SRI LANKA EQUITY | TOBACCO

EARNINGS UPDATE | 17 MAY 2018

Ceylon Tobacco [CTC]: BUY [+16%] Mangalee Goonetilleke

mangalee@asiasecurities.lk
+94 11 772 2042
Volumes stabilize; local leaf sourcing back to normal
CTC 1Q CY18 recurring net profits came in at LKR ~3.7bn (+16.9% YoY) Key statistics
driven by an 14.2% net revenue growth and EBIT margins of 73.0% (-1.5pp). BBG ticker CTC SL
Volumes picked up 11.0% YoY during the quarter. However, we note that CSE ticker CTC.N0000
recent fuel/gas prices could have an impact on discretionary spending GICS subsector Tobacco
through CY18E. We also remain cautious of the impact from beedi and
Price at 16 May 18 (LKR) 1,059.90
illegal products. While higher opex for the quarter hurt EBIT margins, lower
52 week Hi/Lo (LKR) 1,089.80/940.40
COGS and higher interest income kept net margins intact. With minimal
revisions to forecasts, we maintain our DCF based TP of LKR 1,150/share, Market cap (LKR mn) 198,544
and including a DPS of LKR 84.00, we arrive at a TSR of +16.4%. BUY. Market cap (USD mn) 1,281
No. of shares (mn) 187
Volumes pick up; recent fuel/gas price hikes could lead to lower spending ADT (LKR mn) - 3M 2.8
In 1Q, gross revenues were up 15.2% YoY with volumes up ~11.0% YoY (+35.0% ADT (USD k) - 3M 18.1
YoY in 4Q CY17 and -29.0% YoY in 1Q CY17). CTC noted that volumes have ADT (shares k) – 3M 2.7
begun to pick up, which was also confirmed by our recent channel checks. Free float (%) 6.9
However, we note that with the recent impact from PAYE income tax changes
Public float (%) 15.9
and fuel/gas price increases, could have an impact on discretionary spending.
Company website | CSE website
Increases in fuel prices has resulted in a number of household expenses and
transportation costs to increase over the past week. We also remain cautious of Source: CSE, Bloomberg, Company data
the impact from cheaper substitutes such as beedi and illegal cigarettes, which Note: LKR converted at 155 LKR per USD
could rise in demand should there be an impact on spending. As a result, for
Valuation summary
CY18E we expect total net revenues to be up 8.4% YoY.
Price at 16 May 18 (LKR) 1,059.90
New product launches continue; demand for premium brands intact Target price (LKR) 1,150.00
With consumers still price pressured to spend on legal cigarettes, and threat of Upside (%) +8.5%
cheaper illegal and beedi products, CTC continues to launch new affordable CY18E DPS (LKR) 83.00
products. Following its launch of Navy Cut under the John Player Gold Leaf Total return (%) +16.4
(JPGL) brand in 4Q CY17, in April 2018 (2Q CY18E) it launched a limited edition Source: Asia Securities
JPGL Switch product at the same price of LKR 50/stick. We believe that in
order to keep the consumer engaged, CTC will continue to keep introducing Share price movement (indexed to CTC)
new products and price points. On its premium brand Dunhill, CTC noted that
LKR
volumes saw a significant uptick, albeit from a lower base last year. 1,100

GP margin improves; however, opex increases hurt EBIT margins 1,050

COGS continued to decline as CTC is now fully sourcing its leaf supply from
local growers. As a result, gross margins improved by 1.3pp YoY. Other 1,000
operating expenses were up 42.0% YoY while employee expenses were up
~15.0% YoY, due to timing of projects as well as a salary increase. As a result, 950
EBIT margins were down 1.5pp YoY to 73.0%. However, higher interest income
kept net margins intact. With the local leaf supply stabilized, we continue to 900
expect improvement in gross profits over the next few quarters, albeit at lesser May-17 Oct-17 Mar-18
levels. We expect CY18E EBIT margins to settle at 73.1% (+0.2pp YoY). CTC ASPI S&P SL20

