transferred to MCRP with shareholders of DIST as at 30th September 2016 being issued shares in MCRP in the ratio of 04 shares of MCRP for every 01 share held in DIST at a value of LKR 11.75 per share. On 30th September 2016, a total of 1.2 Bn shares of MCRP to be issued for a total consideration of LKR 14.1 Bn for 300 Mn shares in DIST subsequent to which DIST would be suspended from trading on CSE  The consolidated 1,000 ordinary shares are converted to 1,000 ordinary non-voting shares  Dissolve the Melstacorp Limited Employees Share Trust and repurchase the MCRP shares to be allotted to the Trust through the settlement of a loan outstanding from the Trust to MCRP of LKR 1,392,132,049 as at 31st March 2016  Post-acquisition of DIST, MCRP Group would adopt a Common Control Accounting Policy for the said Business Combination. Hence, goodwill on acquisition will not be recognized in MCRP consolidated financial statements  MCRP to be the ultimate holding company, with a 100% stake in subsidiary DIST  List MCRP on the Colombo Stock Exchange (CSE) through an Introduction of maximum of 1,165,397,072 shares at a price of LKR 69.0  DIST to recommence trading after meeting free float criteria as per the CSE (MCRP shareholders to receive preferential allotment)

1.4 Group Structure Post-Restructure1

1 162,164 shares of DIST held by sixty four (64) deceased shareholders and three (3) shareholders who continued to hold their shares ‘in locked balance’ (which were excluded from the off-the-floor share transfer until the beneficiaries of the deceased are registered in the Register of DIST/ shares are transferred to the ‘trading balance’) are considered as held in trust for MCRP in consideration of the 648,656 MCRP shares allotted to those shareholders for the transfer of their DIST shares in terms of the ‘Arrangement’ (now held in trust). 6

1.5 MCRP: Group Operations

MCRP Group’s operations currently consist of five primary sectors (prior to restructure), namely:  Beverage (Excl. DIST Alcohol Company)  Plantations  Telecommunication  Financial Services  Diversified Historically, MCRP Group operations exclude the DIST Alcohol Company, which operates in the legacy alcohol business. Prior to the restructure, MCRP Group was the only fully owned subsidiary of DIST Group, and held all other subsidiaries. As such, DIST Group is a combination of DIST Alcohol Company and MCRP Group operations.

Under the restructuring process being carried out, MCRP will become the ultimate holding company of the former DIST Group, following a share swap. Hence, going forward, MCRP Group will also include the performance of DIST Alcohol Company. For consistency, this report will analyze the historical Financial Statements for DIST Group, which is the proforma Financial Statements of MCRP Group (post-restructure).

2.0 DIST GROUP: HISTORICAL ANALYSIS OF POST-RESTRUCTURE MCRP GROUP FINANCIALS

The Group operates in the following segments:

 Beverage: DIST Alcohol Company and Periceyl (Pvt) Ltd (PCEYL). DIST is market leader in Sri Lanka’s legal hard alcohol segment and focuses on the manufacture of arrack. PCEYL focuses on the premium alcohol segment and manufactures foreign liquor brands while also importing well-known premium brands

 Plantations: Includes operations of subsidiary, Balangoda Plantations PLC (BPL)

 Telecommunication: Focuses on the telecommunication industry through Lanka Bell Ltd, Telecom Frontier (Pvt) Ltd, Bell Solutions (Pvt) Ltd

 Financial Services: Operates in the Insurance and Financial Services businesses through subsidiaries, Continental Insurance Lanka Ltd and Melsta Regal Finance Limited

 Diversified: Includes a range of industries including tourism, hydro power, real estate and media

2.1 Income Statement Analysis

(LKR Bn) FY12 FY13 FY14 FY15 FY16 Net Revenue 27.0 28.8 29.0 28.9 33.8 Gross Profit 12.2 12.9 13.8 12.7 13.0 EBIT 8.3 8.0 8.5 8.5 8.4 Profit before Tax 9.0 8.1 9.5 9.7 9.0 Net Profit attributable to Equity Holders 5.5 5.1 6.1 6.6 6.0

Gross Margin 45.3% 44.7% 47.5% 43.9% 38.5% EBIT Margin 30.7% 27.9% 29.4% 29.3% 25.0% PBT Margin 33.3% 28.1% 32.8% 33.6% 26.6% Net Margin 20.5% 17.9% 21.1% 22.7% 17.6%

Segmental Net Revenue Beverages 16.8 19.5 18.9 19.1 24.2 Plantations 2.7 2.8 3.2 3.0 2.4 Telecommunication 4.0 4.0 3.6 3.4 3.3 Financial Services 0.0 0.0 0.0 1.4 2.0 Diversified 3.6 2.5 3.2 2.0 1.9

Segmental Profit before Tax Beverages 6.6 6.3 8.0 8.4 8.4 Plantations 0.1 0.1 0.1 -0.1 -0.4 Telecommunication 0.1 -0.2 -0.6 -0.7 -0.6 Financial Services 0.0 0.0 0.0 0.2 0.2 Diversified 0.8 0.5 0.5 0.5 0.7

Segmental PBT Margins Beverages 39.6% 32.6% 42.4% 43.9% 34.7% Plantations 4.4% 4.0% 4.1% -3.5% -17.8% Telecommunication 2.4% -3.8% -17.6% -20.5% -19.5% Financial Services n/a n/a n/a 13.0% 11.5% Diversified 21.3% 19.1% 16.5% 28.2% 36.4%

2.1.1 Revenue

Revenue Growth Revenue Composition 35 Total Net Revenue 20% Growth (%) - RHS 30 FY16 6% 15% 6% Beverages 25 13% 0% 10% Plantations 20 10% 15% Telecommunication

LKR Bn LKR 7% FY12 15 5% 62% Financial Services 10 10% Diversified 0% 72% 5

0 -5% FY12 FY13 FY14 FY15 FY16 Source: Company Financials Source: Company Financials

DIST Group reported gross revenue of LKR 88.9 Bn in FY16, increasing 33.1% YoY and at a CAGR of 8.9% over the period FY12-16. The Beverage sector constitutes majority of the Group’s net revenues, generating 71.5% of revenue in FY16 and an average of 66.6% over FY12-16. Telecommunication was the second largest contributor to revenue, accounting for 9.7% (average of 11.7% over FY12-16). Plantation, Financial Services and Diversified sectors accounted for 7.1%, 6.0% and 5.6% of revenue in FY16, respectively. Revenue growth in FY16 was largely due to higher volumes and increased prices in the Beverage sector. Despite a slowdown during 4QFY16 due to the excise duty led price revisions, alcohol sales volumes recorded significant growth largely owing to cracking down of the illicit un invoiced / tax unpaid local liquor segment under the current political regime and higher consumer disposable income.

2.1.2 Gross Profit

Group gross profit for FY16 amounted to Gross Profit LKR 13.0 Bn, implying a margin of 38.5% Gross Profit Gross Margin (%) - RHS (vs. margin of 43.9% in the prior year). The 16 50% declining trend of gross margins since a high of 47.5% in FY14 was due to the Value 12 45% Added Tax (VAT) and Nation Building Tax

(NBT) being consolidated with excise Bn LKR 8 40% duties for the Alcohol Beverage sector in 4 35% October 2014. Prior to the amendment of the tax regulation, Group gross profit 0 30% margins ranged between 44-48%. FY12 FY13 FY14 FY15 FY16

Source: Company Financials

2.1.3 Other Operating Income

Meanwhile, DIST Group recorded other income of LKR 1.2 Bn in FY16, down 16.2% YoY due to the previous year consisting of a refund on telecommunication development charge and a gain from disposal from investments. Other operating income consists of dividend income from financial assets, gain on disposals and rent income. Other operating income declined at a CAGR of 8.6% over the period FY12-16, while it averaged 4.3% of net revenue during the same period.

2.1.4 Operating Expenses

Administration Expenses for the Group declined 6.0% YoY to LKR 3.6 Bn in FY16, while it grew at a CAGR of 3.2% over the period FY12-16. The decline in FY16 was primarily owing to the cost reduction efforts taken by management in order to reduce the losses incurred by the Telecommunication sector. Increasing 3.0% YoY, distribution expenses amounted to LKR 1.8 Bn for FY16 and were 5.2% of net revenue, below the 5-year average of 6.2%. Other operating expenses of LKR 350.5 Mn in FY16 increased significantly from that of the previous year due to impairment of loans and advances and a loss on revaluation of property, plant and equipment.

2.1.5 EBIT

LKR Bn FY12 FY13 FY14 FY15 FY16 Reported EBIT 8.3 8.0 8.5 8.5 8.4 Reported EBIT Margin 30.7% 27.9% 29.4% 29.3% 25.0%

Non-Recurring Expenses

Loss on disposal of subsidiaries - - 0.6 - - Loss on disposal of equity accounted investee - - 0.1 - -

Impairment of Goodwill - 0.8 - - -

Recurring EBIT 8.3 8.8 9.3 8.5 8.4 Recurring EBIT Margin 30.7% 30.6% 31.9% 29.3% 25.0%

Consequently, DIST Group EBIT amounted to LKR 8.4 Bn in FY16 marginally declining from that of the prior year. EBIT margins declined to 25.0% in FY16 from 29.3% in FY15, largely due to the impact of lower gross margins. During the period FY12-16, DIST Group recorded non-recurring expenses such as loss on disposal of subsidiaries and associates and impairment of goodwill in FY13-14. The disposal was related to the de-recognition of Pelwatte Sugar Industries PLC following the enactment of Underperforming Enterprises and Underutilized Assets Bill by the Government of Sri Lanka.

2.1.6 Net Finance Cost

Refer Section 2.1.9 Balance Sheet Analysis

2.1.7 Share of Profit from Equity Accounted Investees

The share of profit from equity accounted investees amounted to LKR 0.7 Bn, down 46.2% YoY. The reasons for the decline in profits are lower profits from Aitken Spence (SPEN) (lack of contribution from the 74% owned 100MW thermal power plant, Ace Power Embilipitiya) and the widening loss of MADU. DIST’s share of profit during the year from SPEN amounted to LKR 0.9 Bn declining from LKR 1.5 Bn in the previous year. Furthermore, the loss from MADU widened to LKR 0.1 Bn.

2.1.8 Net Profit

EBIT and Net Profit Effective tax rate of 37.0% for the Recurring EBIT Recurring Net Profit to Equity Holders year was above the 33.5% EBIT Margin (%) - RHS Net Profit Margin (%) - RHS 10 35% recorded in FY15 and also exceeded the four year average of 8 28% 33.8%. The higher effective tax rate was owing to the higher LKR Bn LKR 6 21% contribution to PBT from the 4 14% Beverage sector, which is taxed at a higher rate. 2 7% Consequently, DIST’s net profit 0 0% attributable to equity holders of FY13 FY14 FY15 FY16 Source: Company Financials LKR 6.0 Bn in FY16 was down 9.0% YoY and resulted in a net margin of 17.6%, approximately 500 bps below that of FY15. This implied an earnings per share of LKR 19.88 in FY16, declining from LKR 21.84 in the previous year.

FY12 FY13 FY14 FY15 FY16 Recurring NP Margin 20.5% 20.6% 23.6% 22.7% 17.6% Reported NP Margin 20.5% 17.9% 21.1% 22.7% 17.6%

Meanwhile, the Group’s shareholders’ funds for FY16 were LKR 63.2 Bn, leading to a return on equity of 9.6% for the year on a recurring basis. During FY13-16, the Group’s recurring ROE averaged 11.9%.

FY12 FY13 FY14 FY15 FY16 Recurring Net Profit Attributable to Equity Holders 5.5 5.9 6.8 6.6 6.0 Shareholders' Funds 41.6 48.0 53.6 61.0 63.2 Recurring ROE (%) 13.2% 13.5% 11.4% 9.6%

Reported Net Profit Attributable to Equity Holders 5.5 5.1 6.1 6.6 6.0 ROE (%) 11.5% 12.0% 11.4% 9.6%

Group dividend per share was LKR 3.35 in FY16, implying a dividend payout ratio of 16.9%, above a 5-year average of 16.3%.

