Olympic Industries Limited Initiating Coverage Fair Value Estimate (Dec 2014): BDT 260 Per Share February 11, 2014 Rating: OUTPERFORM

Analyst: Farah Tasnim Huque [email protected]

Sector: Consumer Good Olympic Industries Limited Initiating Coverage Fair Value Estimate (Dec 2014): BDT 260 per share February 11, 2014 Rating: OUTPERFORM

Company Summary Growth momentum continues to drive superior return 52-week Price Range (BDT) 59.0–194.0 Current Price (BDT) [Feb 10, 2014] 191.3 Olympic Industries Ltd. (DSE: OLYMPIC, “Olympic”) is the market leader Dec 2014 Fair Value (BDT) 260.0 in Bangladesh in factory-made biscuit industry with 20%-22.0% market Price Return 36.0% share. Initially in 1982, the company started operation as a dry-cell Dividend Yield 0.4% battery manufacturer and later the biscuit operation was launched in Total Return 36.4% 1996. The company also acquired a listed ball-point pen manufacturer, Number of Shares MM 117.5 Market Cap BDT MM 22,485.59 Tripti Industries, in 2008. Currently biscuit & confectionary, battery and Free Float 68.5% ball-point pen segments account for 92%, 4% and 3% of the company’s Average Daily Turnover BDT MM (2013) 76.6 revenue, respectively. Bangladesh’s young demography with rising per Revenue & Profit (BDT MM) 2013A 2014E 2015E capita income, increasing demand for quality packaged food coupled Total Revenue 7,093.0 9,261.0 11,146.0 with Olympic’s mindful product mix, supply chain management and Operating Income 886.1 1,336.4 1,762.4 marketing strategies drove its revenue and earnings CAGR of 37% and EBITDA 1,031.0 1,589.1 2,037.2 69% per annum, respectively during the last 5 years. All these were Net Income 615.4 1001.1 1,314.4 catalyzed by a superior management that set and executed the right Margin 2013A 2014E 2015E priorities since 2009 when the second generation of the sponsor-family Gross Margin 25.7% 27.8% 29.2% took over important senior roles. Operating Margin 12.5% 14.4% 15.8% EBITDA Margin 14.5% 17.2% 18.3% We initiate coverage of Olympic with an OUTPERFORM rating with a Net Margin 8.7% 10.8% 11.8% target price of BDT 260 per share for December 2014. Our target price Growth 2013A 2014E 2015E implies a forward P/E of 31.3x and EV/EBITDA of 19.5x based on our Revenue Growth 18.2% 30.6% 20.4% estimates for the FY 2014. While valuations look expensive, the earnings EBITDA Growth 36.5% 54.1% 28.2% growth more than compensates for it. With the current market price of Earning Growth 33.8% 62.7% 31.3% BDT 191, our valuation offers an upside potential of 36%, excluding a Per Share (BDT) 2013A 2014E 2015E dividend yield of 0.4%. Key points from the investment thesis are as Adjusted EPS 5.24 8.52 11.18 follows: DPS 1.00 1.00 1.00 Restated BVPS 14.73 22.58 32.77  Olympic will continue its strong growth momentum, primarily driven Cash Flow (BDT MM) 2013A 2014E 2015E by the biscuit segment, in the next five years when its revenue and Operating 942.2 1,426.0 1,741.4 earnings will grow by 21% and 24% respectively. In FY2014 (ended Investing (846.3) (650.0) (200.0) in June), a biscuit expansion project will come online from the 3rd Financing (66.4) (223.1) (164.4) quarter which will increase the biscuit segment’s capacity by 40%. Valuation 2013A 2014E 2015E We estimate 31% and 20% revenue growth for the company in the P/E 21.3x 30.9x 23.5x next two years. Contrarily, the volume growth for the factory-made P/B 7.6x 11.7x 8.0x biscuit industry will be in the range of 15-20% in next five years as EV/EBITDA 13.1x 19.3x 14.3x referred by the industry insiders. Miscellaneous 2013A 2014E 2015E ROE 42.4% 45.6% 40.4% ROA 19.6% 23.7% 23.9%  Olympic’s margins are inversely related to weak commodity markets, Debt/Equity 27.5% 12.6% 7.4% particularly for wheat, sugar whose prices declined by 22% and 14%, Payout Ratio 12.7% 11.7% 13% respectively, in the calendar year 2013. We expect such weak Figure: Price Performance of OLYMPIC since 2012 commodity market to continue as forecasted in a recent World Bank

200 480.0 study. Per unit ending inventory prices for Olympic’s biscuit segment declined accordingly, by 37% YoY in FY 2013 that ended in June 180 400.0 2013. Additionally, the company has been able to pass-through cost 160 inflation to the consumers, but does not revise down end-product 140 320.0 prices if the raw material prices decline. Resultantly, we estimate 120 gross margin improvement of total 3.5% during next two years.

100 240.0 Economies of scale due to the capacity expansion will also be

80 partially contributing to the overall margin improvement. 160.0

60 Price, BDT Price,

40  Given a CAGR of 46% for Olympic’s earnings in the next two years 80.0 and higher valuation multiples for FMCG companies in comparable 20 Turnover, BDT Turnover, BDT Mn growth markets, we have a conviction that the seemingly-premium

0 .0 forward P/E of 31.3x will be realized.

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May May Turnover Adjusted Price Source: DSE, BRAC EPL Research, February 2014 See “Important Disclosures” section at the end of his report for important required disclosures, including potential conflict of interests. Olympic Industries Limited (DSE: OLYMPIC; Bloomberg: OLYMPI:BD) Company Background

Olympic Industries Ltd. (DSE: OLYMPIC) was incorporated in 1979 as a public limited company with the name “Bengal Carbide Ltd.”. The company started its Olympic Industries started its journey commercial operation in 1982 with dry-cell battery production. The company in 1979 and commenced its name was later changed to Olympic Industries in 1996, following the launch of commercial operation in 1982 its biscuit and confectionery segment. The company has been listed on Dhaka Stock Exchange (DSE) since 1984. After twelve years of its listing with DSE, the company got listed on Chittagong Stock Exchange (CSE) in 1996. In 2008, OLYMPIC merged with Tripti Industries Limited (a former listed company) and took over the ballpoint pen manufacturing business.

Company Description

The company has diversified its business with various fast moving consumer goods (FMCGs) over the years. At present, the company is engaged in manufacturing and marketing of three product lines - biscuit & confectionery, The company’s portfolio includes three product lines - biscuit & dry cell battery and ballpoint pen items. With its head office located in the confectionery, dry cell battery and capital city– Dhaka, OLYMPIC operates three production facilities situated in ballpoint pen. Kanchpur, Lolati and Madanpur of Narayanganj. Two factories are assigned for biscuit and confectionery production while the other one is for ballpoint pen and battery. The company has achieved the HACCP certification, a globally recognized standard for food processing companies, in early 2010 as all its factories are in compliance with quality and safety standards. The company had soyabean oil, vegetable ghee, palm oil and electric bulb manufacturing operations which have been discontinued for quite sometime.

Business Segments & Revenue Breakdown

The company is the market leader in As mentioned earlier, OLYMPIC’s product portfolio includes three segments - the automated biscuit manufacturing biscuit & confectionery, batteries and ball pen. Among the three, biscuit & industry and holds the second confectionery is the main revenue generating segment for the company as it position in the battery segment. accounts for 92% of the total revenue. OLYMPIC is currently the market leader in automated biscuit manufacturing industry and has started exporting biscuits recently. The contribution from non-biscuit segments are not very significant as Chart:01 Revenue composition battery and ball-pen accounted for 5% and 4% of total revenue respectively in from the three business segments: 2013. The company holds the second position in battery market.