We maintain our TP of LKR 1,150/share and our BUY rating Movement (%) YTD 3M 12M
With minimal changes to our forecasts, we maintain our DCF based (WACC of CTC 6 (2) 7
19.0%) target price of LKR 1,150/share. Including a DPS of LKR 84.00 (div. yield ASPI 2 (1) (3)
of 7.9%), we expect a TSR of +16.4%. The company announced first interim S&P SL20 (1) (2) (6)
dividend of LKR 18.00/share for CY18E. in our view, the stock continues to be a Source: CSE, Bloomberg
strong dividend play. BUY.
Financial summary
In LKR mn 1Q CY17 1Q CY18 YoY % CY2017 CY2018E YoY %
Revenue 7,032 8,029 +14.2 31,653 34,299 +8.4
EBITDA 5,290 5,817 +10.0 23,303 25,311 +8.6
Recurring net profit 3,197 3,737 +16.9 14,586 15,915 +9.1
Diluted recurring EPS (LKR) 17.07 19.95 +16.9 77.87 84.96 +9.1
ROE (%) 250.6 232.0 -18.6pp 362.2 341.5 -20.7pp
P/E (x) 15.6 13.1 13.6 12.5
EV/EBITDA (x) 8.6 7.5 7.6 7.0
P/B (x) 29.5 23.9 43.4 41.8
Source: Company data, Asia Securities | Note: Historical interim ROE, P/E, EV/EBITDA on a TTM basis
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 Estimate revisions
In LKR mn CY18E - O CY18E – N %Δ CY19E - O CY19E – N %Δ CY20E - O CY20E – N %Δ
Revenue 34,153 34,299 +0.4 36,587 36,728 +0.4 41,855 42,017 +0.4
EBITDA 25,234 25,311 +0.3 27,055 27,302 +0.9 30,957 31,341 +1.2
Recurring net profit 15,955 15,915 -0.3 17,109 17,143 +0.2 19,532 19,603 +0.4
Diluted recurring EPS (LKR) 85.18 84.96 -0.3 91.34 91.52 +0.2 104.28 104.65 +0.4
DPS (LKR) 84.00 84.00 - 90.00 90.00 - 103.00 103.00 -
ROE (%) 340.9 341.5 0.6pp 348.0 350.3 2.4pp 378.4 377.7 -0.7pp
P/E (x) 11.9 12.5 11.1 11.6 9.7 10.1
EV/EBITDA (x) 6.8 7.0 6.3 6.5 5.5 5.7
P/B (x) 39.5 41.8 37.5 39.4 35.8 37.1
Source: Company data, Asia Securities | Note: O – Old estimate, N – New estimate

Key ratios
CY2015 CY2016 CY2017 CY2018E CY2019E CY2020E
Revenue growth (%) 20.1 21.6 (0.3) 8.4 7.1 14.4
EBITDA growth (%) 23.2 16.1 13.2 8.6 7.9 14.8
Recurring net profit growth (%) 23.4 18.1 16.1 9.1 7.7 14.4
Recurring diluted EPS growth (%) 23.4 18.1 16.1 9.1 7.7 14.4

EBITDA margin (%) 67.9 64.8 73.6 73.8 74.3 74.6

Net margin (%) 40.7 39.6 46.1 46.4 46.7 46.7

Recurring diluted EPS (LKR) 56.78 67.05 77.87 84.96 91.52 104.65
DPS (LKR) 45.15 42.40 60.30 84.00 90.00 103.00
Tan. BVPS (LKR) 15.40 18.60 24.40 25.36 26.88 28.54

OCF (LKR mn) 10,523 14,738 15,121 14,224 15,781 18,141

Unlevered FCF (LKR mn) 9,972 14,339 14,895 13,881 15,414 17,595
Levered FCF (LKR mn) 9,972 14,339 14,895 13,881 15,414 17,595

OCF/EBITDA (%) 59.3 71.6 64.9 56.2 57.8 57.9

Unlevered FCF/EBIT (%) 56.9 70.4 64.6 55.4 57.0 56.7
Levered FCF/Recurring net profit (%) 93.8 114.2 102.1 87.2 89.9 89.8

Net debt/equity (x) (3.9) (4.3) (3.8) (3.6) (3.4) (3.2)

Net debt/EBITDA (x) (0.6) (0.7) (0.7) (0.7) (0.6) (0.5)
EBITDA/interest (x) nm nm nm nm nm nm

ROA (%) 62.3 60.9 61.6 64.8 69.9 78.1

ROE (%) 313.5 394.3 362.2 341.5 350.3 377.7
P/E (x) 18.7 15.8 13.6 12.5 11.6 10.1
EV/EBITDA (x) 10.0 8.6 7.6 7.0 6.5 5.7
P/B (x) 68.8 57.0 43.4 41.8 39.4 37.1
Dividend yield (%) 4.3 4.0 5.7 7.9 8.5 9.7
Dividend payout (%) 79.5 63.2 77.4 99.0 99.0 99.0
Source: Company data, Asia Securities