FY12 FY13 FY14 FY15 FY16 Dividend per Share (LKR) 3.00 3.00 3.25 3.25 3.35 Dividend Payout (%) 16.3% 17.5% 15.9% 14.9% 16.9%

2.1.9 Balance Sheet Analysis

Capex and Depreciation MCRP Group reported Property, Plant and st Capex Equipment (PPE) of LKR 22.3 Bn as at 31 12 Depreciation & Amortization (Excl. Biological Assets) 40% March 2016, increasing from LKR 18.5 Bn in Capex as a % of Net Revenue 10 32% the previous year. Intangible Assets and Investment Property for FY16 totaled LKR 3.7 8 24% Bn increasing from LKR 3.3 Bn in FY15. Capex 6 of LKR 3.7 Bn was 11.0% of net revenue in LKR Bn LKR 16% 4 FY16, declining from 35.5% in FY15. FY15

2 8% capex included the investment in a new plant for DIST, in order to improve efficiencies. The 0 0% new plant-related capex totaled FY12 FY13 FY14 FY15 FY16 Source: Company Financials approximately LKR 5.0 Bn over a period of 3 years. Over the period FY12-16, capex as a percentage of revenue averaged at 16.1%. Depreciation and Amortization for FY16 amounted to LKR 2.4 Bn increasing from LKR 1.5 Bn in FY15.

Working Capital (Days) FY12 FY13 FY14 FY15 FY16 Inventory 143 141 106 112 105 Trade and Other Receivables 111 99 122 127 122 Trade and Other Payables 282 257 210 230 210 Working Capital Cycle -28 -17 18 10 17

The Group reported inventory of LKR 6.0 Bn, while trade receivables and payables amounted to LKR 11.3 Bn and LKR 12.0 Bn, respectively. Inventory amounted to 28.9% of cost of sales, slightly below that of the previous year. Meanwhile, trade receivables as a percentage of revenue amounted to 33.3%, down from 34.9% in FY15. Trade and other payables as a percentage of cost of sales amounted to 57.6%, declining from 62.9% in the previous year as the increased excise duty resulted in higher costs.

The working capital cycle for the period ending 31st March 2016 was 17 days, increasing from 10 days in FY15. During the years FY12-13, the Group had a negative cash cycle while on average it has maintained a cash conversion cycle of 15 days over the period FY14-16.

FY12 FY13 FY14 FY15 FY16 Total Debt 2.6 11.2 13.4 13.8 14.5 YoY Growth (%) 322.5% 20.1% 3.3% 5.0% Debt to Equity (x) 0.06 0.23 0.25 0.23 0.23

Finance Income 0.7 0.7 0.6 0.4 Finance Cost (0.7) (2.0) (1.2) (0.7) (0.6) Effective Finance Cost (%) 28.5% 9.9% 5.2% 4.3%

The Group’s balance sheet strength is reflected in its relatively low gearing levels, with a low debt to equity of 0.23x in FY16 and a 5 year average of 0.20x. Total debt for FY16 amounted to LKR 14.5 Bn, increasing 5.0% YoY. Majority

13 of debt for the Group is in the form of short term borrowings and bank overdrafts (80.5% of total debt in FY16). Excluding short term debt the Group’s debt to equity ratio would be even lower averaging 0.03x over the 5 year period FY12-16. Finance cost for FY16 amounted to LKR 0.6 Bn, declining from LKR 0.7 Bn in the previous year. Meanwhile, finance income declined 28.9% YoY to LKR 0.4 Bn. The effective finance cost for the year of 4.3% is below 5.2% recorded in FY15.

2.2 DIST Group: Quarterly Financial Analysis of Post-Restructure MCRP Group Financials

Quarterly Performance (LKR Bn) 1QFY16 1QFY17 YoY Growth Net Revenue 7.6 9.3 23.3% Gross Profit 3.3 4.0 21.3% EBIT 2.2 2.8 29.9% Profit before Tax 2.4 2.8 16.3% Net Profit Attributable to Equity Holders 1.8 1.9 9.5% EPS (LKR) 5.85 6.41 9.5%

Gross Profit Margin (%) 43.7% 43.0% EBIT Margin (%) 28.8% 30.3% Net Profit Margin (%) 23.2% 20.6%

DIST Group reported net revenue of LKR 9.3 Bn in 1QFY17, recording 23.3% YoY growth (-0.5% QoQ). Revenue growth from 1QFY16 was largely owing to growth in the Beverage sector, which remained the largest contributor to net revenue during the quarter (74.1% of net turnover). Group gross profit also increased at a significant 21.3% YoY to LKR 4.0 Bn (+26.6% QoQ). However, gross margins declined from 43.7% in 1QFY16 to 43.0% in 1QFY17, as the Group was affected by higher margins being provided to retailers by the Beverage sector and low tea and rubber prices affecting the Plantation sector.

Administration Expenses amounted to LKR 1.0 Bn in FY16 up 12.2% YoY while distribution expenses were LKR 0.5 up 4.7% YoY. Other operating expenses were LKR 0.2 Bn for the year. Total operating expenses for the quarter thus amounted to LKR 1.5 Bn, increasing from LKR 1.3 Bn in the previous year. Operating expenses as a percentage of net revenue was 15.8% in 1QFY17 declining from 17.7% in 1QFY16. Consequently, the Group recorded 1QFY17 EBIT of LKR 2.8 Bn, which implies a margin of 30.3%, an expansion of 150 bps from that of 1QFY16. Net finance cost amounted to LKR 0.1 Bn in 1QFY17 against a net finance income of LKR 0.1 Bn in the previous year’s quarter. The Group reported total debt of LKR 12.3 Bn in 1QFY17, declining slightly from the prior year quarter and as such debt to equity for the quarter of 0.19x was broadly in line with that reported in 1QFY16. Meanwhile, share of profit from equity accounted investees amounted to LKR 0.1 Bn, declining from the previous year mainly due to the decline in the tourism sector. Effective tax for the quarter increased to 36.6% from 31.5% in 1QFY16. Net profit attributable to equity holders grew 9.5% YoY to LKR 1.9 Bn in 1QFY17, implying a net margin of 20.6%. Reported EPS was LKR 6.41.

2.3 Melstacorp Group (Prior to Restructure): Financial Analysis

Melstacorp as a stand-alone company is an investment holding company which generates income through rent and investment returns through its diversified portfolio of quoted and unquoted equity investments, corporate debt securities, sovereign debt instruments and investment property. This section of the research report analyzes the Melstacorp Group (prior to restructure), which excludes operations of DIST Alcohol Company.

Melstacorp Group, which was historically a fully owned subsidiary of DIST Group, held stakes in the following companies:

 Periceyl (Pvt) Ltd  Bellvantage (Pvt) Ltd  Balangoda Plantations PLC  Bogo Power (Pvt) Ltd  Bell Solutions (Pvt) Ltd  Browns Beach Hotel PLC  Lanka Bell Ltd  Milford Holdings (Pvt) Ltd  Telecom Frontier (Pvt) Ltd  Splendor Media (Pvt) Ltd  Continental Insurance Lanka Limited  Texpro Industries Ltd  Melsta Regal Finance Ltd  Melsta Properties (Pvt) Ltd  Melsta Logistics (Pvt) Ltd  Melsta Technology (Pvt) Limited  Timpex Ltd  Melsta Tower (Pvt) Limited

Prior to the restructure, MCRP Group recorded total net revenue of LKR 13.0 Bn in FY16, up 3.7% YoY. The largest contributor to net revenue in FY16 was the Telecommunication Sector followed by Beverage and Diversified sectors contributing 25.3%, 20.5% and 19.7% to revenue, respectively. The Group reported gross profit of LKR 4.3 Bn in FY16, below that of FY15, and as such saw its gross margins decline by 150 bps to 33.0% primarily owing to weakness in the Plantation sector. Consequently, EBIT for the Group also declined to LKR 1.3 Bn, down 4.8% YoY. On a segmental basis, the Diversified sector generated profit before tax of LKR 1.2 Bn in FY16 while the Beverage sector earned LKR 1.0 Bn. Both Telecommunication and Plantation sectors however, reported a loss before tax. Net profit attributable to equity-holders declined 22.8% YoY to LKR 2.0 Bn in FY16 resulting in the net margin narrowing to 15.1% from 20.3% in the prior year.

3.0 BUSINESS SEGMENTS

3.1 Beverage Sector

The Beverage sector comprises operations across two companies, DIST Alcohol Company and Periceyl (Pvt) Ltd (PCEYL) and is the largest revenue generating segment for the Group (71.5% of total Group net revenue in FY16).

The origin of DIST traces back to 1913, with the commencement of distillation and manufacture of liquor products by the Excise Department of Ceylon. The State Distilleries Corporation which was incorporated to take over the operations was converted to a limited company, and privatized in 1992 with the acquisition by the Stassens Group of Companies.

DIST Company markets a wide range of products including, Old Arrack, Coconut Arrack, Double Distilled Arrack, V.S.O.A and Extra Special. Meanwhile, PCEYL’s key brands include Periceyl Black Opal, Franklin and Galerie. The price range for several key brands of DIST Co. and PCEYL are highlighted below.

Prices of Key Brands of DIST Company and PCEYL per 750ml bottle

DIST Company Rs.* PCEYL Rs.* Extra Special 1,200 Periceyl Lemon Arrack 1,320 Special Arrack 1,080 Flinton London Dry Gin 1,650 White Label Arrack 1,250 Franklin Brandy 1,630 Old Arrack 1,400 Petroff Vodka 1,700 V.S.O.A Premium 1,500 Balmora Rum 1,670 D.D.A 1,500 House of Tilbury Whisky 2,000 Sri Lanka Arrack 1,700 Galerie Brandy 1,950

* w.e.f 23 Nov 2015 Source: CT CLSA

DIST Company has continued to maintain its position as market leader in the industry over the years. In terms of Coconut and Processed Arrack, the Beverage sector accounted for 70.3% market share in 2014, while in the Total Arrack market the sector had a market share of 71.7%. One of the primary reasons for the decline in DIST Company market share is the increasing presence of cheap illicit alcohol. However, the current political regime has taken a firm stance on the illicit local liquor segment in Sri Lanka, particularly of un-invoiced and tax unpaid products, which liberally entered the market at significantly lower prices. In FY16, the Beverage sector paid 69.4% of its gross revenue as direct turnover related taxes, up from 66.4% in the previous year. The direct turnover related taxes for FY16 amounted to LKR 55.0 Bn, increasing from LKR 37.8 Bn in the previous year. The industry faces another challenge due to the prohibition of advertising and promoting alcoholic brands (NATA Act).

Meanwhile, the increasing taxes on hard alcohol over the recent years has also affected performance. The hard liquor market continued to decline, and with it the market for DIST Alcohol Company, primarily due to the impact of substitution, resulting from strong beer (above 5% alcohol content) being priced relatively lower. In November 2015 however, the GoSL increased the duty on strong beer, thus ending the comparative advantage of purchasing cheaper strong beer versus more expensive hard liquor. Given these challenges, the beverage sector has continued to lose market share from 80.5% in 2012 to 71.7% in 2014.

Tax Structure on Alcohol Beverages

2011 2012 2013 2014 2015 Segment Jan Oct Mar Oct Jul Oct Oct* Oct Nov Beer - Alcohol % < 5% (LKR / Ltr) 80 85 90 100 110 120 150 190 190 Beer - Alcohol % >/=5% (LKR / Ltr) 96 101 106 116 130 145 185 245 315 Molasses & Arrack (LKR / Proof Ltr) 863 923 983 1,043 1,120 1,210 1,485 1,595 1,850 Foreign Liquor (LKR / Proof Ltr) 1,003 1,063 1,123 1,183 1,250 1,370 1,700 1,860 2,030

Source: Excise Department of Sri Lanka * Consolidation of Duties

As a result of the differing tax structure for hard liquor and malt beer (prior to the amendment in November 2015), there has been a shift in production of liquor. The chart below indicates that production of hard liquor has continued to decline while production of malt liquor (beer) has been on an upward trajectory. Over the period 2010-2014, hard liquor production declined at a CAGR of 2.7%, while malt liquor production grew at a CAGR of 15.0%.

Liquor Production 140 Hard Liquor (Proof Litres Mn) Malt Liquor (Beer) (Bulk Liters Mn) 120 100 80 60 40 20 0 2008 2009 2010 2011 2012 2013 2014 Source: Excise Department

The segment earned net revenue of LKR 24.2 Beverage Sector: Net Revenue per Proof Liter and Bn in FY16, up 26.4% YoY primarily driven by Volume Growth higher volumes (+11.8%) and increased 20.0% Volume Growth (Proof Liters) (%) prices (+13.1%). Volume growth was largely Growth in Net Revenue per Proof Liter (%) owing to the cracking down of the illicit local 10.0% liquor segment in Sri Lanka, while higher disposable income also supported the 0.0% recovery. Revenue growth was however, slightly hampered by the sharp excise duty -10.0% led price revisions. Volume growth in proof liters declined 14.7% and 9.2% in FY14 and -20.0% FY15 against a growth in net revenue per FY14 FY15 FY16 Source: Company Financials proof liter of 14.1% and 11.4% in the same periods, respectively.