Chart:02 Product Porfolio of Olympic Industries Ltd. 4.6% 3.7% Biscuit Confectionery Ballpoint Pen Battery

• Salted • Candy • Gel • UM-1 • Glucose • Cereal Bar • PVC Jacket • UM-2 • Flavored Glucose • Gum • Piano Type • UM-4 • Marie • Chutney • Cake • Vegetable Cracker

91.7%

Source: Company Annual Report, 2013 Biscuit Ball Pen Battery Source: Company Annual Report, 2013 Biscuit Industry in Bangladesh

The automated biscuit industry in Bangladesh was estimated at BDT 23.7 billion The BDT 31.3 billion biscuit industry (USD 304.8 million) in 2011 and has been growing at an annual rate of 15.0% has been growing at 15.0% per year (in terms of value) since 2009. Hence after embedding 15.0% annual growth, since 2009. the total size of the biscuit industry as of 2013 was estimated to be about BDT 31.3 billion (USD 403.1 million). According to industry experts, the biscuit industry will continue to post 15.0% to 20.0% volume growth in each of the next five years.

2 Olympic Industries Limited (DSE: OLYMPIC; Bloomberg: OLYMPI:BD)

Regulatory Body of Biscuit Industry BSTI is a government body regulating the biscuit industry in Bangladesh Standard and Testing Institution (BSTI) is a government body Bangladesh. The BSTI certification is compulsory for regulating and supervising the industrial, food and chemical industries of the every food processing company. country. Hence, It is mandatory for every company in food processing and related industries to comply with BSTI certification before selling their products in the market. The BSTI certification ensures quality and standard of each product for both local consumption and export.

In addition to BSTI certification, some food processing companies (including OLYMPIC) hold international standards e.g. ISO standard (International Organization for Standardization) and HACCP (Hazard Analysis & Critical Control Points)

Consumption of Biscuit by different Income Groups

Biscuit is generally considered as a food item of mass consumption due to its low price. In developing countries like Bangladesh, the middle income and lower middle income groups account for about 95% of total consumption of biscuit. The remaining 5.0% includes the upper income group that mostly consume imported biscuits accounting for only 2% of the volume.

Chart:03 Market Share of Local & Imported Chart:04 Consumption by Middle & Upper Biscuits Income Groups

98.0% of total biscuit consump- 2.0% tion is met by local manufacturers 5% while only 2.0% is being imported.

Middle income & lower-middle income groups account for 95.0% of total biscuit consumption. Up- per income group consumes only 98.0% 95% 5.0%.

Local Biscuits Imported Biscuits Middle & lower-middle class Upper class Source: Nabisco Biscuit Bangladesh, 2014

Market Share of Local & Imported Biscuit

In the recent time, 98.0% of total biscuit consumption is met by the local Local biscuit manufacturers are protected from overseas manufacturers while only 2.0% is being imported abroad. However, in earlier competition with high times, imported biscuits used to hover around 25.0% of total biscuit supplementary duties and other consumption in Bangladesh. taxes on imported products that sum up to about 200.0%. On the One of the reasons behind the falling demand for imported biscuits is high other hand, total tax incidence for supplementary duty (SD) imposed on imported biscuits. Government imposes the local players is only 15%. heavy duties and taxes on imported biscuit to promote local value-adding food processing industries, thereby substituting imports. Although, SD on imported (sweet) biscuits has been cut down from 100.0% in FY 2013 to 60.0% in FY 2014, the total tax rate (including SD) on imported biscuits is quite significant and sum up to 200.0%. The taxes and duties included in the computation of total tax (on imported biscuits) are supplementary duty, import tax, regulatory duty, advance trade tax, pre-shipment inspection tax etc. Whereas, the sales tax on local biscuits is 15.0%.

Category of Biscuit Glucose biscuits dominate the local biscuit market and account Biscuit can be classified into four broad categories - glucose, arrow root (marie), for the lion’s share of total biscuit sweet assorted (including coconut cookies, cream sandwich biscuits etc.) and production. plain salted. Among these four types, glucose biscuit dominates the market with 3 Olympic Industries Limited (DSE: OLYMPIC; Bloomberg: OLYMPI:BD)

more than 50.0% contribution to the total biscuit production in the country. This is because, most of the biscuit consumers in Bangladesh belong to middle and lower middle income groups and prefer low-priced glucose biscuit over the premium ones. With increasing per capita income and improved customer sophistication, we may expect a steady rise in demand for premium biscuits in the years to come. The other types of biscuit - sweet assorted accounts for 25.0% of total biscuit production, marie about 10.0% and salted about 5.0%. Chart 05: Category of biscuit as a percentage of total production

Salted 5%

Marie 10%

Sweet 25%

Glucose 60%

0% 10% 20% 30% 40% 50% 60% 70%

Source: Small Industry Setup and Costing, Website

Under the glucose segment, the two most popular brands in the market are Energy Plus (OLYMPIC) and Glucose (Nabisco Biscuit Company Ltd.). Other Energy Plus and Glucose are the two most popular glucose biscuits popular brands in the biscuit industry include - Horlicks Biscuit in the country. (GlaxoSmithKline Bangladesh Ltd.), TIP (OLYMPIC), Lite Crackers (Romania Food & Beverage Ltd), Marie Biscuit (Haque Biscuit Ltd) etc.

Major Players in the Industry

There are about 160 companies in the automated biscuit industry - out of them only 30 to 40 are currently in operation. The top eleven companies hold about 62.4% share of the total biscuit market. The remaining 37.6% of the market share is occupied by a large number of small biscuit manufacturers. Table 01: Market Share of Top 11 Biscuit Companies Rank Name of Companies Market Share 1 Olympic Industries Ltd 16.0% 2 Al Amin Bread & Biscuits Ltd 10.1% Out of 160 registered biscuit companies, only 30-40 are 3 Pran Foods Ltd 5.7% currently operational. 4 Nabisco Bread and Biscuits Ltd 5.4% 5 Globe Biscuits and Dairy Milk Ltd 4.0% 5 New Olympia Biscuit Factory Ltd 4.0% 5 Romania Foods and Beverages Ltd 4.0% 8 Silex Limited (Multi-Novelty) 3.6% 9 Dekko Foods Ltd 3.4% 10 Danish Foods Ltd 3.2% 11 Haque Brothers Industries Ltd 3.0% Top 11 biscuit companies 62.4%

Source: Sector Assessment Survey conducted by Matrix Consulting Ltd., 2011

Based on a past survey on biscuit industry (conducted by Matrix Consulting Ltd. OLYMPIC has retained its in 2011), OLYMPIC was found to be the market leader in 2011 with 16.0% leadership position in the biscuit market share. According to the industry experts, OLYMPIC still holds on to its industry for the last few years. At present, it enjoys 20.0% to 22.0% leadership position in the automated biscuit industry and enjoys about 20.0% to market share. 22.0% market share. The expansion of market share is reasonable for OLYMPIC as its topline has been growing 2.4 times faster than the annual industry growth of 15.0% in the last two years. In fact, the company has

4 Olympic Industries Limited (DSE: OLYMPIC; Bloomberg: OLYMPI:BD)

Table 02: Total Revenue (BDT mn) of Biscuit industry and OLYMPIC

2011 2012 2013 2-year CAGR

Biscuit Industry 23,680.0 27,232.0 31,316.8 -

Annual Growth 15.0% 15.0% 15.0%

OLYMPIC Biscuit 3,494.0 5,432.5 6,502.2 - Annual Growth 55.5% 19.7% 36.4%

Market Share 15.0% 19.9% 20.8% Source: Company Annual Report & Sector Assessment Survey conducted by Matrix Consulting Ltd., 2011

retained the top position in the last couple of years. However, the second position has hovered around a number of companies in the last few years. Al Amin Bread & Biscuits Ltd. used to rank second in 2011. The company has recently resumed its operations after remaining inactive for some time during 2012-13. The brief demise of a strong competitor like Al-Amin certainly helped OLYMPIC to enhance its market share in the last two years. However, we may see the level of competition going up in coming years, given the recent resumption of Al-Amin’s operations. The other strong players in the industry are Pran Food Ltd., Nabisco Bread & Biscuit Ltd., Globe Biscuit & Dairy Milk Ltd., Romania Foods & Beverages Ltd. etc.

