BPPL HOLDINGS LIMITED RESEARCH REPORT 02ND DECEMBER 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 reports of this nature involving a company quoted under Consumer Discretionary Sector B P P L Holdings Limited - Initial Public Offering | 117 TABLE OF CONTENTS LIST OF ABBREVIATIONS 119 KEY HIGHLIGHTS 121 OBJECTIVE OF THE REPORT 121 01. THE COMPANY: BPPL HOLDINGS LIMITED 122 02. FINANCIAL ANALYSIS 143 03. INTERIM FINACIAL PERFORMANCE 151 04. FINANCIAL FORECASTS AND OUTLOOK 152 05. VALUATION 158 06. RESEARCH TEAM - CT CLSA CAPITAL (PVT) LTD 168 RESEARCH REPORT ANNEXURE 01: BPPL PEER COMPANY PROFILES 169 RESEARCH REPORT ANNEXURE 02: BPPL SUMMARY FINANCIALS 171 RESEARCH REPORT ANNEXURE 03: ASSUMPTIONS USED IN FORECAST AND OUTLOOK SECTION 175 118 | B P P L Holdings Limited - Initial Public Offering LIST OF ABBREVIATIONS BBL : Beira Brush Limited Bn : Billion BPPL : BPPL Holdings Limited BOI : Board of Investment of Sri Lanka Bps : Basis Points BSF : Beira Synthetic Fibre (Private) Limited CAGR : Compounded Annual Growth Rate Capex : Capital Expenditure CBSL : Central Bank of Sri Lanka CEO : Chief Executive Officer COO : Chief Operating Officer CoS : Cost of Sales CSE : Colombo Stock Exchange DCF : Discounted Cash Flow EBIT : Earnings Before Interest and Tax EBITDA : Earnings Before Interest, Tax, Depreciation and Amortization EIA : Energy Information Agency EPS : Earnings per Share ERP : Enterprise Resource Planning EU : European Union EV : Enterprise Value FY : Financial Year FSC : Forest Stewardship Council GDP : Gross Domestic Product GNI : Gross National Income GoSL : Government of Sri Lanka GPM : Gross Profit Margin B P P L Holdings Limited - Initial Public Offering | 119 GSP+ : Generalized Scheme of Preferences HEXP : Hayleys Fibre PLC IMF : International Monetary Fund IPO : Initial Public Offering LDPE : Low Density Polyethylene Terephthalate LEED : Leadership in Energy and Environmental Design LKR : Sri Lankan Rupee Km : Kilometer MGT : Hayleys Fabric PLC Mn : Million NPV : Net Present Value OHSAS : Occupational Health and Safety Management Systems PBT : Polybutylene Terephthalate PER : Price to Earnings Ratio PET : Polyethylene Terephthalate PLC : Public Limited Company PP : Polypropylene PPE : Property, Plant and Equipment PwC : PricewaterhouseCoopers REXP : Richard Pieris Exports PLC ROE : Return on Equity TJL : Teejay Lanka PLC UK : United Kingdom USA : United States of America USD : United States Dollar YoY : Year over Year 120 | B P P L Holdings Limited - Initial Public Offering KEY HIGHLIGHTS • Established in 1991, BPPL Holdings Limited (BPPL) is a leading brush manufacturer in Sri Lanka and is well positioned in the international market place serving blue chip customers such as Tesco, Oates, Carrefour and The Home Depot • Has displayed strong financial performance – revenue growth at a 4-year CAGR of 10% and recurring net profit growth at a CAGR of 22% (FY12-16) • Extensive process of streamlining business operations leading to operating margin expansion of over 600bps to 17% in FY16 from 11% in FY12. While 41% of margin expansion in FY16 (vs. FY15) was owing to operational efficiencies the remaining was a result of lower raw material costs and currency depreciation • Strong growth potential in marketing own brands in the Southeast Asian region - BPPL launched Tip Top and Jab in Sri Lanka and Indonesia to cater to increasing demand for high-quality durable cleaning tools from the growing middle income population in the region • BPPL is extending its monofilament extrusion expertise by expanding operations to the largely untapped synthetic yarn manufacturing industry. Current demand from the Sri Lankan fabric manufacturers for synthetic yarn is estimated to be 600 tons per month • BPPL’s existing business in the price inelastic and stable brush manufacturing industry enables it to record continuous growth without compromising on price • Strong commitment to ethics and sustainable operations reflected through its wide range of certifications such as OHSAS 18001, ISO 14001:2004, Forest Stewardship Council (FSC), Leadership in Energy and Environmental Design (LEED) • Proven management team possessing industry expertise; majority of senior management has worked with the Company for over 20 years • A low debt/equity ratio of 0.24x and high interest cover of 11.7x in FY16 reflects a strong balance sheet, with further borrowing capacity • The Issue is attractively priced at a Price to Earnings Ratio (PER) of 8.5x for FY17E and 7.1x for FY18E, at a discount to the listed industry peers and broader market OBJECTIVE OF THE REPORT The objective of this report is to validate the Issue Price of the Initial Public Offering (IPO) of BPPL, through an