Beverage - Profit before Tax Despite significant revenue growth however, the BeverageProfit before - TaxRevenue PBT Margin (%) - RHS segment’s profit before tax declined marginally to 25 9 44% 50% Revenue YoY Growth (%) - RHS LKR 8.4 Bn in FY16 due to the adverse impact of 8 20 35% 40% exchange rate movements and raw material price 6 increases. The average exchange rate for LKR 26% 30% 15 LKR Bn LKR 5 against the USD declined approximately 6% in 17% 20% 3 FY16, thus resulting in import of raw materials LKR Bn LKR 10 8% being more expensive. Given that majority of the 2 10% 5 sector’s ethanol requirement is imported -1% 0 0% (approximately 70% of cost of sales), a depreciating FY12 FY13 FY14 FY15 FY16 0 -10% rupee has a negative impact on sector FY12 FY13 FY14 FY15Source: CompanyFY16 Financials performance.

Furthermore, import duties on ethanol were raised in 2015, while global sugar and ethanol prices also increased, which also had a negative impact on sector performance. given that sugarcane is a primary raw material in the production of ethanol, sugar prices broadly track ethanol prices.

Earnings were also impacted by the end of PCEYL’s partnership with Pernod Ricard, for distribution of imported brands.

The sector recorded strong financial performance in 1QFY17. Net revenue from Beverages increased 30.1% YoY to LKR 6.9 Bn during the quarter while profit before tax recorded growth of 30.3% YoY to LKR 2.8 Bn. Revenue growth was largely due to higher volumes and product prices. PBT margins remained broadly flat during the quarter at 39.9%. On a QoQ basis, revenue growth was 1.2% while profit before tax grew 12.3%.

In FY16, DIST Alcohol Company recorded net revenue of LKR 21.5 Bn increasing 27.3% YoY driven by higher volumes as well as prices. Gross profit for the year amounted to LKR 9.2 Bn implying a gross margin of 42.8%, decreasing from 52.2% primarily owing to the consolidation of VAT and NBT with excise duties. Margins were further hampered by increasing competition and the resulting higher margins provided to retailers. During 1QFY17, DIST Alcohol Company recorded net revenue of LKR 6.2 Bn increasing 31.8% YoY. Gross profit during the quarter amounted to LKR 2.9 Bn, implying a gross margin of 46.4%, down from 47.9% in 1QFY16, given the consolidation of duties and increased competition.

3.2 Plantation Sector

MCRP’s exposure to the Plantation sector stems from its subsidiary (effective stake of 43.2%), Balangoda Plantations PLC (BPL), which primarily focuses on the cultivation and processing of tea and rubber. The Group is also exposed to the Plantation industry through its associate, Madulsima Plantations PLC (MADU), of which it has an effective stake of 45.9%. The Plantation sector of the Group includes the performance of BPL, while the performance of MADU is recorded under share of associate profits.

PlantationPlantation - Revenue- Profit before Tax RevenueProfit before TaxYoY GrowthPBT (%) Margin - RHS (%) - RHS The Plantation sector earned net revenue of LKR 4 200 20% 10% 2.4 Bn in FY16 (accounted for 7.1% of Group net 100 5% revenue) declining significantly due to weak 3 0 demand for tea from export destinations such as 0% 0% -100 Russia, Ukraine, Turkey and the Middle East LKR Bn LKR 2 -5% LKR '000s LKR -200 combined with the impact of low prices. Revenue -20%-10% from rubber plantations also declined owing to the -300 1 unfavorable weather conditions that persisted and -400 -15% continued global weakness. The sector generated a -500 -20% 0 -40% net loss before tax of LKR 0.4 Bn in FY16, increasing FY12 FY12FY13 FY13FY14 FY14FY15 FY15 FY16 FY16 Source:Source:CompanyCompany Financials Financials from a loss of LKR 0.1 Bn in the previous year. The Group’s Plantation sector, similar to the industry at large, was affected by continued labour issues and trade action for wage increases. A ‘go-slow’ was launched by estate workers in July 2015, demanding a wage hike which had an adverse impact on the sector’s performance. Furthermore, the withdrawal of the fertilizer subsidy and the ban of certain chemicals being used have also affected the industry at large. However, BPL continued its replanting strategy, where unproductive tea areas were diversified into rubber, while new planting was also conducted in Balangoda and Badulla.

The sector generated revenue of LKR 0.6 Bn during 1QFY17 increasing 5.9% YoY, while the loss before tax narrowed to LKR 35.3 Mn from LKR 102.4 Mn in the same quarter of the previous year. Improvement in sector financial performance was largely owing to a recovery in tea prices fetched at the auctions. On a QoQ basis, revenue increased 5.2% while the loss before tax declined.

BPL was incorporated in 1992 and was listed on the CSE in 1998. The company has 06 tea estates, 12 tea cum rubber estates and 04 rubber estates. In 2015, approximately 90% of its total crop was tea, while the remaining 10% comprised rubber. BPL’s tea crop (primarily in Uva Medium and Low elevations) declined 6.4%, down for the second consecutive year in 2015, while rubber crop grew 13.9% YoY.

Cropwise Breakdown BPL: Tea vs. Rubber Total Tea Crop Total Rubber Crop 8.0 Tea - Yield kg/ha Rubber - Yield kg/ha 1,000 Tea Revenue Rubber Revenue Tea NSA - RHS Rubber NSA - RHS 7.0 3,500 600 900 6.0 3,000 500 5.0 2,500 800 400

4.0 2,000 Mn Kg Mn

Kg / ha / Kg 300

3.0 700 1,500 Kg / LKR LKR Mn LKR 2.0 200 600 1,000 1.0 500 100 0.0 500 - - FY12 FY13 FY14 FY15 FY16 FY12 FY13 FY14 FY15 FY16 Source: BPLL Source: BPL

BPL’s National Sales Average (NSA) for tea declined 15.2% YoY while the NSA for rubber declined 16.4% YoY in FY16. Consequently, BPL’s revenue from tea amounted to LKR 2.2 Bn, down 20.6% YoY and rubber revenue declined 4.8% YoY to LKR 177 Mn during the year. The yield / hectare for tea declined to 867 Kg/Ha in FY16, down from 940 Kg/Ha in the previous year. The rubber sector was adversely affected by the continued decline in global demand and large stock piles accumulated in major consuming countries. The rubber yield / hectare however increased to 647 Kg / Ha from 577 Kg / Ha in the previous year.

Tea Industry

Tea Crop Output in Sri Lanka National Sales Average by Elevation

250 High Medium Low 600 Low Medium High 500 200 400 150 Mn Kg Mn 300

100 Kg / LKR 200

50 100

- 0 2012 2013 2014 2015 2012 2013 2014 2015 2016 YTM Source: Sri Lanka Tea Board August Source: Sri Lanka Tea Board

Tea production continued to decline in 2015, for the second consecutive year, primarily due to supply side factors such as unfavorable weather conditions and labour issues. The sector’s concerns were however further exacerbated by lower demand from major export destinations owing to declining oil prices (Middle East) and geo-political uncertainties (Russia and Ukraine). Lower demand led to the declining trend in tea prices to continue in 2015. Production declined 2.7% YoY in 2016 continuing a downward trajectory for the second consecutive year. In 2015, the average NSA for tea in Sri Lanka declined 11.8% YoY to LKR 387.6 per kg. However, prices started increasing towards the end of 2015. By September 2016, prices increased to LKR 499.1 per kg, up 36.3% YoY. Sri Lanka is also expected to benefit from the removal of economic sanctions on Iran, which is one of the country’s major export

21 destinations for tea. Although tea prices showed signs of recovery in 1QFY16, the outlook still remains relatively bleak on the back of a global economic slowdown coupled with political unrest in the Middle East and Russia.

Rubber Industry Natural rubber production declined 10.1% YoY to 88.6 Rubber Production and NSA in Sri Lanka MT ‘000s in 2015, continuing the downtrend

Natural Rubber Production experienced since 2012, as smallholders slowed their Average Rubber NSA tapping operations in response to lower rubber 160 450 prices, globally. The industry was further affected by

120 adverse weather conditions and the high cost of 360 production, poor management of the fields and over

80 aged trees. Sri Lankan rubber prices (average of Latex MT '000s MT LKR / Kg / LKR Crepe No. 1X, RSS1 and Brown Crepe 1X) was down 270 40 4.3% YoY to LKR 245.1 per Kg. Prices have continued to decline following the trend of international rubber 0 180 price decline. The downtrend is due to the primary 2012 2013 2014 2015 Source: Rubber Development Department of Sri Lanka substitute, synthetic rubber prices also being low due to its positive correlation with crude oil prices.

3.3 Telecommunication Sector

The Group’s telecommunication sector consists of Lanka Bell (LBL), Bell Solutions and Telecom Frontier. Lanka Bell is the pioneer of fixed wireless telephony who introduced CDMA technology to Sri Lanka and currently provides a range of telecommunication services to corporate and residential customers. The Sri Lankan telecommunication industry consists of two operators with the ability to offer mobile, fixed, data & television. LBL has clearance to offer just one or two of the services. The Company also introduced Bell4G home broadband services via 4G Long Term Evolution (LTE) technology. LBL has a subscriber base of approximately 0.9 Mn subscribers.

The sector generated LKR 3.3 Bn in FY16 (accounted for 9.7% of Group net revenue) while it recorded a net loss before tax of LKR 0.6 Bn, which narrowed from a loss of LKR 0.7 Bn in the previous year. The primary reason for the consistent net losses incurred by the sector is the significant depreciation costs, although management stated LBL is EBITDA positive with a positive operating Cashflow. The sector recorded revenue of LKR 0.8 Bn during the quarter declining from that of the prior year, while the loss before tax increased to LKR 0.3 Bn. On a QoQ basis, revenues declined 2.3%.

Telecommunication - Revenue Telecommunication - Profit before Tax

Revenue YoY Growth (%) - RHS FY12 FY13 FY14 FY15 FY16 4 14% 200 0%

3 0 -5%

-200 -10%

2 0% LKR Bn LKR

LKR Mn LKR -400 -15% 1 -600 -20%

0 -14% Profit before Tax -800 -25% FY12 FY13 FY14 FY15 FY16 PBT Margin (%) - RHS Source: Company Financials Source: Company Financials

The Sri Lankan telecommunications industry is dominated by Fixed Services Vs. Mobile Services in Sri Lanka mobile services, which accounted for over 90% of the market, Fixed Access Services ('000) Cellular Phones ('000) 27,000 while fixed access services accounted for less than 10%. In 2015, the number of fixed lines declined 4.0% YoY to 2.6 Mn

as a decline in wireless services offset a marginal increase in 18,000 No. No. wireline services. Cellular phone connections however, have increased at a CAGR of 7.1% over the period 2010-2015 to reach 24.4 Mn connections by 2015. 9,000

0 2010 2011 2012 2013 2014 2015 Source: Central Bank of Sri Lanka

Moreover, telephone penetration (connections per Telephone Penetration in Sri Lanka 100 persons) continued to increase in Sri Lanka Cellular Fixed reaching 128.7 in 2015 from 117.0 in 2012 with 2015 growth from cellular phone penetration of 116.3 more than compensating for lower penetration 2014 levels of fixed lines of 12.4. Internet penetration in Sri Lanka also has continued to grow reaching 19.5% in 2015 from 6.7% in 2012. Primarily driven by higher 2013 demand for high speed internet services in Sri Lanka, LBL also rolled out 4G/ Long Term Evolution (LTE) to 2012 enhance the services provided to their customers. 0 40 80 120

Source: Central Bank of Sri Lanka

3.4 Financial Services Sector

The Financial Services sector contributed 6.0% to Group net revenue in FY16, slightly increasing from 5.0% contribution in FY15. The Financial Services sector consists of Continental Insurance Lanka Limited (CIL), which operates in the general insurance business, and Melsta Regal Finance Limited (MERF), which focuses on financing, leasing, hire purchasing and factoring. While historically, these two business lines were segmented under Diversified Sector the Group split the categorization of CIL and MERF as Financial Services in FY16.