GlaxoSmithKline Bangladesh (DSE:GLAXOSMITH) has recently entered into GLAXOSMITH is a new player in the automated biscuit industry. the automated biscuit industry by leveraging its strong brand name “Horlicks”. The company sells Horlicks The company launched its Horlicks biscuit and cookies in market in early 2013. biscuits, which are manufactured Notable here, GLAXOSMITH does not manufacture Horlicks biscuits in its own by OLYMPIC. factories rather outsources the entire production to OLYMPIC. The Horlicks brand has gained much popularity within the first year of launching.

Informal Players in the industry

Outside the automated biscuit industry, a number of small bakeries and shops are also involved in the manufacturing of biscuits. These informal players sell non-branded biscuits in market along with other fast food items. In addition to the small bakeries, there are also many small entrepreneurs which supply home -made biscuits to the retail stores.

Business Segments of Olympic Industries:

1. Biscuit & Confectionery

OLYMPIC commenced operating in the biscuit segment in1996; since then, it has registered strong growth in its top-line. The revenue from biscuit has been growing at a CAGR of 47.6% in the last five years. With such commendable growth, the biscuit line now contributes about 91.7% of the total company revenue. OLYMPIC better recognized the market potential of this segment relative to its competitors and has been able to implement the right strategic priorities to take the full advantage, being the most organized industry player.

Product Mix

Over the years, the company has expanded its product portfolio from primarily glucose biscuit to a diversified product mix (including confectionery items). At present, it produces six types of biscuit under 17 different brands. Among the wide range of biscuits it offers, Energy Plus and Tip are among the most popular brands in the country. These two flagship brands together account for about 35.0% of the total company revenue. Energy Plus - the largest selling glucose biscuit in the country - alone provides 18.0-20.0% of the total company revenue. However the company will be launching country’s best sandwiching line in 2014 with Peters sandwiching machinery coming from Peerless Food

5 Olympic Industries Limited (DSE: OLYMPIC; Bloomberg: OLYMPI:BD)

Equipment- a globally renowned supplier, thereby targeting the premium segment of the market with better ASP and margin. The other production line to be added in 2014 will be a multi-purpose line aiming to cater to increased demand for the existing products.

Production & Capacity

OLYMPIC is currently operating with five biscuit lines across two production OLYMPIC is currently operating facilities. The company undertakes an ongoing capacity expansion program to with five biscuit lines across two satisfy the growing demand for its biscuits. The capacity for biscuit line has production facilities. grown at a CAGR of 38.6% over the past five years. Even after multiple times The capacity for biscuit line has expansion in last five years, the company is heading toward full capacity in grown at a CAGR of 38.6% over biscuit segment. the past five years. The capacity utilization of the segment already reached 70.0% in 2013 after an

Chart 06: Production (MT) and Capacity (MT) of Biscuit & Confectionery Even after multiple times expansion in last five years, the com- 80,000 pany is heading toward full ca- 70,000 pacity. 60,000

50,000

40,000

30,000

20,000

10,000

0 2007 2008 2009 2010 2011 2012 2013

PRODUCTION (MT) CAPACITY (MT)

Source: Company Annual Report, 2007-13

addition of 49.3% capacity in that year. In 2013, the company produced 50.9 thousand MT biscuits (including the outsourced 3.2 thousand MT) against annual capacity of 73.7 thousand MT. OLYMPIC started producing Horlicks biscuit for GLAXOSMITH in 2013.

Supply Agreement with GlaxoSmithKline Bangladesh Ltd.

OLYMPIC has entered in a supply agreement with GlaxoSmithKline OLYMPIC produces Horlicks biscuits for GlaxoSmithKline Bangladesh (DSE: GLAXOSMITH) in November 2012. Under the contract, Bangladesh (a listed company). OLYMPIC produces Horlicks brand biscuits & cookies and supplies to GLAXOSMITH and its affiliates. OLYMPIC has to reserve some of its capacity for GLAXOSMITH because it produces Horlicks biscuits in its own factory premises. The biscuits were launched in early 2013.

Outsourcing to Third Party The company has been outsourcing biscuits from Oriental Bakery OLYMPIC outsources some of its biscuit items to a third party named Oriental for the last six years since late Bakery and Biscuit Industries Limited, Chittagong. OLYMPIC is tied up with 2008. Oriental Bakery for the last five years since 2008.

Table 03: Biscuit Outsourced to Oriental Bakery Ltd.

2008 2009 2010 2011 2012 2013

Biscuit Outsourced (MT) 676.5 347.4 347.4 2,757.5 4,005.4 3,227.0

As a % of Total Production 5.2% 1.9% 1.5% 9.0% 9.1% 6.3% Source: Company Annual Report, 2008-13

6 Olympic Industries Limited (DSE: OLYMPIC; Bloomberg: OLYMPI:BD)

Chart 07: Quantity Sold & Price (BDT) of Table 04: Growth numbers in biscuit & confectionery Biscuit & Confectionery 2007 2008 2009 2010 2011 2012 2013 60,000 Revenue (BDT mn) 796.9 1,249.1 1,803.5 2,154.3 3,494.0 5,432.5 6,502.2 Gross profit (BDT mn) 151.1 240.4 479.2 629.6 889.8 1356.5 1689.3 50,000 130,000 Operating profit (BDT mn) 49.2 63.1 228.2 284.3 361.6 666.0 873.0 40,000 100,000 Revenue growth 27.4% 56.7% 44.4% 19.4% 62.2% 55.5% 19.7% 30,000 70,000 Volume growth 24.7% 20.6% 35.6% 27.8% 33.8% 39.0% 20.0% 20,000 40,000 Price growth 2.2% 29.9% 6.5% -6.6% 21.3% 11.9% -0.3% 10,000 Gross profit growth 19.5% 59.1% 99.3% 31.4% 41.3% 52.5% 24.5% 0 10,000 2007 2008 2009 2010 2011 2012 2013 Operating profit growth 22.7% 28.4% 261.8% 24.6% 27.2% 84.2% 31.1% Source: Company Annual Report Quantity sold in MT (LHS) price per MT (RHS)

Source: Company Annual Report, 2007-13 Revenue Growth

The biscuit segment has posted an impressive topline CAGR of 41.9% over the last six years. Much of the growth is driven by volume growth which has grown The biscuit line has posted a at an annual rate of 29.3% in the past six years. During the same period, the staggering top-line CAGR of annual growth in average price per MT of OLYMPIC’s biscuit was 9.8% against 41.9% over the last six years. its direct cost per MT growth of 8.1% and annual CPI food inflation of 9.5%.

The company has been able to Table 05: Price Growth of Olympic Biscuit against Direct Cost & CPI Inflation pass through cost inflation to its customers. CPI Food Inflation Growth in Direct Growth in Price/MT Fiscal Year (12-month Avg) Cost/ Ton (Olympic Biscuit) 2006-07 8.1% 3.7% 2.2% 2007-08 12.3% 29.5% 29.9% 2008-09 7.2% -3.2% 6.5% 2009-10 8.5% -9.9% -6.6% 2010-11 11.4% 27.7% 21.3% 2011-12 10.4% 12.6% 11.9% 2012-13 7.4% -1.6% -0.3% Source: Company Annual Report 2007-13, Bangladesh Bank Thus, the company has been able to pass through cost inflation to its customers, sometimes with a time-lag though.

In the last couple of years, the growth in OLYMPIC’s biscuit has surpassed the overall industry growth. Since 2009, biscuit segment of the company grew by 37.8% per year as compared to 15.0% annual growth of the overall industry. According to the industry experts, the biscuit industry is likely to post 15.0% to 20.0% volume growth in the next five years. We expect that OLYMPIC will continue to grow at higher than industry average rate in the next five years.

