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. 12 13 12 13 13 12 12 12 13 12 13 13 11 12 13 12 13 12 12 13 14 13 13 13 12 - - - - - - - - - - - - - - - - - - - - - - - - - Jul Jul Jul Jan Jan Jan Jan Jun Jun Oct Apr Apr Sep Feb Sep Feb Sep Dec Dec Dec Nov Nov Mar 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.