CIL, which operates in the general insurance business, accounts for approximately 4% market share. The industry has recently been intensely scrutinized by regulatory authorities and several reforms were introduced in an effort to strengthen the framework and ensure insurance policyholders’ safety and protection. The company’s product portfolio includes categories such as automobile, home-owners, travel, marine, general accident and property insurances. CIL has a branch network of 40 and continues to expand its network. CIL was the first insurance company under 5 years of operations to be rated A- (lka) by Fitch Ratings Lanka.

MERF has a rating of A+ (lka) by Fitch Ratings, and has continued to focus on penetrating the market over the last four years of operations. The company has seven branches across the island and continues to expand its geographical footprint. The company hopes to expand its product range to include housing loans and micro leasing products.

The sector generated revenue of LKR 2.0 Bn in FY16, increasing a significant 40.9% YoY from LKR 1.4 Bn in FY15. Profit before Tax also grew 2.8% YoY in FY16 to LKR 0.2 Bn. Financial Services recorded revenue growth of 44.1% YoY to reach LKR 0.7 Bn in 1QFY17, although profit before tax remained relatively flat YoY, owing to the significant claims stemming from the recent floods. On a QoQ basis however, revenues improved 7.6% while the profit before tax increased a significant 162.8%.

Financial Services - Revenue and Profit before Tax

2.1 Revenue Profit before Tax

1.4 LKR Bn LKR 0.7

0.0 FY15 FY16 Source: Company Financials

3.5 Diversified Sector

DIST’s Diversified sector consists of a range of industries:

 Milford Holdings : 98.4% Holdings : An Investment Holding Company  Browns Beach Hotels : 53.9% Holdings : Operates in the Leisure Business  Texpro Industries : 41.8% Holdings : Dyeing and Printing Fabric  Timpex : 51.0% Holdings : An Investment Holding Company  Melsta Logistics : 100.0% Holdings : Automobile Servicing & Logistics  Splendor Media : 100.0% Holdings : Media Buying & Creative Services  Bogo Power : 99.3% Holdings : Hydro Power Generation  Bellvantage : 100.0% Holdings : BPO, KPO & Call Centre Services  Melsta Properties : 100.0% Holdings : Management of Real Estate  Melsta Towers : 100.0% Holdings : Real Estate Company  Melsta Technologies : 100.0% Holdings : Information Technology

The Diversified sector contributed 5.6% to Group net revenue in FY16, declining from Diversified Sector - Revenue and Profit before Tax

6.7% in the previous year. The sector 2.0 Revenue Profit before Tax generated revenue of LKR 1.9 Bn in FY16, declining 2.5% YoY. Despite lower revenue 1.5 however, sector earnings before tax increased 25.9% YoY to LKR 0.7 Bn in FY16 1.0 implying a PBT margin of 36.4%. Margins Bn LKR expanded over 800 bps during the year. 0.5 Margin improvement was owing to higher return on investments, an increase in rent 0.0 income and higher profits from Bogo Power. FY15 FY16 Source: Company Financials During 1QFY17 revenue from Diversified Sector declined 3.0% YoY to LKR 0.4 Bn, while profit before tax declined 58.1% YoY to LKR 0.1 Bn. On a QoQ basis, revenues were down 32.3% while a loss before tax in the previous quarter turned profitable. The weak performance is primarily attributable to the slowdown in equity markets.

The hydro power project, Bogo Power however, is likely to have contributed positively to the sector, due to high rainfall levels. The Group re-launched Browns Beach Hotels PLC as Heritance Negombo in April 2016, in an effort to capitalize on the booming tourism industry in Sri Lanka. Meanwhile, the Group’s Collision Repair Centre, Melsta Logistics, expects to continue investing in advanced technology to enhance efficiencies as well as expand its facility. Owing to increasing competition and lower demand for woven fabric, the Group’s textiles company, Texpro experienced a marginal decline in revenue.

Bogo Power (Pvt) Ltd. was formed to set up a mini hydro plant in Bogowantalawa. A Power Purchase Agreement has been entered into with the Ceylon Electricity Board for the sale of electricity generated over a period of 20 years. The project was commissioned in December 2011, with power capacity of 4 MW and annual energy generated of 15.2 GWH. The Group’s Business Process Outsourcing Company, Bellvantage, is a leading brand in the industry. Splendor Media meanwhile offers marketing communication solutions to its customers and is currently exploring new opportunities in the industry.

Within the Diversified Sector, the Group also maintains a large investment portfolio which includes strategic and non-strategic equity, the market value of which amounted to LKR 18.1 Bn, using Volume Weighted Average Share Price from 15/08/2016 to 23/09/2016 and the shareholdings as at 30th June 2016 (no materials changes to the shareholdings have taken place as at 23rd September 2016).

Shareholdings WA Price* Value Company (No.'000) (Rs.) (Rs.'000) ACL Cables PLC 63 62.22 3,920 Aitken Spence Hotel Holdings PLC 23 51.44 1,188 Bukit Darah PLC 72 282.00 20,360 Carson Cumberbatch PLC 29 206.35 6,067 Ceylon Hospitals PLC - Non Voting 136 81.18 11,033 Commercial Bank of Ceylon PLC 28,295 140.16 3,965,900 Commercial Bank of Ceylon PLC - Non Voting 1 117.32 78 CT Holding PLC 1,476 128.19 189,149 DFCC Bank PLC 17,043 130.61 2,226,034 Free Lanka Capital Holdings PLC 2,851 1.27 3,633 Hatton National Bank PLC 10,179 226.75 2,308,044 Haycarb PLC 74 159.07 11,752 Hemas Holdings PLC 100 100.07 10,007 The Kingsbury Hotel PLC 824 16.24 13,376 John Keells Holdings PLC 49,848 153.53 7,653,051 John Keells Holdings PLC - Warrant 2015 2,176 3.69 8,030 John Keells Hotels PLC 529 11.76 6,219 Lanka IOC PLC 30 39.38 1,181 Lanka Milk Foods (CWE) PLC 6,710 123.15 826,360 Nation Trust Bank PLC 50 81.21 4,061 National Development Bank PLC 0 165.41 0 Nestle Lanka PLC 4 2,267.73 9,064 Renuka Agri Foods PLC 6,119 3.25 19,909 SeyLan Bank PLC 10 95.01 950 Softlogic Capital PLC 40,000 6.03 241,226 Softlogic Holdings PLC 380 14.76 5,607 Textured Jersey Lanka PLC 13,512 42.57 575,137 Tokyo Cement PLC 100 55.06 5,506 Vallibal One PLC 121 21.68 2,625 Total 18,129,467

3.6 MCRP: Diversified Sector Analysis

The Diversified sector on the Colombo Stock Exchange comprises over 15 listed companies with a total market capitalization of LKR 456.7 Bn as at 23rd September 2016, accounting for approximately 17% of the total market capitalization. Sector earnings for the trailing twelve months ending 30th June 2016 amounted to LKR 27.8 Bn and contributed 13.1% to total earnings during the period.

Shareholder Earnings Market Funds LKR Mn FY16/ Cap FY16/ FY2016 FY2016

John Keells Holdings 204,064 14,070 154,982 Transportation, Leisure, Property, Consumer, Financial, IT & Plantation Hemas Holdings 60,117 2,653 21,992 FMCG, Healthcare, Leisure &Transportation Carson Cumberbatch 37,471 2,373 41,084 Beverage, Plantation, Oils & Fats, Asset Mgmt, Real Estate, Leisure &Investment Holdings Aitken Spence 28,298 2,027 36,646 Tourism, Maritime &Logistics, Strategic Investments & Services C T Holdings 23,345 1,626 18,860 FMCG, Retail &Wholesale Distribution, Restaurants, Real Estate, Entertainment &Banking Hayleys 21,375 3,004 30,855 Eco Solutions, Hand Protection, Purification, Textiles, Construction Materials, Plantations,

Transportation &Logistics, Leisure, Consumer, Power &Energy, Industry Inputs Vallibel One 22,383 4,228 38,091 Investment, Tiles and Sanitary-ware, Lifestyle & Consumer, Plantation, Banking, Tourism,

Healthcare Richard Pieris And Company 17,094 2,148 10,873 Retail, Plantations, Tyre, Plastic & Furniture, Rubber, Financial Services Expolanka Holdings 13,293 1,113 11,854 Freight & Logistics, Investments & Services, International Trading & Manufacturing,

Leisure Softlogic Holdings 11,296 722 9,400 Retail, Healthcare, ICT, Financial Services, Automobile, Leisure Sunshine Holdings 7,298 587 5,782 Healthcare, FMCG, Agribusiness, Power & Energy, Packaging Browns Investments 4,836 -943 13,991 Leisure, Plantation, Renewable Energy, Construction, Real Estate, Investments Taprobane Holdings 4,512 -1,742 3,673 Investments, Leisure, Finance, Stock &Money Brokering, Manufacturing, Property,

Services The Colombo Fort Land & Building 3,960 -321 7,611 Trading of Consumer Products & Industrial Products, Leisure, Planations Dunamis Capital 3,186 -439 781

Financial Services, Manufacturing, Real Estate F L C Holdings 1,642 -216 5,223 Plantation, Power, Leisure &Real Estate Adam Investments 1,033 -1 1,019 Apparel, Metal, Network Communication & Automobile Adam Capital 454 2 589 Activated Carbon, Micro Credit Diversified Sector 456,657 30,891 413,306 * Market capitalization calculated based on 23rd September 2016 share prices

3.7 Other Key Events

 Amount due from the Secretary to the Treasury on account of Sri Lanka Insurance Corporation (SLIC) Shares

The Supreme Court of Sri Lanka declared and directed that the shares of SLIC purported to have been sold to Distilleries Consortium in 2003 along with any shares purchased from employees shall be deemed to have been held for and on behalf of the Secretary of the Treasury. Consequently, the money that was paid by the Group subsidiary, Milford Holdings (Pvt) Limited (MHL) to purchase shares from SLIC has been returned. MHL was also entitled to retain the profits of SLIC derived by MHL during its period of ownership. However, since the value of profits has not been determined by MHL, no adjustments were made to the financial statements.

 Pelwatte Sugar Industries PLC Group (PSIP) affected by the revival of Underperforming Enterprises and Underutilized Assets Bill

Following the enactment of the Underperforming Enterprises and Underutilized Assets Bill in November 2011, the state officials occupy the land leased to PSIP and are currently running its operations and related companies. Subsequently, a compensation tribunal was formed as required by the Act. Without assuming any liability or without any prejudice to, or impact on its rights, PSIP has submitted a claim to the tribunal. Management is currently awaiting instructions by the Secretary to the Treasury. Financial results of PSIP up to 30 September 2011 were consolidated to the full year results ending 31 March 2012 however; consolidation has been suspended due to non-accessibility of the information. The investment in PSIP is classified as a fully impaired long term investment in the group.

 Rights Issue of Shares for Browns Beach Hotels PLC

Browns Beach Hotel PLC (BBH) ceased its operations in March 2011 for the construction of a new resort. The new resort commenced its operations in April 2016, under Negombo Beach Resorts (Pvt) Ltd, a fully owned subsidiary of BBH.

The Board of Directors of BBH decided on 23rd August 2016, to issue 54,000,000 ordinary shares by way of a rights issue subject to the approval of the CSE and shareholders of the Company. The shares are to be issued in the ratio of 5 new ordinary shares for every 12 ordinary shares held at a consideration of LKR 25.85 per share. The Company expects to raise approximately LKR 1,395,900,000 as equity capital to invest in its subsidiary, Negombo Beach Resorts (Private) Limited. The subsidiary would in turn use these funds to reduce the existing debt levels and finance the project and construction costs of the hotel in Negombo (Heritance Negombo). The current share price of BBH as of 23rd September 2016 is Rs. 25.00 per share.

4.0 MCRP GROUP: FORECASTS AND OUTLOOK POST-RESTRUCTURE

Under the restructuring process being carried out, MCRP will become the ultimate holding company of the former DIST Group with a 100% stake2, following a share swap. Hence, going forward, MCRP Group will also include the performance of DIST Alcohol Company.

Hence, FY15 and FY16 figures in this section are of DIST Group while the forecasts are estimates for post- restructure financials of MCRP Group, which is equivalent to the former DIST Group. Further, it is assumed DIST Alcohol Company was a fully owned subsidiary of Melstacorp for the entire FY17E (for comparative purposes).