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 Income statement
In LKR mn CY2015 CY2016 CY2017 CY2018E CY2019E CY2020E
Revenue 26,100 31,748 31,654 34,299 36,728 42,017
Operating expenses (8,368) (11,160) (8,350) (8,988) (9,427) (10,676)
EBITDA 17,732 20,588 23,304 25,311 27,302 31,341
Depreciation and amortization (214) (218) (237) (252) (268) (291)
EBIT 17,518 20,369 23,067 25,060 27,034 31,050
Interest income 561 850 1,504 1,465 1,537 1,622
Interest expense - - - - - -
Associate/JV income - - - - - -
FX gain/loss - - - - - -
Other non-operating income/expenses - - - - - -
Profit before tax 18,079 21,220 24,571 26,524 28,571 32,671
Income tax expenses (7,444) (8,660) (9,984) (10,610) (11,429) (13,069)
Profit for the year 10,635 12,560 14,587 15,915 17,143 19,603
Minority interest - - - - - -
Preferred dividends - - - - - -
Recurring net profit 10,635 12,560 14,587 15,915 17,143 19,603
Source: Company data, Asia Securities

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 Balance sheet
In LKR mn CY2015 CY2016 CY2017 CY2018E CY2019E CY2020E
Assets
Non-current assets
Property, plant and equipment 2,063 2,269 2,258 2,349 2,449 2,704
Intangible assets 9 1 - - - -
Goodwill - - - - - -
Equity method investments - - - - - -
Interest earnings investments - - - - - -
Other investments - - - - - -
Other non-current assets 670 795 799 799 799 799
Total non-current assets 2,742 3,064 3,057 3,148 3,248 3,503

Current assets
Accounts receivable 716 1,999 1,472 1,691 1,811 2,072
Inventories 3,532 2,068 2,589 2,300 2,410 2,674
Prepaid expenses - - - - - -
Other WCA 304 373 275 152 152 152
Cash and cash equivalent 11,378 15,051 17,424 17,035 17,128 17,052
Restricted cash - - - - - -
Short term interest earning investments - - - - - -
Other short term investments - - - - - -
Other current assets - - - - - -
Total current assets 15,930 19,490 21,760 21,178 21,501 21,949

Total assets 18,672 22,555 24,817 24,326 24,749 25,452

Liabilities
Non-current liabilities
Long term borrowings - - - - - -
Employee benefits - 1 1 1 1 1
Other non-current liabilities 408 447 507 507 507 507
Total non-current liabilities 408 448 508 508 508 508

Current liabilities
Accounts payable 306 424 437 369 387 439
Accrued expenses 2,498 2,624 2,703 2,462 2,583 2,925
Other WCL 7,571 8,945 9,215 8,851 8,851 8,851
Short term borrowings - - - - - -
Other current liabilities 5,004 6,629 7,384 7,385 7,385 7,385
Total current liabilities 15,378 18,622 19,739 19,068 19,206 19,600

Total liabilities 15,786 19,070 20,247 19,575 19,714 20,107

Equity
Common equity 1,873 1,873 1,873 1,873 1,873 1,873
Preferred equity - - - - - -
Retained earnings 1,012 1,612 2,697 2,878 3,162 3,472
Other reserves - - - - - -
Minority interest - - - - - -
Total equity 2,885 3,485 4,570 4,751 5,036 5,345

Total equity and liabilities 18,672 22,555 24,817 24,326 24,749 25,452
Source: Company data, Asia Securities

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 Cash flow statement
In LKR mn CY2015 CY2016 CY2017 CY2018E CY2019E CY2020E
Cash flows from operating activities
EBITDA 17,732 20,588 23,304 25,311 27,302 31,341
Other non-cash items - - -
Change in working capital 2,708 1,726 455 (478) (92) (131)
Tax paid (10,448) (8,381) (10,121) (10,610) (11,429) (13,069)
Other 530 805 1,483 - - -
Cash generated from operating activities 10,523 14,738 15,121 14,224 15,781 18,141

Cash flows from investing activities

Capex on PPE & intangibles (563) (420) (226) (343) (367) (546)
Proceeds from disposals 12 21 - - - -
Net (acquisition)/disposal of subsidiaries - - -
Net (acquisition)/disposal of EMIs - - - - - -
Dividends received - - - - - -
Interest received - - - 1,465 1,537 1,622
Other - - - - - -
Cash used in investing activities (551) (399) (226) 1,122 1,170 1,076

Cash flows from financing activities

Issuance/(repurchase) of common shares - - - - - -
Issuance/(redemption) of preference shares - - - - - -
Drawdown/(repayment) of debt - - - - - -
Dividends paid to common shareholders (7,603) (10,667) (12,521) (15,734) (16,858) (19,293)
Dividends paid to preferred shareholders - - - - - -
Interest paid - - - - - -
Dividends paid to minority interest - - - - - -
Other - - - - - -
Cash from financing activities (7,603) (10,667) (12,521) (15,734) (16,858) (19,293)

Net increase/(decrease) in cash 2,368 3,672 2,374 (389) 93 (76)