extensive analysis of the industry, BPPL’s financials, and forecasts and outlook for the Company. Following are the details of the IPO: • The objective of the proposed IPO is to facilitate a partial sell down by Hirdaramani Investment Holdings (Pvt) Ltd. The controlling shareholder (Infinity Capital (Pvt) Ltd.) will continue to hold its stake in the Company • To raise LKR 368.2 Mn through an Offer for Sale • Issue 30,685,000 existing shares at LKR 12.00 per Share, representing a 10.0% stake of the total share capital • The cost of IPO is estimated to be LKR 15 Mn (borne by the selling shareholder) B P P L Holdings Limited - Initial Public Offering | 121 01. THE COMPANY: BPPL HOLDINGS LIMITED 1.1 TIMELINE BPPL was established in 1991, with the controlling shareholder being Moosajees (Private) Limited. This was following the transfer of activities from Interbrush Lanka Limited (which was established in 1984) into Beira Parawood Products (Private) Limited and Beira Brush (Private) Limited (BBL). Beira Synthetic Fibre (Private) Limited (BSF), a Company focused on the production of monofilaments for brushes joined the Group in 2003, while Beira Enviro Solutions (Private) Limited, a Company that focuses on the manufacture of recycled monofilaments was introduced to the Group in 2010. In 2012, Infinity Capital (Pvt) Ltd., Hirdaramani Investment Holdings (Pvt) Ltd. and LOLC Investments Limited acquired the Group from Moosajees (Private) Limited. In 2013, the Company divested BSF and transferred its operations and sold its usable assets to BES in order to consolidate the monofilament extrusion business under a single entity. The Group expects to expand its operations into the manufacture of synthetic yarn for the fabric manufacturing industry in FY19, through BES. Interbrush Lanka 1984 Limited established The Beira Group established with Interbrush’s 1991 activities transferred to BPP/BBL BSF joins The 2003 Beira Group BES joins The 2010 Beira Group Infinity Capital led Consortium 2012 acquires The Beira Group BSF divested 2013 BPPL Enterprises 2015 established as a trading arm The Beira Group rebranded as BPPL 2016 Holdings Limited Source: BPPL 122 | B P P L Holdings Limited - Initial Public Offering 1.2 Group Overview BPPL engages in the production of unprocessed, semi-processed and processed cleaning 1.2 GROUPtools OVERVIEW and janitorial products, with majority of the products being exported to reputed brands such as Oates, Grainger and Rubbermaid. BPPL carries out operations in a BPPLsustainable engages in theand production eco-friendly of unprocessed, manner semi-processed providing Forestand processed Stewardship cleaning toolsCouncil and janitorial(FSC) products,certified with majoritywood, recycledof the products or virgin being exportedplastic, tonatural reputed and brands synthetic such as Oates, fibre Grainger based andproducts Rubbermaid. and BPPL carries out operations in a sustainable and eco-friendly manner providing Forest Stewardship Council (FSC) certifiedhas wood,Leadership recycled in or virginEnergy plastic, and naturalEnvironmental and synthetic Design fibre based (LEED products) certified and has factory Leadership buildings. in Energy and TheEnvironmental Group benefits Design (LEED)as its existingcertified factory business buildings. is in aThe relatively Group benefits price asinelastic its existing market business, which is in a relativelyallows price the inelastic Company market, to whichcontinue allows to thegrow Company without to continue compromising to grow without on price. compromising on price. Wooden/Plastic Backs Natural / Synthetic Brushes Fibre 1.3 GROUP STRUCTURE 1.3 Group Structure Hirdaramani Investment Holdings Infinity Capital LOLC Investments (Pvt) Ltd. (Pvt) Ltd. Limited BPPL Holdings Limited (BPPL) Beira Enviro Beira Brush (Private) Solutions (Private) BPPL Enterprises Limited (BBL) Limited (BES) (Private) Limited Note: In July 2016, 100% ownership of BES was transferred to BPPL, which was formerly held by BBL Source: BPPLSource: BPPL 1.4 Revenue Segments and Product Portfolio Note: In July 2016, 100% ownership of BES was transferred to BPPL, which was formerly held by BBL 8 B P P L Holdings Limited - Initial Public Offering | 123 B P P L Holdings Limited Revenue Composition - By Product generates its revenue through Exports and Local Sales. FY16 1.4 REVENUE SEGMENTS AND PRODUCT PORTFOLIO2.0 Group exports accounted for 3.9 14.7 4.4 1.2 Brush Exports (Generic) approximatelyBPPL generates 98.0% its revenueof total through B P P L Holdings Limited Brush Exports (Branded) revenueExports in andFY16 Local with Sales. the Group 22.3 Revenue Composition - By Product exportsgen eratesaccounted its forrevenue approximately through