4.1 Revenue

Group (LKR Bn) FY15 FY16 FY17E FY18E FY19E Gross Revenue 66.8 88.9 98.2 108.3 119.6 YoY Growth (%) 33.1% 10.5% 10.3% 10.4%

Net Revenue 28.9 33.8 37.6 41.5 45.9 YoY Growth (%) 17.0% 11.0% 10.4% 10.7%

Segmental Net Revenue Composition Beverage 66.2% 71.5% 71.0% 70.9% 70.7% Plantation 10.4% 7.1% 6.8% 6.8% 6.7% Telecommunication 12.3% 10.2% 9.3% 8.8% 8.5% Financial Services 5.0% 6.0% 6.9% 7.6% 8.4% Diversified 6.1% 5.1% 6.0% 5.9% 5.8%

Segmental Net Revenue YoY Growth Beverage 26.4% 10.2% 10.2% 10.2% Plantation -19.6% 6.5% 9.5% 9.5% Telecommunication -2.7% 0.5% 4.8% 6.6% Financial Services 40.9% 27.4% 22.1% 21.8% Diversified -2.2% 30.1% 8.4% 8.6%

We forecast net revenue for the Group of LKR 37.6 Bn in FY17E, up 11.0% YoY, driven by growth in Beverage, Diversified and Financial Services sectors. Revenue growth over the forecast period is expected at a CAGR of 10.7% during FY16-19E. On a segmental basis, we expect the Beverage sector to be the largest contributor to revenue in FY17E, followed by the Telecommunication Sector, accounting for 71.0% and 9.3% of net revenue, respectively. However, given the changing dynamics within the industries, we expect contribution from Telecommunication sector to decline to 8.5% of net revenue by FY19E, while we expect the Financial Services sector to increase its contribution to 8.4% by FY19E, from 6.9% in FY17E.

2 162,164 shares of DIST held by sixty four (64) deceased shareholders and three (3) shareholders who continued to hold their shares ‘in locked balance’ (which were excluded from the off-the-floor share transfer until the beneficiaries of the deceased are registered in the Register of DIST/ shares are transferred to the ‘trading balance’) are considered as held in trust for MCRP in consideration of the 648,656 MCRP shares allotted to those shareholders for the transfer of their DIST shares in terms of the ‘Arrangement’ (now held in trust).

4.2 Beverage Sector

(LKR Bn) FY15 FY16 FY17E FY18E FY19E Net Revenue 19.1 24.2 26.7 29.4 32.4 YoY Growth (%) 1.1% 26.4% 10.2% 10.2% 10.2%

Volume Growth (Proof Liters) (%) -9.2% 11.8% 4.0% 4.0% 4.0% Growth in Net Revenue per Proof Liter (%) 11.4% 13.1% 6.0% 6.0% 6.0% Direct Turnover Taxes as a % of Gross Revenue 66.4% 69.4% 69.4% 69.4% 69.4%

The Beverage sector is expected to generate net revenue of LKR 26.7 Bn in FY17E, increasing 10.2% YoY. Growth in FY17E is owing to volume growth of 4.0% and net revenue per proof liter growth of 6.0%. Revenue is expected to reach LKR 32.4 Bn in FY19E, as it grows at a CAGR of 10.2%. We expect volume growth to continue at a moderate level of 4.0% on average during FY17E-19E, while we assume growth in net revenue per proof liter would be at 6.0% during the same period. We have not explicitly forecasted the increase in direct turnover related taxes, however, it is expected that the current tax structure would continue.

The DIST Alcohol Company is expected to generate net revenue of LKR 23.7 Bn in FY17E increasing 10.2% YoY. We expect DIST’s market share to remain at its current level of approximately 68.0% throughout the forecast period. We expect DIST Alcohol Company to report net revenue of LKR 28.9 Bn in FY19E, growing at a CAGR of 10.2% during the period FY16-19E.

4.3 Plantation Sector

(LKR Bn) FY15 FY16 FY17E FY18E FY19E Net Revenue 3.0 2.4 2.6 2.8 3.1 YoY Growth (%) -19.6% 6.5% 9.5% 9.5%

Tea Revenue 2.8 2.2 2.4 2.6 2.9 Rubber Revenue 0.2 0.2 0.2 0.2 0.2

The Plantation sector recorded a significant decline in revenue of 19.6% YoY to LKR 2.4 Bn in FY16 continuing the downward trend for the second consecutive year. We estimate revenue of LKR 2.6 Bn in FY17E an increase of 6.5% YoY. Tea accounted for approximately 93.0% of total revenue for the sector in FY16, while the remainder was a contribution from Rubber. In our forecasts, we assume the contribution from Tea would continue to increase while the contribution from Rubber is expected to decline.

Revenue growth is expected to be driven by a 5.8% YoY increase in Tea to LKR 2.4 Bn in FY17E combined with a 15.8% YoY increase in Rubber to LKR 0.2 Bn. Growth in the Tea segment is owing to a potential recovery in NSA, given the upward trend seen during the latter half of 2016. Total net revenue is estimated to grow at a CAGR of 8.5% over the period FY16-19E with revenue from Tea and Rubber expected to record growth at a CAGR of 8.7% and 5.6%, respectively.

4.4 Telecommunication Sector

(LKR Bn) FY15 FY16 FY17E FY18E FY19E Net Revenue 3.4 3.3 3.5 3.6 3.9 YoY Growth (%) -2.5% 5.9% 4.8% 6.6%

Net revenue from Telecommunication is estimated at LKR 3.5 Bn in FY17E increasing 5.9% YoY. Revenue is expected to grow at a CAGR of 5.8% during FY16-19E to LKR 3.9 Bn, driven by the 4G LTE segment, with the contribution to revenue from the 4G LTE segment expected to increase from 6.3% in FY16 to approximately 29.4% in FY19E.

4.5 Financial Services Sector

(LKR Bn) FY15 FY16 FY17E FY18E FY19E Net Revenue 1.4 2.0 2.6 3.2 3.8 YoY Growth (%) 40.9% 27.4% 22.1% 21.8%

Financial Services is expected to record revenue of LKR 2.6 Bn in FY17E reflecting growth of 27.4% YoY. Over the period FY16-19E, we estimate revenue growth at a CAGR of 23.7% to reach net revenue of LKR 3.8 Bn in FY19E. Within the segment, the General Insurance business is expected to contribute 68.3% in FY17E, growth in which is expected to be predominantly driven by the expected growth in the Motor and Miscellaneous sectors. Meanwhile, revenue from the Financial Services business is expected to contribute 31.7% in FY17E, and continue to grow to 35.0% by FY19E.

4.6 Diversified Sector

(LKR Bn) FY15 FY16 FY17E FY18E FY19E Net Revenue 1.8 1.7 2.2 2.4 2.6 YoY Growth (%) -2.2% 30.1% 8.4% 8.6%

Net revenue from the Diversified sector is expected to reach LKR 2.2 Bn in FY17E, increasing 30.1% YoY, primarily stemming from the expected revenues from the commencement of operations of Heritance, Negombo. We anticipate revenue to grow at a CAGR of 15.3% over the period FY16-19E, driven by growth from the Leisure business.

4.7 Gross Profit

(LKR Bn) FY15 FY16 FY17E FY18E FY19E Gross Profit 12.7 13.0 14.9 16.4 18.3 YoY Growth (%) 2.7% 14.3% 10.2% 11.6% Gross Margin (%) 43.9% 38.5% 39.6% 39.5% 39.9%

Our forecast for gross profit for FY17E is LKR 14.9 Bn, recording a growth of 14.3% YoY and implies a margin of 39.6%. The expansion in the margin YoY is primarily due to the reduction in gross losses in the Plantation sector combined with a marginal improvement in Beverage sector gross margins. The marginal decline in gross margins in FY18E is largely due to a potential wage hike in the Plantation industry.

We forecast a gross margin of 42.8% for DIST Alcohol Company in FY17E, stable from that of the previous year and improve to 43.0% by FY19E. Average gross profit growth over the forecast period for MCRP Group and DIST Alcohol Company are 12.0% and 10.4% respectively, over the period FY17-19E. Gross margin over FY17-19E is expected to average 39.7% for MCRP Group over the forecast period.

4.8 Other Operating Income

We have not forecasted dividend income from financial assets and gains/losses from disposal of financial assets. The current market value of the respective financial assets has instead been considered for our Sum-of-the-Parts (SOTP) valuation. Our forecast with the exception of the above amounts to LKR 0.4 Bn in FY17E, which is broadly in line with that of the previous year. Other operating income is expected to remain at the same levels over the forecast period, with operating income as a percentage of net revenue is assumed at 1.0%.

4.9 Operating Expenses

(LKR Bn) FY15 FY16 FY17E FY18E FY19E Distribution Expenses 1.7 1.8 1.9 2.0 2.2 As a % of Net Revenue 5.9% 5.2% 4.9% 4.8% 4.7%

Administrative Expenses 3.8 3.6 4.2 4.6 4.7 YoY Growth (%) -6.0% 17.9% 7.1% 3.9%

Other Operating Expenses 0.0 0.4 0.1 0.2 0.2 As a % of Net Revenue 0.1% 1.0% 0.3% 0.4% 0.5%

Distribution costs are expected to increase 4.7% YoY to reach LKR 1.9 Bn in FY17E and expected to grow to LKR 2.2 Bn in FY19E. We assume distribution costs would average 4.8% of net revenue over the forecast period, declining from 5.2% in FY16. Administration costs for FY17E are estimated at LKR 4.2 Bn, increasing 17.9% from the previous year mainly due to the commencement of operations of Heritance Negombo, while it is expected to grow at a 3-year CAGR of 9.5% to LKR 4.7 Bn in FY19E. Other Operating Expenses amounted to LKR 0.4 Bn in FY16, and we expect this to decline to LKR 0.1 Bn in FY17E. Operating expenses as a percentage of net revenue is expected to average 0.4% during FY17-21E.

4.10 EBIT

(LKR Bn) FY15 FY16 FY17E FY18E FY19E Recurring EBIT 8.5 8.4 9.0 10.1 11.7 YoY Growth (%) -0.4% 7.0% 11.9% 15.2% EBIT Margin (%) 29.3% 25.0% 24.1% 24.4% 25.4%

Comparable EBIT 7.7 7.7 9.0 10.1 11.7 YoY Growth (%) -0.1% 17.7% 11.9% 15.2% EBIT Margin (%) 26.6% 22.7% 24.1% 24.4% 25.4%

Our estimate for recurring EBIT is LKR 9.0 Bn in FY17E, implying a margin of 24.1%, while we expect EBIT to grow at a CAGR of 11.3% over the period FY16-19E. Margin decline in FY17E is owing to losses stemming from the newly commenced hotel, Heritance Negombo. EBIT margin for the forecast period is expected to average 24.6%. Margin expansion in FY19E is from Heritance Negombo generating profits coupled with improvement in Beverage sector gross margins.

Comparable EBIT excludes investment income from the Group’s investment portfolio, and is expected to amount to LKR 9.0 Bn in FY17E and increase to LKR 11.7 Bn by FY19E. Comparable EBIT margins are expected to average 24.6% over the period FY17-19E, increasing from 22.7% in FY16.

4.11 Net Finance Costs

(LKR Bn) FY17E FY18E FY19E Finance Income 0.3 0.5 0.7 Finance Cost (1.0) (1.3) (1.5) Net Finance Cost (0.7) (0.7) (0.7)

Total Debt 17.8 21.0 24.2 Equity attributable to Shareholders 67.7 73.4 79.8 Debt to Equity (x) 0.25 0.28 0.29 Effective Finance Cost (%) 6.5% 6.5% 6.5%

Net finance cost for FY16 amounted to LKR 0.2 Bn, and we expect this to increase to LKR 0.7 Bn in FY17E due to higher effective finance cost and debt. Total debt for the Group is forecasted to be LKR 17.8 Bn in FY17E, increasing to LKR 24.2 Bn by FY19E. Net debt for the Group is estimated at LKR 11.5 Bn in FY17E declining to LKR 9.1 Bn by FY19E, given the generation of operating cash flow. We expect the effective finance cost would remain at 6.5% throughout the forecast period. Our forecast for debt to equity for FY17E is 0.25x, and we estimate an average debt to equity of 0.27x over the forecast period.