Raw-material

The main raw-materials for biscuit production are wheat, sugar, vegetable oil, The main raw-materials for bis- fat, flavor etc. Most of the ingredients are sourced locally except flavors and cuit segment are essential food commodities e,g. wheat, sugar, some packaging materials which are actually imported. However, the other palm oil. ingredients (e.g. wheat, sugar, vegetable oil etc.) are procured domestically but from the local importers who import these essential food commodities from The raw-material cost accounts foreign countries. This implies that a significant portion of COGS (raw material for 89.0% of the company's costs account for about 89.0% of total COGS) is indirectly exposed to the COGS. exchange rate risk and commodity price fluctuations in the international market. Besides, OLYMPIC also imports wrappers (packaging materials) and flavors to deliver better customer experience.

The price series of three global food commodities - wheat, palm oil (vegetable oil) and sugar are shown below. In general, these three items account for the major portion of raw-materials used in biscuit production - wheat (~65%), sugar (~15%) and vegetable oil (~15%).

7 Olympic Industries Limited (DSE: OLYMPIC; Bloomberg: OLYMPI:BD) Chart 08 : Wheat prices (USD/ MT)

500 450 400 350 300 250 200 150 100 50

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Jan Jan Jan Jan Jan Jan Jan

Sep Sep Sep Sep Sep Sep Sep

May May May May May May May

Wheat

Source: World Bank, January 2014

Chart 09: Palm oil prices (USD/ MT)

1400 1200 1000 800 The global food commodity prices 600 are currently facing downward pressure. 400 200

07 08 09 10 12 13 11

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07 08 09 10 11 13 12

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Sep Sep Sep Sep Sep Sep Sep

May May May May May May May Palm oil

Source: World Bank, January 2014

Chart 10: Sugar - White #5 (Liffe) (USD/ MT) 900 800 700 600 500 400 300 200 100

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Nov Nov Nov Nov Nov

May May May May May

Sugar - White #5 (LIFFE)

Source: Capital IQ, February 2014

Distribution Network

For distribution and marketing of its consumer products, OLYMPIC employs a The company’s products are field force of 1,000 people who hands over the company’s products to more distributed to more than 600,000 than 300 distributors nationwide. They ensure that the products reach both rural outlets across the country. and urban areas of the country, given the presence for local biscuits is more intense in rural areas and semi urban areas. The products of OLYMPIC sell in over 600,000 outlets across the country.

8 Olympic Industries Limited (DSE: OLYMPIC; Bloomberg: OLYMPI:BD) Chart 11: Distribution network of Olympic Industries Ltd.

Oriental Bakery OLYMPIC Field Force Dealers Retailers •Supplies about •Supplies its own •Field force of •300 dealers of •Dealers supply 9.0% of total biscuits to field 1000 people who Olympic are the products to biscuits to Olym- force and Hor- hand over goods located all over ~ 600 thousand pic licks biscuits to to dealers the country retail ends GSK

GLAXOSMITH •Supplies horlicks biscuits to dealers and retailers

Source: BRAC EPL Research , Company Annual Report, 2013 Margins

The gross margin averaged 24.3% over the last seven years and remained at or above 25.0% in all years except in 2007 and 2008. During these two years, The gross margin averaged the margin dropped below 20.0% due to inflation in essential commodities - 24.3% over the last seven years and remained at or above 25.0% wheat, flour, palm oil etc. - which are the main raw-materials for biscuit. In the in all years except in 2007 and last three years, the company has maintained very stable gross margin, 2008. hovering around 25.0%. The operating margin expanded from 6.2% in 2007 to 13.4% in 2013 as the company achieved economies of scale with increased capacity utilization and triggered the efficiency curve. The improvement in operating margin also flowed into net margin which went up from 5.3% in 2007 to 13.7% in 2013.

Table 06: Margins of Biscuit & Confectionery 2007 2008 2009 2010 2011 2012 2013 Gross Profit Margin 19.0% 19.2% 26.6% 29.2% 25.5% 25.0% 26.0% Net Profit Margin 5.3% 4.0% 10.8% 12.0% 9.8% 12.0% 13.7% Operating Profit Margin 6.2% 5.1% 12.7% 13.2% 10.3% 12.3% 13.4% Source: Company Annual Report, 2007-13

Expansion Plan

The company plans to install two additional lines (line 6 & 7) in the biscuit The company plans to install two segment in 2014 at an expected cost of BDT 622.3 million. The CAPEX will be additional lines (line 6 & 7) in the partially financed through debt worth BDT 350.0 million while the rest will be biscuit segment in 2014 at an financed from the internal funds. The new lines are expected to start expected cost of BDT 622.3 mil- commercial production in March 2014 and will together add 30,000 tons per lion. annum to its existing capacity. With these two lines, the company will not only be able to cater to increased demand for the existing products but also be launching cream sandwich biscuits targeting the premium market-segment with better ASP and margin.

2. Dry Cell Battery

The company has been involved in battery manufacturing for more than three At present, the company pro- decades. In fact, OLYMPIC started its commercial operation with battery and duces three sizes of dry sell bat- then later diversified its product portfolio with other consumer goods like biscuit tery - UM-1, UM-3 and UM-4 and and ball pen. At present, the company produces three sizes of dry sell battery - holds the second position in the UM-1, UM-3 and UM-4 and holds the second position in the battery industry battery industry. (after Quasem Drycells (DSE:QSMDRYCELL) which is currently the market leader). The battery segment posted BDT 327.9 million worth revenue in 2013 and contributed 4.6% to the company’s topline. Six years ago, the contribution from battery line was much higher - about 40.0% of total revenue. Recently, in

9 Olympic Industries Limited (DSE: OLYMPIC; Bloomberg: OLYMPI:BD)

an attempt to revamp performance of the battery segment, the company partners with the leading local consumer electronics manufacturer- R. B. Group to supply UM-3 and UM-4 batteries for their Walton branded durables’ remote controls. Likely implications of such partnership include better topline growth and margin expansion of the battery operation due to a shift to a B2B business model.

Production & Capacity

The company produced 46.5 million pieces battery in 2013, against an annual capacity of 118.0 million pieces. Since capacity utilization is below 50.0% as of 2013, the company is less likely to go for CAPEX in coming years.

Chart 12: Production (MT) and Capacity (MT) of Dry Cell Battery 140,000,000

120,000,000

100,000,000

80,000,000

60,000,000

40,000,000

20,000,000

0 2007 2008 2009 2010 2011 2012 2013 PRODUCTION (MT) CAPACITY (MT)

Source: Company Annual Report, 2007-13

The capacity utilization remained low from 2007 to 2010, largely due to the poor Although demand for UM-1 demand for UM-1 battery. The utilization rate averaged only 24.4% during the battery is shrinking, revenue from the other two batteries - period. After the launch of UM-4 battery in 2010, the utilization picked up from UM-3 and UM-4 - are posting 23.8% in 2009 to 50.0% in 2013. Although demand for UM-1 battery is shrinking decent growth in the recent day by day, revenue from the other two batteries - UM-3 and UM-4 - are posting years. decent growth in the recent years. The company also added capacity twice in last three years seeing growing demand for UM-3 and UM-4 batteries.