Cash and cash equivalent at BOP 9,010 11,378 15,050 17,424 17,035 17,129
Effect of exchange movements - - -
Cash and cash equivalent at EOP 11,378 15,050 17,424 17,035 17,129 17,052
Source: Company data, Asia Securities | EMI stands for equity method investments

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 Top 10 shareholders – (% held)
Shareholder Mar 2017 Dec 2017 Mar 2018 Δ YoY (pp) Δ QoQ (pp)

British American Tobacco International (Holdings) BV 84.13 84.13 84.13 - -

FTR Holdings SA 8.32 8.32 8.32 - -

Pershing LLC S/A Averbach Grauson & Co. 1.05 1.06 1.03 -0.02 -0.03

HSBC INTL NOM LTD - SSBT-BMO Incestments 11 (Ireland) 0.64 0.64 0.70 +0.06 +0.06

Northen Trust Company S/A - Fundsmith Emerging Equities Trust

- - 0.58 +0.58 +0.58
PLC

RBC Investor Services Bank-COELI SICAV 0.24 0.28 0.39 +0.15 +0.11

HSBC INTL NOM LTD-BBH-Matthews Emerging Asia Fund - 0.19 0.20 +0.20 +0.01

HSBC INTL NOM LTD-JPMCB-Long Term Economic Investment Fund 0.18 0.18 0.18 - -

Mrs Jasbinderjit Kaur Piara Singh 0.17 0.17 0.17 - -

Nortthen Trust Company S/A - Coupland Cardiff Funds PLC 0.19 0.16 0.16 -0.03 -

Source: Company data, Asia Securities

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 Analyst Certification
I, Mangalee Goonetilleke, certify that the views expressed in this report accurately reflect my
personal views about the company. I also certify that no part of my compensation was, is, or
will be, indirectly or directly, related to the specific view or recommendation expressed in this
report.

Company Certification
Asia Securities (Private) Limited has no direct affiliation with the company/companies covered
in this report and does not receive any material benefit from the company for publishing this
report.

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Research
Kanishka Perera – Head of Research Mangalee Goonetilleke Naveed Majeed
Strategy | Banks | Insurance | Conglomerates | Consumer | Manufacturing | Leisure |
Telecommunications Healthcare Energy | Construction
kanishka@asiasecurities.lk mangalee@asiasecurities.lk naveed@asiasecurities.lk
+94 11 772 2044 +94 11 772 2042 +94 11 772 2043

Lakshini Fernando
Economics | Finance
lakshini@asiasecurities.lk
+94 11 772 2045

Osadi Hettiarachchi Thilini Amarasiri

osadi@asiasecurities.lk thilini@asiasecurities.lk
+94 11 772 2045 +94 11 772 2045

Institutional Sales
Sabri Marikar Shiyam Subaulla Niroshan Wijekoon
CEO Head of Institutional Sales niroshan@asiasecurities.lk
sabri@asiasecurities.lk shiyam@asiasecurities.lk +94 11 772 2007
+94 11 772 2022 +94 11 772 2011 +94 77 771 3645
+94 77 357 6868 +94 77 350 2016

Anushan Kandasamy Ruwan Hettiarachchi Gagani Jayawardhana

anushan@asiasecurities.lk ruwan@asiasecurities.lk gagani@asiasecurities.lk
+94 11 772 2019 +94 11 772 2020 +94 11 772 2014
+94 77 722 2519 +94 77 741 0164 +94 71 408 4953

Niroshan Ratnam Miflal Farook Charith Perera

ratnam@asiasecurities.lk miflal@asiasecurities.lk charith@asiasecurities.lk
+94 11 772 2006 +94 11 772 2010 +94 11 772 2015
+94 77 371 7515 +94 77 225 3730 +94 77 359 8937

Foreign Sales
Dinusha Gomes
Head of Foreign Sales
dinusha@asiasecurities.lk
+94 11 772 2080
+94 77 300 2274

Retail Sales
Subeeth Perera Priyantha Hingurage Romesh Priyadarshana
Head of Retail Sales priyantha@asiasecurities.lk romesh@asiasecurities.lk
subeeth@asiasecurities.lk +94 11 772 2033 +94 11 772 2032
+94 11 772 2035 +94 77 350 2015 +94 77 254 8795
+94 71 404 2683

Kalana Hewawasam Nuwan Eranga Perera Uthpala Karunathilaka

kalanag@asiasecurities.lk eranga@asiasecurities.lk uthpala@asiasecurities.lk
+94 11 772 2028 +94 11 772 2026 +94 31 567 6881
+94 77 395 9438 +94 77 736 8012 +94 77 369 1685

Bhanu Ganegama Ashan Silva

bhanu@asiasecurities.lk ashan@asiasecurities.lk
+94 11 772 2031 +94 11 772 2005
+94 77 184 8789 +94 77 045 8028

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