4.12 Share of Associate Profits

We expect the share of associate profits to amount to LKR 1.1 Bn in FY17E, increasing from LKR 0.7 Bn in the previous year, primarily driven by a renewed power purchasing agreement with the Ceylon Electricity Board for one year through SPEN (Ace Power Embilipitiya (Pvt) Ltd). The contribution from SPEN is forecasted at LKR 1.1 Bn for the year increasing from LKR 0.9 Bn, while we expect a negative contribution from MADU, owing to weakness in the plantation industry. The contribution from SPEN is expected to increase to LKR 1.4 Bn by FY19E, driven by the tourism sector. Total share of associate profits is expected to increase to LKR 1.3 Bn by FY19E.

4.13 Profit before Tax

(LKR Bn) FY15 FY16 FY17E FY18E FY19E Share of Associate Profits 1.4 0.7 1.1 1.1 1.3

Profit Before Tax 9.7 9.0 9.4 10.5 12.3 YoY Growth (%) -7.6% 4.6% 11.7% 16.8% PBT Margin (%) 33.6% 26.6% 25.0% 25.3% 26.8%

Comparable PBT 8.9 8.2 9.4 10.5 12.3 YoY Growth (%) -1.2% -7.9% 14.4% 11.7% 16.8% PBT Margin (%) 30.9% 24.3% 25.0% 25.3% 26.8%

Segmental PBT (excl. associate profits) Beverage 8.4 8.4 8.9 10.2 11.5 Plantation (0.1) (0.4) (0.2) (0.3) (0.3) Telecommunication (0.7) (0.6) (0.8) (0.9) (0.9) Financial Services 0.2 0.2 0.3 0.4 0.5 Diversified 0.5 0.7 0.1 0.1 0.0

The Group is forecasted to record PBT of LKR 9.4 Bn in FY17E, up 4.6% YoY. PBT is expected to grow at a CAGR of 10.9% to reach LKR 12.3 Bn in FY19E. We expect PBT margins to range from 25.0% – 26.8% during the forecast period FY17-19E, and average 25.7%. Comparable PBT for FY17E is expected to amount to LKR 9.4 Bn increasing from LKR 8.2 Bn in the previous year, with PBT margins improving to 25.0% in FY17E from 24.3%. Growth in PBT is driven by the leisure business turning profitable in FY19E.

On a segmental basis, the Beverage sector is expected to earn PBT of LKR 8.9 Bn in FY17E, increasing from LKR 8.4 Bn in the previous year. The Beverage sector PBT margin is expected to be 33.5% in FY17E declining from 34.7% in the previous year as other operating income has not been forecasted. We expect Beverage sector PBT to grow at a 3-year CAGR of 11.2% during FY16-19E to reach LKR 11.5 Bn by FY19E based on improvement in gross margins which benefited from lower depreciation and lower growth in administration expenses following the recently completed restructure. PBT margins are expected to range between 33.5% - 35.6% over this period. The DIST Alcohol Company is forecasted to record PBT of LKR 7.0 Bn in FY17E and increase to LKR 10.5 Bn in FY19E. The PBT margins for DIST Alcohol Company are expected to range from 33.9% - 36.2% during FY17-19E.

Given the weak supply side factors, we do not expect a turnaround in the Plantations sector in the near term. As such, we forecast a loss before tax of LKR 0.19 Bn in FY17E and expect it to record an average loss before tax of LKR 0.27 Bn over the period FY17-19E. It is expected that there would be a wage hike in FY18E, which would not be paid in arrears, which is likely to hamper profitability further.

Despite the expectation of the Telecommunication sector recording growth in revenue, we believe the sector losses before tax would continue to expand during the forecast period. We estimate a loss before tax of LKR 0.77 Bn in FY17E, while a loss of LKR 0.85 Bn is expected on average over the years FY17-19E due to increasing operating and finance costs. We do not expect the company to record a turnaround during the forecast period.

Profit before tax for Financial Services is estimated at LKR 0.3 Bn for FY17E, reflecting growth of 9.4% YoY. We expect PBT to continue to record growth at a CAGR of 27.8% over the forecast period. The General Insurance business is expected to contribute 57.9% to PBT in FY17E, while the financial services company is expected to contribute the remaining. Continental Insurance is expected to record underwriting profits by FY18E. PBT margin for FY17E is expected to be 9.9%, declining from the prior year due to the increased claims stemming from the floods which took place in May 2016. Margins are expected to average 11.3% during FY17-19E.

The Diversified sector income consists of dividend and gains/losses on disposal of financial investments, which we have not forecasted and instead have used the current market value for our SOTP valuations. Over our forecast period, we expect the profit before tax to average LKR 0.06 Bn.

4.14 Net Profit attributable to Equity Holders

(LKR Bn) FY15 FY16 FY17E FY18E FY19E Taxation 3.3 3.3 3.5 3.9 4.5 Effective Tax Rate (%) 33.5% 37.0% 37.0% 37.0% 37.0%

Recurring Net Profit attributable to Equity Holders 6.6 6.0 6.3 7.0 8.0 YoY Growth (%) -9.0% 5.3% 11.9% 14.4% NP Margin (%) 22.7% 17.6% 16.7% 16.9% 17.5%

Comparable Profit attributable to Equity Holders 5.8 5.2 6.3 7.0 8.0 YoY Growth (%) -9.8% 20.9% 11.9% 14.4% NP Margin (%) 19.9% 15.4% 16.7% 16.9% 17.5%

Income tax for the Group is estimated using an effective tax rate of 37.0% over the forecast period FY17-19E. We estimate recurring net profit attributable to equity holders of LKR 6.3 Bn in FY17E, increasing from LKR 6.0 Bn in FY16. Growth in recurring net profit attributable to equity holders is expected at a CAGR of 10.1% over FY16-19E. Net profit margin is estimated at 16.7% in FY17E and is expected to average 16.9% during FY17-21E.

Comparable net profit attributable to shareholders excludes investment income from the Group’s investment portfolio, which includes a range of quoted debt and equity investments. In FY16, the comparable net profit amounted to LKR 5.2 Bn, down 9.8% YoY. We expect the comparable net profit for FY17E to amount to LKR 6.3 Bn, increasing 20.9% YoY, while we expect the profit to grow at a CAGR of 15.3% over the period FY16-19E primarily driven by improved performance in the Beverage sector. Comparable net margins are expected to average 16.9% over the period FY17-19E.

Group FY15 FY16 FY17E FY18E FY19E Profit for the Year 6.5 5.7 5.9 6.6 7.7 Dividend Payout Ratio (%) 15.1% 17.1% 20.0% 20.0% 20.0%

In terms of dividend payout, we expect MCRP to maintain a 20.0% payout ratio over the forecast period, increasing from the 15.1% and 17.1% in FY15 and FY16, respectively.

4.15 Depreciation and Capex

(LKR Bn) FY17E FY18E FY19E Property, Plant and Equipment 18.8 20.1 21.6 YoY Growth (%) 70.4% 6.9% 7.5% Capex 3.3 3.7 4.1 Capex as a % of Net Revenue 8.8% 8.9% 8.8%

Depreciation and Amortization 2.1 2.2 2.4

Property, Plant and Equipment for the Group is expected to total LKR 18.8 Bn in FY17E. Capex for the Group is estimated at LKR 3.3 Bn in FY17E, with capex as a percentage of revenue amounting to 8.8% of net revenue. Over the forecast period, we expect capex as a percentage of revenue to average 8.8%. Depreciation and Amortization is estimated at LKR 2.1 Bn in FY17E, declining from LKR 2.4 Bn in FY16. The effective depreciation rate in FY16 amounted to 15.8% and we expected this to decline to 11.1% in FY17E.

4.16 Shareholders’ Funds

After incorporating the accounting entries as a result of the Arrangement to the 30th June 2016 Balance Sheet of DIST, the proforma equity position of MCRP would be as follows:

LKR No of Voting Shares (Bn) (Mn) Pre-Arrangement Stated Capital 48.3 265.5 Settlement of sum owing to DIST 1.8 10.1 Promissory Notes 24.8 138.1 413,668,056 voting shares converted into 1,000 ordinary non-voting shares New issue of shares to acquire DIST Alcohol Company 14.1 1,200.0 Buyback of shares to dissolve trust (34.6) Proforma Stated Capital 89.1 1,165.4

The MCRP Group Stated Capital for FY17E would be LKR 89.1 Bn, with total negative retained earnings of LKR 20.6 Bn. Post-acquisition of DIST, MCRP Group would adopt a Common Control Accounting Policy for the said Business Combination. Hence, goodwill on acquisition of DIST Alcohol Company by MCRP will not be recognized in MCRP consolidated financial statements and would be set off against reserves. The estimated goodwill is LKR 34.3 Bn. The total shareholders’ funds for FY17E is expected to be LKR 67.7 Bn.

Stated Retained Other Shareholders’ Reconciliation of Shareholders' Funds for FY17E (LKR Bn) Capital Earnings Reserves Funds Opening Balance 48.3 10.1 (0.8) 57.6 New Share Issue 40.8 40.8 Profit for the Year 6.2 6.2 Dividends Paid (1.2) (1.2) Goodwill set off against Reserves (34.3) (34.3) Share Repurchase (1.4) (1.4) Closing Balance 89.1 (20.6) (0.8) 67.7

ROE for FY17E is estimated at 8.9% growing to 9.6% by FY19E. The average ROE for the forecast period is expected to be 9.2%.

4.17 DIST Alcohol Company to be a Stand-alone Entity

Following the Arrangement, trading of DIST shares would be suspended on 30th September 2016 as DIST would become a fully owned subsidiary of MCRP. DIST is expected to commence trading subsequent to meeting the free float criteria as per the continuous listing requirements of the CSE.

However, we have not factored any dilution of stake by MCRP Group in DIST in our projections as the loss in value via a dilution would be offset through the capital raised.

5.0 VALUATION

The following valuation methodologies were considered in deriving a fair value for MCRP as at 23rd September 2016:

1. Relative Price to Earnings Method (PE) 2. Relative Price to Book Value Method (PBV) 3. Market Price Method 4. Sum of the Parts Method (SOTP)

SOTP and PE are the two preferred valuation methods for a conglomerate where the value is driven as a combination of business units. Discounted Cash Flow (DCF) valuation has been used to value the Beverage sector within the SOTP method. As MCRP group has two companies in the Financial Services sector, DCF valuation is considered less applicable for MCRP overall.

Managers and Financial Advisors to the Issue have established that all assumptions used in the forecasts and outlook section of this report are fair and reasonable to the best of their knowledge.

All market prices used in this section are volume-weighted average prices for the period of 15th August 2016 to 23rd September 2016 assuming that all interim results for the quarter ended 30th June 2016 were released by 15th August 2016, which was the deadline for release of interim results. This is in order to avoid possible anomalies that may arise in share price movement on a single day.

Valuation Summary

A summary on the prices derived and the applicable price multiples are shown below for the four valuation methodologies used on MCRP:

Fair Value Introductory Price (Discount)/Premium Method per Share (LKR) per Share (LKR) (%) SOTP 74.94 69.00 (7.93) Relative PER 70.62 69.00 (2.29) Relative PBV 65.52 69.00 5.32 Market Price 68.04 69.00 1.41 Average 69.78 69.00 (1.12)

Based on the methodologies used the fair value of MCRP’s share ranges from LKR 65.52 – LKR 74.94 with an average price per share of LKR 69.78.

Based on the above we recommend a share price of LKR 69.00 to be the Reference Price for the introduction of MCRP.

5.1 Relative Price to Earnings Method (PE)

Under the Relative PE method, MCRP share was valued using the PE multiples of comparable listed peers in the market.

푷 = 푬푷푺 × 푷푬

Where, P = Price per Share at year 0 EPS = Earnings per Share PE = Applicable Price to Earnings multiple

Comparable Listed Local Peers

Market Cap Diversified Holdings PER (x) ** (LKR Mn)* John Keells Holdings PLC 208,726 14.6 Hemas Holdings PLC 57,295 19.5 Carson Cumberbatch PLC 40,524 37.5 Aitken Spence PLC 28,490 15.4 Vallibel One PLC 23,560 5.3 C T Holdings PLC 23,472 13.1 Hayleys PLC 21,397 7.5 Richard Pieris And Company PLC 17,442 8.1 420,905 13.4

Source: Company Financials, CSE * Using Volume Weighted Average Share Price from 15/08/2016 to 23/09/2016 **Trailing Twelve Months for the period ended 30th June 2016

MCRP Group has exposure to Beverage, Plantation, Telecommunication, Financial Services and other Diversified sectors. Given its diversified nature of operations, we have selected peers listed on the Colombo Stock Exchange (CSE) with a total market capitalization over LKR 15 Bn and operating in similar industries. However, there are no direct comparable peers for MCRP, as 71.5% of its net revenue for FY16 was generated from the beverage sector, closest peer being Carson Cumberbatch with its limited exposure to the alcohol segment (43.1% of revenue in FY16).