Supply Agreement with R.B. Group

In recent time, the company has entered into of a Tripartite Agreement with R.B. Group of Companies Ltd. and its agent Mr. Mohammod Sirajul Islam. OLYMPIC is to manufacture Walton Brand UM-3 (R-6), Size-AA and UM-4 (R- 03), Size-AAA, 1.5V, Mercury and Cadmium free Drycell Battery in its factory as per requirement of the R.B. Group and will supply those to them or to their appointed agent against approved rates. The agreement will initially remain valid till December 31, 2014 given a further provision for renewal under mutually agreed terms. Following this strategic partnership with Walton (the local giant in Chart 13:Quantity Sold & Price of Dry Cell consumer durable manufacturing), the utilization and margins of OLYMPIC’s Battery battery segment may improve. 49,000,000 9.00 42,000,000 8.00 Revenue Growth 35,000,000 28,000,000 7.00

21,000,000 6.00 The topline growth in battery segment was sluggish over the past years. The 14,000,000 5.00 battery revenue grew at only 3.8% per annum over the last six years. The 7,000,000 0 4.00 company suffered de-growth in its revenue from 2007 to 2009. The period was 2007 2008 2009 2010 2011 2012 2013 challenging for the overall battery industry, particularly so for the UM-1 battery. Quantity sold in Psc (LHS) Price per unit (RHS) The demand for UM-1 battery (which are mostly used in torch lights) almost Source: Company Annual Report, 2013 died in the market for a number of reasons. First, the availability of electricity in 10 Olympic Industries Limited (DSE: OLYMPIC; Bloomberg: OLYMPI:BD)

Table 07: Growth numbers in Dry Cell Battery 2007 2008 2009 2010 2011 2012 2013 Revenue (BDT mn) 261.8 211.1 177.8 178.5 223.3 273.3 327.9 Gross profit (BDT mn) 39.5 47.3 43.1 48.2 60.5 74.2 93.5 Operating profit (BDT mn) 6.0 17.4 13.5 19.2 30.9 29.3 49.6 Revenue growth -36.4% -19.4% -15.8% 0.4% 25.1% 22.4% 20.0% Volume growth -48.0% -16.5% -8.8% 2.4% 28.2% 29.0% 18.4% Price growth 22.2% -3.5% -7.6% -1.9% -2.4% -5.1% 1.3% Gross profit growth -49.4% 19.6% -8.9% 11.8% 25.6% 22.6% 26.0% Operating profit growth -71.6% 186.9% -22.2% 42.3% 61.1% -5.2% 69.2%

Source: Company Annual Report, 2007-13

rural areas reduced the use of torch lights. The second reason was easy accessibility of rechargeable torch lights (which do not require batteries). Third, the growing customer sophistication together with increasing popularity of cell phones with built-in torch lights also dampened the demand for torch lights. On the backdrop of falling demand, the company’s total battery revenue declined 36.4% in 2007. The sale of UM-1 battery dropped by 50.0% in the same year. The battery segment later recovered in 2010, after the company launched UM-4 size batteries- which are commonly used in remote controls and toys. At present, the major portion of battery revenue comes from UM-3 and UM-4 category batteries.

Despite the slowdown in demand for UM-1 size battery, the segment managed to post commendable topline growth in the recent years. The growth was above 20.0% per annum in the last three years.

Margin

Though the battery line did not see much growth over the years, but the Though the battery line did not margins improved significantly in last six years. The steady decline in raw- see much growth over the years, material price has helped the gross margin increase from 15.1% in 2007 to but the margins improved signifi- 28.5% in 2013. The operating margin was not very stable in the last six years. cantly in last six years. One of the reasons behind the volatility was higher marketing expenses. OLYMPIC used to undertake aggressive marketing and promotional activities to recover its battery sales.

Table 08: Margins of Dry Cell Battery Column1 2007 2008 2009 2010 2011 2012 2013

Gross Profit Margin 15.1% 22.4% 24.2% 27.0% 27.1% 27.1% 28.5%

Net Profit Margin 1.5% 7.2% 5.8% 9.6% 13.3% 10.5% 15.4%

Operating Profit Margin 2.3% 8.2% 7.6% 10.8% 13.9% 10.7% 15.1% Source: Company Annual Report, 2007-13

3. Ball Pen

OLYMPIC took over the ballpoint pen manufacturing business following the acquisition of Tripti Industries Limited (a former listed company) in 2008. The production of ballpoint pen commenced in 2009. The company now manufactures seven brands of pen to meet various demand of the market.

Production & Capacity The company expanded its ball pen capacity by 47.6% in 2013, Following 47.6% capacity expansion in the last year, utilization rate in ball pen after utilization rate hit 90.6% in segment dropped to 56.9% in June 2013 compared to 90.6% rate in the the previous year. previous year. The company produced 84.0 million pieces of pen against its annual capacity of 147.6 million pens.

11 Olympic Industries Limited (DSE: OLYMPIC; Bloomberg: OLYMPI:BD)

Chart 14: Production (MT) and Capacity (MT) of Ball pen 160,000,000

140,000,000

120,000,000

100,000,000

80,000,000

60,000,000

40,000,000

20,000,000

0 2009 2010 2011 2012 2013 PRODUCTION (MT) CAPACITY (MT) Source: Company Annual Report, 2007-13

Revenue Growth

Chart 15:Quantity Sold & Price of Ball Pen Ball pen accounted for 3.7% of total revenue in 2013. The segment has been 100,000,000 3.3 growing at 22.1% CAGR in revenue over the last four years. The company 80,000,000 3.2 incurred a net loss of BDT 20.0 million and posted a negative gross margin of 60,000,000 3.1 2.7% in 2009 - the inception year for the ball-pen segment. The business soon 40,000,000 3.0 returned to profitability from 2010 onwards. In 2013, the company reported 20,000,000 2.9 revenue worth BDT 263.1 million, which was 11.6% lower than that of the last 0 2.8 2009 2010 2011 2012 2013 year. The dip in the revenue resulted from 9.1% fall in volume and 2.7% decline Quantity sold in Psc (LHS) Price per unit (RHS) in average price per pen.

Source: Company Annual Report, 2007-13 Table 09:Growth numbers in ball pen 2009 2010 2011 2012 2013 Revenue (BDT mn) 118.2 124.9 167.8 297.6 263.1 Gross profit (BDT mn) -3.2 20.3 21.4 29.9 39.0 Operating profit (BDT mn) -17.8 1.7 -0.3 2.2 8.6 Revenue growth 5.7% 34.3% 77.3% -11.6% Volume growth 5.6% 38.6% 61.8% -9.1% Price growth 0.1% -3.1% 9.6% -2.7% Gross profit growth NA 5.2% 40.0% 30.2% Operating profit growth NA NA NA 288.6% Source: Company Annual Report, 2007-13

Margin

Ball pen is the lowest margin The margins of ball pen are not very consistent. The gross margin has product for OLYMPIC compared averaged 13.5% in the last four years, ranging from 10.1% to 16.3%. Ball pen is to other segments - biscuit and the low margin product for OLYMPIC compared to other segments - biscuit and battery which provide margins battery which provide margins roughly 25.0% and 27.0% respectively. Margins roughly 25.0% and 27.0% re- especially operating and net margin improved significantly over the years and spectively. reached the highest in 2013.

Table 10: Margins of Ball Pen

2009 2010 2011 2012 2013

Gross Profit Margin -2.7% 16.3% 12.7% 10.1% 14.8%

Net Profit Margin -16.9% 0.2% 0.2% 0.5% 3.5%

Operating Profit Margin -15.0% 1.3% -0.2% 0.7% 3.3%

EBIT Margin -14.7% 1.7% 0.6% 1.8% 4.9% Source:

12 Olympic Industries Limited (DSE: OLYMPIC; Bloomberg: OLYMPI:BD) Historical performance and outlook of the consolidated operation

Table 11: Growth numbers of OLYMPIC 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014E 2015E 2016E

Revenue 1,058.7 1,460.1 2,099.6 2,457.8 3,885.1 6,003.3 7,093.2 9,261.0 11,146.0 13,564.0

Biscuit 796.9 1249.1 1,803.5 2,154.3 3,494.0 5,432.5 6,502.2 8,605.0 10,425.0 12,778.0

Ball Pen 118.2 124.9 167.8 297.6 263.1 282.0 306.0 330.0

Battery 261.8 211.1 177.8 178.5 223.3 273.3 327.9 373.0 415 .0 456.0

Gross Profit 190.7 287.7 519.1 698.1 971.6 1,460.6 1,821.7 2,574.9 3,253.2 3,965.9

Operating Profit 53.0 77.3 215.1 292.1 374.6 665.0 886.1 1,336 1,762.0 2,167.0

Earnings 32.6 45.3 128.8 191.2 256.2 460.0 615.4 1,001 1,314.0 1,607.0

EBITDA 76.2 100.9 262.9 351.7 443.7 755.4 1,031.0 1,589.1 2,037.2 2,463.7.0 Source: Company Annual Report, 2007-13

Revenue growth momentum to continue, driven by biscuit segment’s expansion

OLYMPIC has achieved a top-line CAGR of 37.2% in the last five years. The biscuit segment, which is the largest contributor to company’s revenue, is mainly driving the growth of the company. We expect that OLYMPIC will achieve 32.0% revenue growth in biscuit segment in June 2014, given 40.7% capacity has been added during the year. We also expect that the company’s biscuit revenues will grow by about 19.2% annually over the next five years, We expect that the company’s more than the industry growth of 15.0%. Overall we believe that OLYMPIC’s biscuit revenues will grow by ongoing CAPEX program as well as the industry’s decent growth will continue about 19.2% annually over the to drive the company’s topline. We expect that the company’s dependence on next five years in line with the biscuit segment will increase from 91.7% in 2013 to 94.2% in 2016. With 20.0% industry growth of 15.0%. to 22.0% market share, OLYMPIC has marked its strong presence in the local biscuit industry. In addition to local market, the company also looks forward to export sales and has recently (in 2013) started exporting on a small scale. Moreover, OLYMPIC’s deal with GLAXOSMITH to manufacture Horlicks biscuit and cookies will further add to the growth of the company.

