Cargills (Ceylon) CARG – Rs.193.0 Disclaimer: CT CLSA Securities (Pvt) Ltd is an associate of C T Holdings PLC, the parent of CARG Chayanika Ranasinghe Key Highlights Email : [email protected] Phone : +94 77 2379731 3Q18 Results Update . 3Q18 recurring net profit of Rs.636mn (largely unchanged YoY), broadly in line with our expectations. Earnings are adjusted for CARG‟s proportion of the Rs.481mn capital gain received by associate Cargills Bank from disposal of subsidiary Colombo Trust Finance (CALF) . CARG group net profit forecasts broadly maintained at Rs.2,535mn for FY18E (+20% YoY) and Rs.3,055mn for FY19E (+21% YoY), particularly driven by the Retail and Restaurants sectors. Retail sector to marginally overtake FMCG earnings contribution in FY19E given the significant expansion plans in the pipeline - targeting to double its retail network in the medium term . On 01 Feb 2018, CARG announced a capitalisation of reserves amounting to Rs.6.4bn (out of reserves of Rs.9.4bn as at 30 Sep 2017), via the issuance of 32mn shares in the proportion of 01:07 at a consideration of Rs.200.0 per share; XC : 20 Mar 2018 . The CARG share has outperformed the market rising +13% both during the past 3 months and 12 months (vs. the ASI‟s gains of +1% and +2% respectively during the same period) ASI . CARG is trading at PER multiples of 19.5X FY18E and 16.2X FY19E whilst offering ROEs of 17- CARG 130 1,200 19% (up from low single digits in FY15) Share Volume ('000) - RHS 10 April 2018 1,000 Our estimated Sum-of-the-parts (SOTP) valuation suggests that CARG is currently trading at a 120 . 800 Sri Lanka -19% discount to our estimated breakup NAV of Rs.238 per share 110 600 Thousands Beverage Food & Tobacco . CARG has demonstrated much greater resilience to its peers in the recent quarters. CARG‟s 400 closest listed competitor, Ceylon Cold Stores (CCS) has been negatively impacted from the 100 introduction of the “sugar tax”, given its exposure to carbonated soft drinks. The relative 200 attractive multiples vs. other listed peers, coupled with the double digit growth expectations and 90 0 the recent measure to improve share liquidity will likely find favour amongst investors, 14-Feb-17 14-Aug-17 14-Feb-18 particularly given that the relatively illiquid nature of the share may be a deterrent. Moreover, medium to long term investors favouring the consumer driven story of Sri Lanka may find favour in the share, on the back of CARG‟s strong market positioning and brand equity Key Trading Information Relative Share Price Movement (%) Shares in Issue (mn) 256.0 115 Market Cap (US$ mn) 318.1 CARG 110 Estimated Free Float (%) 18.7 3M Avg Daily Volume 38,024 105 3M Avg Daily Turnover (US$) 45,882 100 ASPI 12M High / Low (Rs) 200.2 / 157.5 95 3M / 12M Price Change (%) 10.9 / 22.5 07-Apr-17 09-Oct-17 10-Apr-18 CARG: Valuation Ratios FY15 FY16 FY17 FY18E FY19E Net Revenue (Rs mn) 61,631 71,017 84,191 89,916 103,750 Net Profit (Rs mn) 158 1,571 2,106 2,535 3,055 Earnings per Share (Rs) 0.6 6.1 8.2 9.9 11.9 Earnings per Share Growth (%) -79.7 >+100.0 34.0 20.4 20.5 Price / Earnings Ratio (X) 193.9 21.4 15.2 19.5 16.2 Price / Earnings Growth (X) -2.4 0.0 0.6 1.0 0.8 Gross Dividends per Share (Rs) 1.8 3.1 4.9 3.8 4.5 Gross Dividend Yield (%) 1.5 2.3 3.0 2.0 2.3 Net Book Value per Share (Rs) 49.0 55.2 54.5 60.7 68.1 Price / Book Value (X) 2.4 2.4 3.0 3.2 2.8 Return on Equity (%) 1.3 11.8 15.0 17.2 18.5 Market Price per Share (Rs) 119.9 131.3 164.5 192.6 193.0 Note: Valuations are based on recurring EPS, Adj. for Capital Issues (if any); Historic Ratios are based on Y/E MPS Source: CARG, CT CLSA Adjusted for the 01:07 Capitalisation of Reserves – XC : 20 Mar 2018 CT CLSA SECURITIES (PVT) LIMITED | A Member of the Colombo Stock Exchange 1 CARGILLS CARG (CEYLON) PLC Cargills (Ceylon) Investment Cargills Foods Cargills Restaurants s Company (Pvt) Quality Cargills Quality Cargills Food Co. Ltd (92%) Foods Foods Limited Restaurants Investments (Pvt) Ltd (92%)* (100%) ‘Food City’ Limited Banking Cargills Quality Dairies Property Cargills Quality Cargills Bank Cargills Agrifoods The Business Dairies (20%) 8% stake Cargills Ceylon (CARG), a 70% owned subsidiary of listed conglomerate, C T Holdings held by IFC Cargills Agrifoods (Kist) Leading player in local (CTHR), is one of the leading retail and food & beverage companies in Sri Lanka. The group food and beverage space primarily operates in three sectors – Retail, Fast Moving Consumer Goods (FMCG) and Restaurants, Cargills Quality Cargills Food CT Properties with exposure to banking through 40% associate, Cargills Bank, and property development through Confectionaries Processors (KFC) (25%) 22% associate, C T Properties. The group was listed on the Colombo Stock Exchange (CSE) in 1946 and the Page family currently Cargills Quality Confectionaries(Kist) controls ~81% of the company. CPC Lanka Operates Sri Lanka’s CARG has evolved to become Sri Lanka‟s largest private retail chain with 351 outlets spread across largest private retail the country. CARG owns and operates leading processed food brands under its FMCG umbrella, with chain its key product categories comprising dairy (ice cream, yoghurt, liquid milk forms, cheese), processed meat, agrifoods (fruit juices and nectars, jams, sauces, cordial, water and spices) and Cargills Food Processors (Pvt) Ltd - KFC confectionery (biscuits). The group has operated the KFC franchise in Sri Lanka since 1996, which * 8% stake held by IFC Source: Company Filings currently comprises 31 outlets, and a TGI Fridays‟ outlet under franchise operations since 2013. Recent Financial Performance C P C Lanka (Kist, My Choice) CARG posted a 3Q18 recurring net profit of Rs.636mn (largely unchanged YoY), broadly in line with our expectations. Quarterly earnings are adjusted for CARG‟s proportion of the Rs.481mn capital gain received by associate Cargills Bank from disposal of subsidiary Colombo Trust Finance (CALF). Consequently, 1-3Q18 recurring net profit amounted to Rs.1,912mn (-1% YoY) Key Figures & Ratios (Rs mn) 3Q17 3Q18 % YoY 1-3Q17 1-3Q18 % YoY Net Revenue (Rs mn) 22,226 23,164 4.2 64,095 68,671 7.1 Gross Profit (Rs mn) 2,646 2,705 2.2 7,801 8,206 5.2 Other Operating Income (Rs mn) 424 487 15.0 1,252 1,482 18.4 Composition (%) Total Opex (Rs mn) -1,663 -1,810 8.8 -3,088 -3,362 8.9 Sectoral Information (Rs mn) 2Q14 2Q15 % YoY EBIT (Rs mn) 1,407 1,383 -1.7 4,269 4,474 4.8 2Q14 2Q15 CARGILLS Net Revenue 20,879.6 22,164.9 6.2 100 100 Net Finance Cost (Rs mn) 312 268 -14.2 802 1,020 27.2 (CEYLON) PLC Transportation 4,135.8 3,230.8 -21.9 19.8 14.6 Share of Associates (Rs mn) -7 -9 20.9 -30 8 -125.4 Net Profit (Rs mn) 637 636 -0.1 1,936 1,912 -1.2 Leisure 5,268.2 5,480.8 4.0 25.2 24.7 Property 547.9 1,099.5 >+100.0 2.6 5.0 EPS (Rs mn) 2.8 2.8 -0.1 8.6 8.5 -1.2 Consumer Foods & Retail 5,946.4 7,040.1 18.4 28.5 31.8 Gross Profit Margin (%) 11.9 11.7 -0.2 12.2 11.9 -0.2 Cargills Quality Cargills Food Co. Foods Limited Investments Financial Services 2,336.5 2,606.8 11.6 11.2 11.8 EBIT Margin (%) 6.3 6.0 -0.4 6.7 6.5 -0.1 (Pvt) Ltd (92%)* (100%) Information Technology 1,751.5 1,750.8 0.0 8.4 7.9 Effective Tax Rate (%) 26.3 39.7 13.4 36.6 41.5 4.9 Others 893.3 956.0 7.0 4.3 4.3 Net Debt (Rs mn) 10,501 9,247 -11.9 10,501 9,247 -11.9 Net Debt : Equity (%) 66.6 54.3 -12.3 66.6 54.3 -12.3 Cargills Quality Profit After Tax 2,302.4 2,976.9 29.3 100.0 100.0 Kotmale Holdings Cargills Bank Capex (Rs mn) 1,408.1 1,361.6 -3.3 2,938.3 3,502.1 19.2 Dairies (20%) Transportation 696.1 552.8 -20.6 30.2 18.6 Note : Earnings and valuations on a recurring basis Source : CARG & CT CLSA Leisure 1,031.7 1,022.1 -0.9 44.8 34.3 3 Q18 earnings adjusted for a Rs.481mn capital gain (Rs.191mn for CARG’s effective~40% holding) received by Cargills Bank from divesture of its subsidiary Colombo Trust Finance (CALF) ; 2Q18 earnings excluding Rs.1,010mn capital gain from disposal of investment properties Property 8.4 322.5 >+100.0 0.4 10.8 Cargills Quality Cargills Agrifoods Consumer Foods & Retail 175.7 364.4 >+100.0 7.6 12.2 Confectionaries CT Properties Sectoral Analysis Financial Services 216.2 318.3 47.2 9.4 10.7 (25%) Composition % Information Technology 31.2 91.0 >+100.0 1.4 3.1 (Rs mn) 3Q17 3Q18 % YoY 1-3Q17 1-3Q18 % YoY 3Q17 3Q18 DIST’s quarterly interims only report the cumulative sectoral earnings, thus quarterly sectoral earnings are derived and may be subject to Others 143.1 305.8 >+100.0 6.2 10.3 change subsequent to restatements of accounts Cargills Food Millers Ltd.