Considering a weighted average trailing PE multiple of 13.4x for the peer group, MCRP share is valued at LKR 70.62 based on the relative PER method.

Relative PER TTM Earnings June 2016 (LKR Mn) 6,131 Diversified Peer Multiple 13.4 Total Equity Value (LKR Mn) 82,298 Number of Shares (Mn) 1,165 Value per Share (LKR) 70.62

5.2 Market Price Method (Sub Division of Shares)

Given that all the shareholders of DIST Group as at 30th September 2016 will receive four shares of MCRP for every one share held in DIST via a share swap and will own 100% of the voting shares of MCRP post share swap, this could be viewed as a 1 : 4 (approximately) subdivision of the shares of DIST.

DIST Share Price Current Shares of DIST (Mn) 300 DIST Share Price (LKR)* 264.32 DIST Market Capitalization (LKR Mn) 79,295 SWAP Ratio 1 : 4 MCRP Total Voting Shares - Post SWAP (Mn) 1,165 MCRP Market Capitalization - Post SWAP (LKR Mn) 79,295 Post SWAP - Value per Share (LKR) 68.04

*Volume Weighted Average Share Price from 01/08/2016 to 23/09/2016

Considering a weighted average price for DIST share of LKR 264.32 since the announcement of the restructure, MCRP share is valued at LKR 68.04.

5.3 Relative Price to Book Value Method (PBV)

Under the Relative Price to Book Value method, MCRP share was valued using the Price to Book Value multiple of comparable listed peers in the market.

푷 = 푩푽푷푺 × 푷푩푽 where, P = Price per Share at year t BVPS = Book Value per Share PBV = Applicable PBV multiples

Market Cap PBV June Diversified Holdings (LKR Mn)* (x)** John Keels Holdings PLC 208,726 1.34 Hemas Holdings PLC 57,295 2.52 Carson Cumberbatch PLC 40,524 1.29 Aitken Spence PLC 28,490 0.78 Vallibel One PLC 23,560 0.60 C T Holdings PLC 23,472 1.21 Hayleys PLC 21,397 0.70 Richard Pieris And Company PLC 17,442 1.52 420,905 1.21

*Using Volume Weighted Average Share Price from 15/08/2016 to 23/09/2016 **Based on Shareholders’ Funds as at 30th June 2016

Relative PBV Shareholders' Funds June 2016 (LKR Mn) 62,921 Diversified Peer Multiple 1.21 Total Equity Value (LKR Mn) 76,354 Number of Shares (Mn) 1,165 Value per Share (LKR) 65.52

Considering a weighted average trailing PBV multiple of 1.21x for the peer group, MCRP share is valued at LKR 65.52 based on the relative PBV Method.

5.4 Sum of the Parts Method (SOTP)

The Sum-of-the-Parts (SOTP) method is a valuation methodology which is commonly used to value a Company operating in several industries. SOTP aggregates the independently valued business units of a company in order to arrive at a single total equity value. The individual business units could be valued using a range of valuation methodologies, depending on the industry it operates in. The SOTP valuation incorporates a conglomerate discount to compensate potential owners for the possible loss of focus that may arise due to expansion of operations into unrelated businesses.

Sum of the Parts (SOTP) Segment Value (LKR Mn) Beverage 80,723.1 Note 1 Telecommunications 1,461.8 Note 2 Financial Services 3,289.9 Note 3 Plantations 144.7 Note 4 Diversified 7,937.4 Note 5 Associates 13,080.9 Note 6 Market Portfolio 18,129.5 Note 7 Total Equity Value 124,767.4 Number of Shares (Mn) 1,165 Value per Share (LKR) 107.06 Applicable Discount 30% Value per Share (LKR) 74.94 * Managers and Financial Advisors to the Issue have established 30% as a fair discount to the SOTP valuation, considering the market dynamics and future prospects and the risks associated with MCRP.

Applying different valuation methodologies applicable to MCRP business segments, SOTP valuation derives a fair value per share of LKR 74.94.

Beverage (Note 1)

The Beverage sector of MCRP has been valued using the median of three methods namely, Discounted Cash Flows (DCF), Relative Price to Earnings (PER) and Relative EV/EBITDA. The following table shows the values derived under each method:

Beverage (LKR Bn) DCF 66.6 Note A Relative PER 80.7 Note B Relative EV/EBITDA 129.4 Note C Median Equity Value 80.7

DCF (Note A)

DCF FY17E FY18E FY19E Free cash flow to the firm 3,528,449 6,658,237 7,293,224 Change in Debt 1,489,472 206,261 261,515 Interest paid (1,508,512) (624,611) (642,518) FCF to the equity holders 3,509,409 6,239,886 6,912,221 Value from Secondary Growth Phase (FY20-26E) 42,116,578 Terminal Value - - 39,760,534 Total 3,509,409 6,239,886 88,789,333 Present Value 3,131,285 4,782,447 58,454,655

NPV 66,368,387 Cash (June 2016) 278,435 Equity Value 66,646,822

Assumptions 5 Year Treasury Bond Secondary Market Rate (%)* 11.42 Equity Risk Premium (%) ** 5.00 Cost of Equity (%) 16.42 Terminal Growth Rate (%) 2.50 Medium Term Growth Rate (%) (FY20-26E) 12.38

*Source: Central Bank of Sri Lanka weekly average yield YTD till 23rd September 2016 ** Managers and Financial Advisors to the Issue have established 5.0% as a fair equity premium, considering the future prospects and the risks associated with MCRP.

Relative PER and Relative EV/EBITDA

Adjusted PER PER EV/EBITDA EV/EBITDA Adjusted Market (Market Cap. Selected Peers Financial TTM Financial TTM (Market Cap. Cap.** weighted) Year End June*** Year End June*** weighted) PE EV/EBITDA CTC* 167,765 15.78 14.94 14.42 13.36 12.65 11.31 LION 30,397 14.61 29.68 11.09 16.65 2.24 1.70 Industry 198,162 15.59 16.17 13.67 13.87 14.89 13.01 * Year ended 31st December 2015 ** Using Volume Weighted Average Share Price from 15/08/2016 to 23/09/2016 ***Trailing Twelve Months for the period ended 30th June 2016

For the purpose of relative valuation of the Beverage sector, we have selected Ceylon Tobacco Company PLC (CTC) and Lion Brewery Ceylon PLC (LION) as close peers, given their focus on similar regulated industries Adjusted PER and EV/EBITDA has been calculated for CTC using TTM June financials and year-end financials have been used for LION. The inconsistency is due to the quarter ending 30th June 2016 for LION being an anomaly, given the recent floods and the negative impact on its performance.

Relative PER (Note B)

Relative PER (LKR Mn) TTM Earnings June 2016 5,422 Selected Peer Multiple (x) 14.9 Total Equity Value 80,723

Relative EV/EBITDA (Note C)

Relative EV/EBITDA (LKR Mn) TTM EBITDA June 2016 10,112 Selected Peer Multiple (x) 13.0 Net Debt 2,122 Total Equity Value 129,429

Telecommunications (Note 2)

The Telecommunication sector of MCRP was valued on the basis of Net Book Value (NBV), assuming a multiple of 0.5x, given that the sector is loss making. Our average fair value for the Telecommunication sector is LKR 1.5 Bn.

Financial Services (Note 3)

We arrive at an average fair value of LKR 3.3 Bn for the Group’s Financial Services sector, using a relative price to book valuation. We assign the June 2016 PBV multiple of People’s Insurance PLC for Continental Insurance Lanka Limited as it is the only listed general insurance company. Melsta Regal Finance Limited was valued using the PBV multiple for all licensed Finance Companies listed on the CSE.

PBV June 2016 (x) * People's Insurance PLC 1.51 Listed Licensed Finance sector 1.29 *Based on Shareholders’ Funds as at 30th June 2016

Plantations (Note 4)

The Plantations sector of the Group is valued using the average market value from 15th August 2016 to 23rd September 2016. We arrive at a value of LKR 144.7 Mn for the segment.

Balangoda Plantations PLC WASP from 15 Aug 2016 - 23 Sep 2016 (LKR) 14.16 Shares Held by MCRP (No. Mn) 10.2 Fair Value (LKR Mn) 144.7

Diversified (Note 5)

We derive a value of LKR 7.9 Bn for the Diversified sector, using a combination of Market Value, NBV and PER. Within the Diversified sector, we have valued Browns Beach Hotel using market value based on the weighted average prices from 15th August 2016 to 23rd September 2016.

Browns Beach Hotel PLC WASP from 15 Aug 2016 - 23 Sep 2016 (LKR) 26.09 Shares Held by MCRP (No. Mn) 54.3 Fair Value 1,416.2

Bogo Power has been valued based on the TTM June 2016 PER for the sector (excluding the loss making companies), as shown below:

Market Cap PER TTM June Power (LKR Mn)* (x)** Vallibel Power 6,864 8.1 Vidul Lanka 4,471 13.0 Resus Energy 1,388 9.6 Pan Asian Power PLC 1,641 14.4 Browns Hydro Power PLC 768 16.8 Industry 15,458 10.6 *Volume Weighted Average Share Price from 15/08/2016 to 23/09/2016 **Trailing Twelve Months for the period ended 30th June 2016

Apart from Bogo Power and BBH, we value the remaining companies using the NBV. The two companies owning properties Melsta Towers and Melsta Properties are valued at current net book value, whereas the remaining companies are valued applying a 50% discount to the NBV due to their loss making nature.

The market portfolio (refer Note 7) under the Diversified sector is valued separately.

Associates (Note 6)

The Associates, SPEN and MADU have been valued at LKR 13.1 Bn using the Volume Weighted Average Share Price from 15/08/2016 to 23/09/2016.

Aitken Spence Holdings PLC WASP from 15 Aug 2016 - 23 Sep 2016 70.17 Shares Held by MCRP (No. Mn) 178.5 Fair Value 12,525.0

Madulsima Plantations PLC WASP from 15 Aug 2016 - 23 Sep 2016 7.14 Shares Held by MCRP (No. Mn) 77.8 Fair Value 555.9

Market Portfolio (Note 7)

The Market Portfolio for the Group, which is categorized under the Diversified sector, is valued using Volume Weighted Average Share Price from 15/08/2016 to 23/09/2016 and the shareholdings as at 30th June 2016 (no materials changes to the shareholdings have taken place as at 23rd September 2016).

Shareholdings WA Price* Value Company (No.'000) (Rs.) (Rs.'000) ACL Cables PLC 63 62.22 3,920 Aitken Spence Hotel Holdings PLC 23 51.44 1,188 Bukit Darah PLC 72 282.00 20,360 Carson Cumberbatch PLC 29 206.35 6,067 Ceylon Hospitals PLC - Non Voting 136 81.18 11,033 Commercial Bank of Ceylon PLC 28,295 140.16 3,965,900 Commercial Bank of Ceylon PLC - Non Voting 1 117.32 78 CT Holding PLC 1,476 128.19 189,149 DFCC Bank PLC 17,043 130.61 2,226,034 Free Lanka Capital Holdings PLC 2,851 1.27 3,633 Hatton National Bank PLC 10,179 226.75 2,308,044 Haycarb PLC 74 159.07 11,752 Hemas Holdings PLC 100 100.07 10,007 The Kingsbury Hotel PLC 824 16.24 13,376 John Keells Holdings PLC 49,848 153.53 7,653,051 John Keells Holdings PLC - Warrant 2015 2,176 3.69 8,030 John Keells Hotels PLC 529 11.76 6,219 Lanka IOC PLC 30 39.38 1,181 Lanka Milk Foods (CWE) PLC 6,710 123.15 826,360 Nation Trust Bank PLC 50 81.21 4,061 National Development Bank PLC 0 165.41 0 Nestle Lanka PLC 4 2,267.73 9,064 Renuka Agri Foods PLC 6,119 3.25 19,909 Seylan Bank PLC 10 95.01 950 Softlogic Capital PLC 40,000 6.03 241,226 Softlogic Holdings PLC 380 14.76 5,607 Textured Jersey Lanka PLC 13,512 42.57 575,137 Tokyo Cement PLC 100 55.06 5,506 Vallibel One PLC 121 21.68 2,625 Total 18,129,467

6.0 RESEARCH TEAM - CT CLSA CAPITAL (PVT) LTD

Nichula Witharana – Assistant Vice President

Nichula counts for over five years of experience in equity research, investment management and financial analysis. Prior to joining CT CLSA Capital, he held the position of Assistant Manager at NDB Capital Holdings Limited prior to which he served as Assistant Manager Finance and Accounting at WNS Global Services (Pvt) Ltd.