With regards to the non-biscuit segments, we expect that revenue growth from battery and ball pen will continue to slow down in the coming years. As a result, the contribution from these two segments is likely to decline going forward.

Chart 16: Revenue Breakdown

101%

96%

We expect that the company’s 91% dependence on biscuit segment will increase from 91.7% in 2013 86% to 94.2% in 2016.

81%

76% 2009A 2010A 2011A 2012A 2013A 2014E 2015E 2016E

Biscuit Ball Pen Battery

Source: Company Annual Report, 2013 13 Olympic Industries Limited (DSE: OLYMPIC; Bloomberg: OLYMPI:BD)

Table 12: Margins of OLYMPIC

2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E Gross Margin 18.0% 19.7% 24.7% 28.4% 25.0% 24.3% 25.7% 27.8% 29.2% 29.2% 29.3% 29.3%

Biscuit & Confectionery 19.0% 19.2% 26.6% 29.2% 25.5% 25.0% 26.0% 28.2% 29.6% 29.6% 29.6% 29.6%

Battery 15.1% 22.4% 24.2% 27.0% 27.1% 27.1% 28.5% 28.5% 28.5% 28.5% 28.5% 28.5%

Ball Pen Point -2.7% 16.3% 12.7% 10.1% 14.8% 14.8% 14.8% 14.8% 14.8% 14.8%

Operating Margin 5.0% 5.3% 10.2% 11.9% 9.6% 11.1% 12.5% 14.4% 15.8% 16.0% 15.9% 16.0%

Net Margin 3.1% 3.1% 6.1% 7.8% 6.6% 7.7% 8.7% 10.8% 11.8% 11.8% 11.8% 11.8% EBITDA Margin 7.2% 6.9% 12.5% 14.3% 11.4% 12.6% 14.5% 17.2% 18.3% 18.2% 18.0% 18.3% Source: Company Annual Report, 2007-13 Gross margin to improve due to commodity market weakness and scale

The company has maintained stable gross margin (around 25.0%) over the past years except in 2007, 2008 and 2010 when the margin dipped significantly as the international commodity market rallied strongly in those years when the company could not pass•-through the higher cost to the end-consumers immediately. Subsequently, the company raised product prices (biscuit price per ton was increased by 33% during 2011-12), thereby driving mean-reversion of the margins. Chart: 17: World Bank Commodities Price Forecast The battery segment, contributing 5% of the total revenue, generates the Forecasted price of wheat (USD/MT) highest gross margin of 28.5% (among the three lines). Going forward, we

320 expect the margin will remain stable but the segment’s contribution to total 310 300 revenue will drop to 2.0-3.0% by 2017, exerting slight pressure to the 290 company’s overall gross margin. 280 270 260 250 Ball pen is the lowest margin segment for the company. Although the margin

remained unstable during the past years, we assumed a constant margin of

2013 2014 2019 2025 2016 2017 2018 2020 2021 2022 2023 2024 2015 14.8% for ball pen in the years to come. We believe that in the best case, the Wheat, US, HRW partnership with R. B. Group will drive operating margin improvement for the Forecasted price of palm oil (USD/MT) battery segment given lower marketing expenses given the bulk business 900 model. 850

800 With regards to biscuit & confectionery (the largest revenue generating

750 segment), we expect the company’s gross margin will expand from 25.7% in

2013 to 29.6% in 2015 as we assume that the global commodity market will

2013 2015 2017 2019 2016 2018 2020 2021 2022 2023 2024 2025 2014 remain weak, thereby driving down raw material cost per ton for the biscuit Palm oil segment. Based on World Bank’s recent publication (Jan 2014) on global

Forecasted price of sugar (USD/kg) commodity outlook, the overall food commodities are projected to decline by a 0.4 further 3.7% in CY 2014. The largest declines among food commodities will be 0.39 in the grain group with maize, rice and wheat down by 13.0%, 9.0% and 4.0% in 0.38 0.37 2014. Thus OLYMPIC will be benefitted from the declining prices in grain sector 0.36 as wheat and maize are one of the major ingredients for biscuit production. 0.35 0.34 (The World Bank’s price forecasts for wheat, palm oil and sugar are shown in 0.33 the charts). Accordingly, the company saw a decline of 37.4% in the finished goods cost per unit. Hence, we estimate that gross margin will improve by total Sugar, World 3.5% until FY 2015 from the base of 25.7% in FY 2013. Notable here, gross Source: World Bank, Website margin has already improved by 1.4% in FY 2013 and by another 1.3% in the first half of the current year (FY 2014).

The recent diversification efforts will also slowly drive the margin in the years to come. The company has recently launched a few confectionery items e.g. dry cake, éclair, hard candy etc. and will also roll out cream sandwich biscuit in the market soon. All these indicate OLYMPIC’s efforts to diversify its mix with higher margin products.

14 Olympic Industries Limited (DSE: OLYMPIC; Bloomberg: OLYMPI:BD)

EBITDA margin will improve by 370 bps in next two years, on a larger base

Operating margin will also increase going forward because of the improved gross margin as well as economies of scale. General administration expense to Operating margin will also sales is likely to go down with higher sales volume. We projected it will increase going forward be- decrease from 2.5% in 2013 to 2.3% in 2014. However, selling and distribution cause of the improved gross expense will increase in line with or slightly higher than sales revenue. Overall, margin as well as economies. we estimate that EBIT and EBITDA margin will improve by 3.3% and 3.7% respectively during next two years until FY 2015 when the EBITDA margin will exceed 18% mark.

Net margin improvement will drive 63% earnings growth in 2014

The net margin is also projected to improve in line with the company’s gross and operating margins. The company also earns significant financial income from its cash reserves which also contribute to higher net margin. OLYMPIC is a cash-rich company and has build up significant cash balance over the years Net profit margin will improve owing to low pay-out ratio. Cash & cash equivalent stood at BDT 1,212.0 million from 8.7% in FY 2013 to 11.8% as on June 2013, comprising an impressive 33.0% of the total company assets. in FY 2015 to drive a 63% and 31% earnings growth for 2014 Most of the cash balance is invested in Fixed Deposits from which OLYMPIC and 2015 respectively. enjoys financial income. Such substantial amount of cash balance also suggests that the company can easily finance its upcoming CAPEX (with its cash balance) without depending too much on debt. Net profit margin will improve from 8.7% in FY 2013 to 11.8% in FY 2015 to drive a 63% and 31% earnings growth for 2014 and 2015 respectively. In the first half of FY 2014, earnings increased by 41%, but the growth will be better in the later half of the year since the additional capacity will come online in the 3Q along with easing raw material related cost pressure.

Investment Positives

Market leader in a growing industry

Private consumption accounts for 77% of the GDP in Bangladesh. With young demography, rising per capita income and dual-income family, demand for packaged food is increasing at above GDP growth rate. We estimated that in the next five years, biscuit demand will grow in the range of 15-20% annually versus a nominal GDP growth rate of 13-14%. OLYMPIC’s biscuit segment’s revenue will grow by 21% in the next five years to maintain a market leadership with 20-22% volume market share. To better cater to outstanding demand, OLYMPIC has also diversified its product mix with wide variety and different flavors of biscuit & confectionery items. The company has rolled out three new items - dry cake, hard boil candy (new flavors) and éclair- in the recent years. Few more (e.g. cream sandwich biscuit) are in the pipeline and will be launched shortly within the next year. Superior management, strong brand-image, end- mile distribution network, strong relationship with key suppliers and partners will drive OLYMPIC’s greater bargaining power in the value chain, thereby driving its superior business results.

Falling input prices will drive significant and sustainable margin improvement

The company's gross margin may see significant expansion in the coming years if the global food commodities continue their weakness with further declining prices. Given no sooner recovery of the global commodity market, OLYMPIC may enjoy a higher margin of 29.6% by 2015 from the existing 25.7%. We expect such margin improvement to sustain given the company’s strong competitive position and ability to pass-through cost inflation.

15 Olympic Industries Limited (DSE: OLYMPIC; Bloomberg: OLYMPI:BD)

Strong balance sheet

With 33% of the total assets being held as cash & equivalent, OLYMPIC’s balance sheet is one of the strongest among the listed local manufacturing companies’. Its debt to asset ratio also declined from 25.3% in 2007 to 12.9% in 2013. These reflect company’s superior working capital management and greater headroom for financing opportunistic investments and/ or extra-ordinary dividend payment to shareholders.

Attractive valuation offers upside potential

With estimated earnings growth of 63% and 31% in next two years, the stock is traded at 14x EV/EBITDA and 23x forward earnings, thereby not reflecting the long-term growth potential of the company. Our estimated target price of BDT 260 implies an upside potential of 36% from current level.

Risk, Challenges & Negatives

Withdrawal/reduction of taxes on imported biscuits

Due to a 200% total tax incidence on the imported biscuits, local biscuit manufacturers currently face limited competition from foreign players. We have seen a 40% cut of the Supplementary Duty (SD) for imported (sweet) biscuit in the last budget. Further reduction of taxes on imported biscuit may critically impact revenue growth and margins of local players including OLYMPIC. However OLYMPIC has a strong foothold in the local market with very good brand image and product mix; hence, we don’t expect a dramatic business decline for OLYMPIC in case the import tax is withdrawn. Moreover, recently OLYMPIC has started export which indicates the company’s international competitiveness.

Input price reversion may hurt margin and growth

Raw material (RM) costs account for about 89.0% of total COGS. Essential food commodities are the key ingredients for biscuits and account for a significant portion of RM costs. Any sharp increase in the prices of wheat, sugar and palm oil, in contrast to our base case assumptions, will hurt gross margin and negatively affect profitability of the company. Though we do not expect the global commodity market to recover any sooner, but if it does it will squeeze the margin.

Political unrest may disrupt business potential

We have seen continuous political unrest in 2013, not unlikely for an election year, which disrupts supply chain management and general economic activity, thereby dampening consumers’ income and demand for packaged food products including biscuit & confectionary items. Though the situation improved post-election on January 5th, return of political uncertainties will impair OLYMPIC’s short-to-mid term business prospect.

Asset impairment may hurt a particular year’s bottom-line

The oil refining and hydrogenation unit will remain dormant until the company finds a counterparty to divest related assets. If the estimated market value of plant and machinery falls below the carrying value in the meantime, impairment charge might have to be booked in the income statement which may hurt a particular year’s bottom-line leaving the long-term cash generating ability of the company intact.

16 Olympic Industries Limited (DSE: OLYMPIC; Bloomberg: OLYMPI:BD)

Exchange rate risk

The main raw-materials for biscuit production are wheat, sugar, vegetable oil, fat, flavor etc. Most of the ingredients are sourced locally except flavors and some packaging materials which are actually imported. However, the other ingredients (like wheat, sugar etc.) are procured domestically but from the local importers who import these essential food commodities from foreign countries. This implies that a significant portion of COGS (Raw material costs account for about 89.0% of total COGS) is indirectly exposed to the exchange rate risk and price fluctuation in the international market. Besides OLYMPIC also imports wrappers (packaging materials) from foreign countries.

Low payout ratio

The company has maintained a low payout ratio (especially in the last 4 years) to finance its expansion programs in various segments. The payout ratio has averaged only 13.0% during 2009-2013, compared to 70.9% average in 2006- 2008 period. The company has actually invested the cashflows generated from operation into future cash generating projects, the impact of which is clearly evident from the growth in both top-line and bottom-line numbers. As a result of low payout ratio coupled with high growth in bottom line, the retained earnings reserve has increased 14.5 times in the last five years - from BDT 65.3 million in 2009 to BDT 948.1 million in 2013.

Correlation with Market

The movements in OLYMPIC and DSEX are positively correlated with a correlation coefficient of 0.59. The correlation suggests moderate relationship between the two variables. DSEX - launched on January 27, 2013 - gained 8.3% as of January 08, 2014 against OLYMPIC whose price appreciated by 151.4% during the same period.

Chart 18: Relative Performance of OLYMPIC and DSEX 300

250

200

Table 13: Shareholding Structure 150 Sponsors & Directors 31.49% Institutional Investors 30.31% 100 Foreign Investors 10.75% General Public 27.45% 50

Source: Dhaka Stock Exchange, Jan 2014 0

13 13

13 13 13 13 13

13 13

13 13 13 13

13 13 14 13

13 13

- -

- - - - -

- -

Jul Jul

Jan Jan

Jun Jun

Oct

Apr Apr

Feb Feb Sep Sep Sep

Dec Dec

Aug

Nov Nov

Mar Mar

May May DSEX OLYMPIC

Source: Dhaka Stock Exchange , February 2014

Free Float, Liquidity & Shareholding Structure OLYMPIC has received significant inflow of foreign investment OLYMPIC is a medium capitalized stock (accounting for about 0.9% of total in 2013, especially during the equity market capitalization) with 68.5% free float. Such large float represents last quarter of the year. Foreign good liquidity of the stock. However, the largest portion of the free floated investors had only 0.02% stake shares (around 44.2%) is held by the institutional investors. Sponsors and in the company in 2012, which directors, (including their family members) hold the remaining 31.5% stake in has soared to 10.8% at the end of 2013. the company. The group profile includes interest in Pharmaceutical, Power, IT 17 Olympic Industries Limited (DSE: OLYMPIC; Bloomberg: OLYMPI:BD) Table 13: Turnover Value of OLYMPIC and Market Olympic (BDT mn) % ∆ Market (BDT mn) % ∆ 2009 26.6 6,046.3 2010 45.5 70.9% 16,433.9 171.8% 2011 36.0 -20.9% 6,642.2 -59.6% 2012 46.5 29.1% 4,206.2 -36.7% 2013 76.6 64.6% 4,003.1 -4.8% Source: Dhaka Stock Exchange , February 2014

and Trading with more than 60 years of experience in operation in Bangladesh. OLYMPIC has received significant inflow of foreign investment in 2013, especially during the last quarter of the year. Foreign investors had only 0.02% stake in the company in 2012, which has soared to 10.8% at the end of 2013.

The liquidity of the stock improved in both 2012 and 2013 in contrary to the market turnover which declined during the period. The average daily turnover of OLYMPIC stood at BDT 76.6 million in 2013 compared to BDT 46.5 million in 2012. The stock was heavily traded in 2013 compared to the last couple of years.