Nichula holds a B.Sc. in Finance from the University of Sri Jayewardenepura. He is also a Chartered Financial Analyst (CFA) and an Associate Member of the Institute of Chartered Accountants of Sri Lanka (ICASL).

Samalka Athuraliya – Senior Associate

Samalka counts for five years of experience in equity research at Copal Amba (a Moody's Analytics Company), a leading KPO in Sri Lanka where she held the positions of Associate Analyst, Analyst and Associate Vice President prior to joining CT CLSA Capital. She is a Chartered Financial Analyst (CFA) and an Associate Member of the Chartered Institute of Management Accountants (CIMA) UK.

David Carvalho - Associate

David counts for over four years of experience in the field of Audit and Assurance. Prior to joining CT CLSA Capital, he was attached to Ernst and Young Sri Lanka, a leading global firm of Chartered Accountants, where he held the positions of Audit Junior, Audit Senior and then Senior Accountant.

Raveen Jayanetti - Analyst

Raveen counts for four years of experience in Finance and Accounting. Prior to joining CT CLSA Capital he held the position of Senior Executive in CMA CGM SSC Lanka (Pvt) Ltd, prior to which he held the positions of Junior Executive and Executive at WNS Global Services (Pvt) Ltd, a leading BPO in Sri Lanka.

APPENDIX

Forecasted Financials

MELSTACORP LIMITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (FORECAST) FOR THE YEAR ENDING 31ST MARCH FY17E* FY17E** FY18E FY19E Gross Revenue 58,849,125 98,226,351 108,342,342 119,609,969

Net Revenue 26,065,202 37,566,677 41,471,118 45,891,132 Cost of Sales (15,979,963) (22,684,104) (25,072,158) (27,592,381) Gross Profit 10,085,239 14,882,573 16,398,960 18,298,750

Other Operating Income 273,713 358,022 405,134 448,513 Distribution Expenses (1,611,220) (1,853,465) (1,989,039) (2,156,463) Administrative Expenses (3,619,299) (4,248,759) (4,550,901) (4,728,389) Other Operating Expenses (100,877) (100,877) (151,315) (211,841) Results from Operating Activities 5,027,556 9,037,494 10,112,840 11,650,570

Finance Income 126,920 302,956 526,684 747,386 Finance Cost (669,471) (1,048,095) (1,258,816) (1,466,748) Net Finance Income (542,550) (745,139) (732,132) (719,362)

Share of Profit of Equity-Accounted Investees 1,113,478 1,113,478 1,129,336 1,348,199 Profit Before Income Tax Expense 5,598,484 9,405,833 10,510,045 12,279,408 Taxation (2,068,742) (3,475,628) (3,883,654) (4,537,466) Profit for the Year 3,529,742 5,930,205 6,626,391 7,741,942

Profit Attributable To: Equity Holders of the Parent 6,246,427 6,957,434 7,969,610 Non Controlling Interest (316,222) (331,043) (227,669)

*Post arrangement Income Statement reflecting DIST alcohol company performance for 6 months in FY17E. **Assuming DIST alcohol company was a fully owned subsidiary of Melstacorp for the entire FY17E (for comparative purposes).

The forecasted financial statements are prepared based on information provided by Management of Melstacorp Limited and other publicly available information. The Financial Advisors and Managers to the Introduction have established that all assumptions used in preparing the Forecasted Financial Statements are fair and reasonable to the best of their knowledge. The forecasts are based on current assumptions and may require adjustments if material changes take place in the company’s operating environment.

MELSTACORP LIMITED CONSOLIDATED STATEMENT OF FINANCIAL POSITION (FORECAST) AS AT 31ST MARCH FY17E FY18E FY19E ASSETS Non-Current Assets Property, Plant and Equipment 18,820,618 20,124,195 21,630,604 Intangible Assets 2,102,985 1,909,046 1,738,002 Investment Property 6,070,113 6,070,113 6,070,113 Biological Assets 4,238,102 4,667,725 5,129,883 Investments in Subsidiaries - - - Investment in Equity-Accounted Investees 25,888,496 26,782,879 27,856,657 Other Non-Current Financial Investments 15,588,519 15,588,519 15,588,519 Deferred Tax Assets 704,876 704,876 704,876 Finance Lease and Hire Purchases Receivables 2,189,655 2,846,552 3,558,190 Advances and Other Loans 581,190 755,547 944,434 76,184,553 79,449,451 83,221,279 Current Assets Inventories 6,676,459 7,370,367 8,155,905 Trade and Other Receivables 12,521,851 13,823,293 15,296,586 Finance Lease and Hire Purchases Receivables 1,248,009 1,622,412 2,028,015 Advances and Other Loans 2,465,885 3,205,651 4,007,064 Amounts due from Related Companies 684,672 755,832 836,389 Other Current Financial Investments 2,998,527 2,998,527 2,998,527 Cash and Cash Equivalents 6,344,893 10,671,480 15,172,953 32,940,296 40,447,562 48,495,439 Total Assets 109,124,849 119,897,013 131,716,717 EQUITY AND LIABILITIES Share Capital and Reserves Stated Capital 89,100,000 89,100,000 89,100,000 Reserves (813,476) (813,476) (813,476) Retained Earnings (20,556,720) (14,924,564) (8,503,342) Equity attributable to Owners of the Company 67,729,804 73,361,960 79,783,182

Non-Controlling Interest 3,209,454 2,878,411 2,650,742 Total Equity 70,939,258 76,240,371 82,433,924 Non-Current Liabilities Interest bearing Loans and Borrowings 4,061,829 5,171,262 6,217,904 Deferred Tax Liabilities 1,820,176 1,820,176 1,820,176 Employee Benefits 1,154,662 1,285,546 1,414,939 Other Deferred Liabilities 246,351 243,112 241,331 7,283,019 8,520,096 9,694,350 Current Liabilities Trade and Other Payables 13,070,689 14,446,697 15,898,862 Deposit Liabilities 1,689,904 2,196,875 2,636,250 Other Deferred Liabilities 105,950 105,950 105,950 Amount due to Related Companies 530,482 585,617 648,033 Current Tax Liabilities 1,737,814 1,941,827 2,268,733 Interest bearing Loans and Borrowings 11,315,764 13,152,769 15,035,311 Bank Overdrafts 2,451,970 2,706,812 2,995,306 30,902,572 35,136,547 39,588,443 Total Liabilities 38,185,591 43,656,643 49,282,793 Total Equity and Liabilities 109,124,849 119,897,013 131,716,717 - - - *Assuming DIST alcohol company was a fully owned subsidiary of Melstacorp for the entire FY17E (for comparative purposes).

MELSTACORP LIMITED CONSOLIDATED CASH FLOW (FORECAST) FOR THE YEAR ENDING 31ST MARCH FY17E FY18E FY19E CASH FLOWS FROM OPERATING ACTIVITIES Operating Profit before Working Capital Changes 11,290,235 12,471,367 14,138,143

Changes in : (Increase) / Decrease in Receivables (2,641,478) (3,246,863) (3,580,834) (Increase) / decrease in Related Party Receivables / Payables (1,692,722) (16,025) (18,142) (Increase) / Decrease in Inventories (662,298) (693,909) (785,538) Increase / (Decrease) in Payables 1,284,223 1,882,979 1,891,539 Cash generated from Operations 7,577,960 10,397,549 11,645,169

Interest Paid (1,048,095) (1,258,816) (1,466,748) Income Tax and Super Gain Tax Paid (2,833,296) (3,679,641) (4,210,560) Gratuity Paid (68,660) (88,720) (98,777) Dividends Received 222,118 234,953 274,420 Net Cash generated from / (used in) Operating Activities 3,850,026 5,605,325 6,143,504

CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of Property, Plant and Equipment and Intangible Assets (3,005,334) (3,317,689) (3,671,291) Acquisition of Intangible Assets (22,823) (25,195) (27,880) Interest Received 302,956 526,684 747,386 Additions to Biological Assets (251,650) (338,539) (359,536) Net Cash used in Investing Activities (2,976,850) (3,154,739) (3,311,321)

CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from Long-term Interest bearing Loans and Borrowings 5,037,609 5,561,186 6,153,900 Repayments of Long-term Interest bearing Loans and Borrowings (2,649,786) (3,407,276) (4,121,894) Net Proceeds / (Repayment) of Other Short Term Borrowings (144,054) - - Dividend Paid (1,186,041) (1,325,278) (1,548,388) Net Cash generated from Financing Activities 1,057,728 828,632 483,617

Net Decrease in Cash and Cash Equivalents during the Year 1,930,903 3,279,218 3,315,800 Net Cash and Cash Equivelents recognized via Aquisition of Subsidiaries (3,139,976) - - Cash and Cash Equivalents at the beginning of the Year (2,523,328) (3,732,401) (453,183) Cash and Cash Equivalents at the end of the Year (3,732,401) (453,183) 2,862,617 Cash at Bank 6,344,893 10,671,480 15,172,953

Other Short Term Borrowings (7,625,323) (8,417,851) (9,315,030) Bank Overdrafts (2,451,970) (2,706,812) (2,995,306) (3,732,401) (453,183) 2,862,617 - - - *Assuming DIST alcohol company was a fully owned subsidiary of Melstacorp for the entire FY17E (for comparative purposes).

DISCLAIMER

This document (the “Document”) has been prepared by CT CLSA Capital (Pvt) Limited (CTCLSA) for the exclusive use of Melstacorp Limited (MCRP/the Recipient). By receiving this Document from CTCLSA, the Recipient shall be deemed to have accepted all the below mentioned provisions.

This Document is confidential and its content may not be copied, reproduced, redistributed, quoted, referred to or otherwise disclosed, in whole or in part, directly or indirectly, to any third party, except with the prior written consent of CTCLSA, other than for publication of this Document in the Introductory Document issued by MCRP in connection with the Listing of its shares via an Introduction.

The information, opinions and estimates in this Document are not directed at, or intended for distribution to or use by, any person or entity in any jurisdiction where doing so would be contrary to law or regulation or which would subject CTCLSA to any additional registration or licensing requirement within such jurisdiction.

The information contained in the Document is being delivered for informational purposes only. Although the information contained in the Document, or on which the Document is based, has been obtained from sources which CTCLSA believes to be reliable, it has not been independently verified. CTCLSA does not make any representation or warranty, express or implied, as to the accuracy or completeness of such information. As a result, the Recipient agrees that no liability of any form is, or will be, accepted by CTCLSA, its affiliates, its shareholders or any of their directors or employees to any person or entity for any direct or consequential loss, damage, cost, charge, expense or other liability whatsoever arising out of, or in connection with the use of, or reliance upon, the information contained in the Document.

Nothing contained in the Document is a promise or a representation of the future or should be relied upon as being so. In particular, no representation or warranty is given by CTCLSA as to the achievement or reasonableness of any future projections, estimates, management targets or prospects, if any. The Recipient should make its own judgment and assessment of the information contained in the Document. The valuations are based on current assumptions and may require adjustments after 31st of March 2017 or if material changes take place in the Company’s operating environment.

In providing this Document, CTCLSA do not undertake to provide the Recipient with access to any additional information or to update the information contained in the Document or to correct any inaccuracies therein which may become apparent.

The following sources were used in compiling this report:-

• Public information provided by the Central Bank of Sri Lanka • Annual Reports and Interim Financial Statements of the Companies Listed on the CSE • Corporate Websites of Local Peers • Audited Financials and Management Accounts of MCRP • Information provided by MCRP and discussions held with the management

The Document does not constitute an offer or invitation to make, and is not intended to provide the basis for, any agreement or be a substitute for the Recipient’s own analysis. Furthermore, the Recipient agrees that although this Document might contain legal, tax, or accounting references as a means of clarifying its contents, it does not constitute legal, tax, investment or accounting advice.

The valuations presented are valid until 31st March 2017, subject to material changes to the operations of MCRP.

CTCLSA is neither related parties nor parties acting in concert with MCRP (including but not limited to any of its promoters, immediate parent, ultimate parent, entities in the Group etc.) and does not have any conflict of interests.