Valuation Method

Table 14: Multiples of International Peers Companies Region EV/EBITDA P/E P/S P/B

Universal Rubina Philippine 17.70x 25.65x 3.18x 5.10x Petra Foods Singapore 17.80x NA 3.09x 5.50x Mayora Indah Indonesia 16.10x 24.56x 2.12x 6.80x Britannia Industries India 19.50x 31.03x 1.62x 14.00x Ülker Bisküvi Turkey 17.60x 31.95x 1.82x 5.10x Hershey Company USA 15.00x 27.54x 3.16x 13.80x

Average Multiple Average 16.08x 24.60x 2.12x 8.38x

Olympic Industries Bangladesh 22.10x 36.50x 3.20x 13.00x Source: Capital IQ, BRAC EPL Research

We have used a combination of discounted cash flow and relative valuation to conduct the equity valuation of OLYMPIC. We have taken a five year forecast using free cash flow to firm model. Meanwhile, we used relative valuation to determine the terminal value of the stock. For relative valuation we have looked into EV/EBITDA multiples of international peers operating in the consumer sector. The EV/EBITDA multiple of these companies stood at 16.1x. In order to estimate the terminal value of OLYMPIC, we used an EV/EBITDA multiple of 12.0x over 2019E EBITDA of BDT 3,910.7 million which gave us a terminal value of BDT 46,928 million.

In order to discount back our forecasted FCFF and terminal value, we assumed a 17.0% weighted average cost of capital. According to our DCF model, the per share value of OLYMPIC for June 2014 is around BDT 260.0. Our fair value estimate of BDT 260.0 would imply a forward P/E of 31.3x on our projected earnings. While valuations look expensive, the earnings growth more than compensates for it. With the current market price of BDT 191.3, our valuation offers an upside potential of 36%, excluding a dividend yield of 0.4%.

18 Olympic Industries Limited (DSE: OLYMPIC; Bloomberg: OLYMPI:BD) Table 15: Discounted FCFF @ 17.0% WACC 2013A 2014E 2015E 2016E 2017E 2018E 2019E Operating Cash Flow 483.9 1,426.0 1,741.4 1,884.8 2,232.7 2,613.1 3,097.7

CAPEX (373.4) (650.0) (200.0) (200.0) (200.0) (900.0) (250.0)

Non Operating Income (1-T) (112.8) (138.5) (138.5) (138.5) (138.5) (138.5) (138.5) Interest (1-T) 94.0 64.8 49.6 42.5 33.7 25.2 24.2

FCFF 91.7 702.4 1,452.6 1,588.8 1,928.0 1,599.9 2,733.5

Terminal Value (12.0x terminal EBITDA) 46,928.9

PV of FCFF 649.4 1,147.8 1,073.0 1,112.9 789.3 20,941.4

Enterprise Value 25,713.7

(+) Cash & Investments 1,215.2

(-) Interest Bearing Debt 476.5

Equity Value 26,452.5

Number of Shares (million) 117.5

Per Share Value (Dec 2013) 225.0

Per Share Value (Dec 2014) 260.0 Source: BRAC EPL Research *All numbers are in BDT mn except per value share which is in BDT

19 Olympic Industries Limited (DSE: OLYMPIC; Bloomberg: OLYMPI:BD)

Olympic Industries Limited Income Statement For the Year Ended June

Income Statement 2011A 2012A 2013A 2014E 2015E 2016E B&C Net Revenue 3,494 5,432 6,502 8,605 10,425 12,778 Battery Net Revenue 223 273 328 373 415 456 Ball-pen Net Revenue 168 298 263 282 306 330 Total Net Revenue 3,885 6,003 7,093 9,261 11,146 13,564

B&C COGS 2,604 4,076 4,813 6,178 7,335 8,991 Battery COGS 163 199 234 267 297 326 Ball-pen COGS 146 268 224 241 261 281 Total COGS 2,913 4,543 5,271 6,686 7,893 9,598

B&C Gross Profit 890 1,357 1,689 2,427 3,090 3,787 Battery Gross Profit 60 74 93 106 118 130 Ball-pen Gross Profit 21 30 39 42 45 49 Total Gross Profit 972 1,461 1,822 2,575 3,253 3,966

Administrative Expenses 112 142 176 214 261 316 Selling & Distribution Expenses 468 621 714 954 1,137 1,370 WPPF 18 33 45 71 93 113 Profit from Operations 375 665 886 1,336 1,762 2,167 EBITDA 444 755 1,031 1,589 2,037 2,464 Non-op Income 31 63 113 138 138 138 Finance Cost 52 77 94 65 50 43 Provision for loss on investment in shares - - 1 - - - Profit Before Tax 353 651 904 1,410 1,851 2,263 Tax Expenses 97 191 289 409 537 656 Net Profit after Tax 256 460 615 1,001 1,314 1,607

20 Olympic Industries Limited (DSE: OLYMPIC; Bloomberg: OLYMPI:BD)

Olympic Industries Limited Balance Sheet For the Year Ended June

2011A 2012A 2013A 2014E 2015E 2016E Property, Plant & Equipment - Net Book Value 527 680 1,102 1,830 1,755 1,658 Capital Work in Progress 240 522 331 - - - Deferred Expenses (Lease Rent) 8 - - - - - Investment ------Non-Current Assets 774 1,202 1,433 1,830 1,755 1,658 Inventories 350 417 518 650 767 933 Accounts Receivable 24 26 23 26 31 38 Advances, Deposits & Prepayments 175 233 505 467 559 674 Investments (Fixed Deposit) 457 609 1,080 1,080 1,080 1,080 Cash & Cash Equivalent 70 106 135 688 2,065 3,532 Current-assets 1,076 1,389 2,261 2,911 4,503 6,257 Total Assets 1,850 2,591 3,694 4,741 6,258 7,915 Shareholders' equity 743 1,169 1,732 2,654 3,851 5,282 Long Term Borrowings - Net of Current Maturity (Secured) 132 227 205 153 102 51 Deferred Liabilities 79 99 138 138 138 138 Lease Finance - Long Term 11 30 45 34 23 11 Deferred Tax Liability 23 29 57 57 57 57 Non-Current Liabilities 245 385 444 382 319 257 Loan 189 231 213 135 151 171 Interest Payable 4 2 2 - - - Creditors for Goods 270 335 520 520 614 747 Creditors for Services 5 5 6 - - - Accrued Expenses 34 48 52 75 91 111 Advance against Sales 130 93 134 129 155 188 Liabilities for other finance 55 74 75 75 75 75 Lease Finance-Current Portion 30 15 13 11 11 11 Liabilities for Capital Expenditure ------Provision for Taxation 130 216 477 736 966 1,050 Provision for Investment in shares - - 1 - - - Unclaimed Dividend 16 18 24 24 24 24 Current Liabilities 862 1,038 1,518 1,705 2,087 2,377 Total Liablities and Shareholders' Equity 1,850 2,591 3,694 4,741 6,258 7,915

21 Olympic Industries Limited (DSE: OLYMPIC; Bloomberg: OLYMPI:BD)

Olympic Industries Limited Cash Flow Statement For the Year Ended June

2011A 2012A 2013A 2014E 2015E 2016E Net Income 1,001 1,314 1,607 Add: Depreciation 253 275 297 Less: Investment in Working Capital 86 78 102 Less: Investment in Other Net Op Assets (258) (230) (84) Cash Flow from Operating Activities 371 588 942 1,426 1,741 1,885

Acquisition of PPE (CAPEX) 650 200 200 Cash Flow from Investing Activities (284) (678) (846) (650) (200) (200)

Debt Repayment 145 47 42 Cash Dividends Paid 78 118 176 Cash Flow from Financing Activities 92 126 (66) (223) (164) (218)

Net Change in Cash 553 1,377 1,466 Opening Balance of Cash 135 688 2,065 Closing Balance of Cash 178 36 29 688 2,065 3,532

22 Olympic Industries Limited (DSE: OLYMPIC; Bloomberg: OLYMPI:BD)

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Ali Imam, CFA Head of Research [email protected] 01730 357 153 Khandakar Safwan Saad Deputy Head of Research [email protected] 01730 357 779 Asif Khan, CFA Deputy Head of Research [email protected] 01730 357 158 Mehedee Hasan Research Analyst [email protected] 01730 727 941 Shaikh Malik Al-Razi Research Associate [email protected] 01755 658 980 Farah Tasnim Huque Research Associate [email protected] 01730 727 913

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