Kenanga Investment Corporation Ltd Research Report as at 10 th …kenangasl.com/wp-content/uploads/2013/03/Chevron... · 2015-07-14 · With this new agreement Caltex will further

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LLUB Equity Research report

CHEVRON LUBRICANTS LANKA PLC (LLUB)

Sri Lankan Lubricant market Overview

Lubricants became a private monopoly in the mid 1990s after Ceylon Petroleum

Corporation privatized its Lubricants to Caltex, which is now part of the Chevron

Petroleum Group.

South Asia consumes an estimated 1,700 kilo tonnes of lubricants per year.

India is the leading lubricant-consuming country in the subcontinent by far,

accounting for an estimated 75% of the volume consumed, followed by Pakistan

and Sri Lanka

At Present the Public Utilities Commission of Sri Lanka (PUSL) is acting as the

shadow regulator for the lubricant sector by way of advising and assisting the

ministry of Petroleum Industries on policy and regulatory matters.

As at the end of year 2011, there were fourteen entities authorized to import,

export, sell, supply and distribute lubricants.

The local lube market is currently estimated at about LKR 6 Billion in terms of

Revenue.

The two authorised parties to blend and produce lubricants in Sri Lanka are

LLUB and Lanka IOC PLC.

During the year 2011, around 64% (33,440 KL) of the lubricant requirement was

produced (Blended) locally.

Around 87% of the blending was carried out at the lube blending plant of

LLUB while the balance 13% was produced by the lube blending plant belonging

to IOC. Local blending is mainly carried out in order to gain the advantage from

the prevailing import tariff differential between raw materials and finished

lubricants.

The lubricant market had a 7% YOY growth in terms of

quantity produced from 2010 to 2011.

For the Purpose of local blending requirements base oils

worth LKR 4,753 Mn and additives worth LKR. 1,244 Mn

were imported by LLUB and LIOC in 2011. While a total of

22,060 KL of finished lubricants and greases worth LKR.

3,708Mn were imported during the year of which 66%

were automotive lubricants.

During 2011, 5,180 KL of lubricants were exported to

regional markets recording a 63% growth from 2010.This

sector has contributed with LKR 52 Mn to government

revenue last year, up from LKR 46 Mn in 2010.

Company Market share %

Chevron Ceylon Limited 56.90

Indian Oil Corporation Limited 8.40

Ceylon Petroleum Corporation 8.40

ExxonMobil Asia Pacific Pte. Ltd 6.90

Laughs Holdings Limited 4.50

Lubricant Company Sinopec Corporation

3.00

Bharat Petroleum Corporation Limited 3.00

BP France S.A. 2.00

Shell Trading (Middle East)Private Limited

1.70

Ashland Inc. 1.10

Toyota Tsusho Corporation 0.90

Total Lubricants India Limited 0.20

Motul France S.A. 0.0

Gulf Oil International Limited (not renewed license for the year)

0

Total 100

Lubricant Market Sector Percentage (%)

Automotive 70%

Industrial 16%

Marine 6%

Greases 4%

Other 4%

LKR. Mn Quantity in Kilo Litres (KL)

Combined Sales in 2011 18,775 58,554

Combined Sales in 2010 14,035 54,369

0

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LLUB Lanka Indian Oil

Corporation Limited

Ceylon Petroleum

Corporation

Exxon Mobil Asia Pacific

Pte. Ltd

Laugfs Holdings Limited

Rs.

00

0

Lubricant Sales Revenue ( LKR'000) by Company

2009 2010 2011

Kenanga Investment Corporation Ltd Research Report as at 10th January 2013

Prepared by Dananjaya Wijesekara & Rasheed Sheriff

Source: PUSL

Source: PUSL Source: PUSL

Market Price:

LKR 212

Recommendation:

Long Term Buy

Price Target:

LKR 245

2


0

10000

20000

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70000

2009 2010 2011

Vo

lum

e (

KL)

LLUB Lubricant Sales Volume Performance Vs. Competition

Total Lubricant Production LLUB Prodcution LIOC Production

Ceylon Petroleum Corporation Exxon Mobil Asia Pacific

A fall in volume of 1,935 KL for LLUB, while Total Market volume increased by 4,184 KL in 2011

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

2009 2010 2011

LLUB Market Share

Ceylon Petroleum Corporation Market Share

73.00% 56.90%

51% 49%

Chevron Shareholding Structure as of Dec 2011

Chevron Ceylon Limited Public Holding

Company Overview

Chevron Lubricants Lanka PLC engages in blending, manufacturing, exporting

Distributing, and marketing lubricant oils, greases, break fluids, and specialty products

in Sri Lanka. The company offers its products for industrial, commercial, and consumer

applications. Chevron Lubricants Lanka PLC markets its products under Chevron and

Caltex brands. The company was incorporated in 1992 and is based in Colombo, Sri

Lanka.

Caltex is the 5th most powerful brand in Sri Lanka, and its brand value is amongst the

top 11 in Sri Lanka.

LLUB has 120 Mn ordinary shares outstanding as at 10th January 2013.

LLUB is considered a high dividend paying company However; KICL foresee a fall in the

dividend payout rate due to its movement from current blending plant in Kollonnawa

to Sapugaskanda at a cost of $ 15 Mn. This plant movement will be funded internally

through its retained profits rather than looking at external financing. However from

2014 onwards KICL have predicted that the dividend payout rate will be sustained at

90% level (85% to 90%).

LLUB recorded a LKR 2 Billion Profit after tax (PAT) in 2011 compared to 2010 in

which it earned a PAT of LKR1.5 Billion. It’s a 33% PAT growth, with revenue growing

at 17%.

LLUB has further recorded a growth rate of 19.2% on its PAT, and a top line growth of 10.2% for 1-3Q 2011-2012. However, LLUB recorded a fall in top line by 2.8% QoQ for Q3 2012. And fall in bottom line by 13.5% QoQ for Q3 2012. As highlighted by CEO Mr. Kishu Gomes, this fall in both top line and bottom line is attributable to macro economic conditions faced by Sri Lanka such as an increase in duty on vehicle imports to minimise currency drain out of the country. Export Market

LLUB exports 5% of its lubricants mainly to Maldives and Bangladesh. LLUB has seen a fall in growth in its Bangladesh sales whereas it has experienced the opposite in Maldives. LLUB entered Maldives in 2003 and has been identified as a key player in the lubricant market industry as one of the major exporters and currently enjoys a 10% market share with expectation of a 5% growth in the near future. It has also announced its commitment to the Damas Company in Maldives by signing an agreement spanning 5 years to distribute Chevron’s product range.

With this new agreement Caltex will further penetrate into the Maldivian lubricant

market by focusing on marine transportation and power generation, going one step

further from supplying lubricants to the transport and fisheries sector.

Sri Lankan economy recorded a steady export growth of 4% in the past 10 to 12

years but saw a decrease of 2% last year when compared to exports ,despite the

prevailed general economic conditions, to Maldives which has grown from10 % to

12% in its lubricant exports.

LLUB Financials

Reuters Code LLUB.Cm

Bloomberg Code LLUB.SL

CSE Code LLUB.N0000

Share Price Rs. 212

Market Capitalization

Rs. 2544 Mn

All Time High Rs.233

All Time Low Rs. 35

52wk range Rs.160.00 - 231.00

Chairman Farrukh Saeed

CEO/ MD Kishu Gomes

Beta Values / ASI

0.43

Beta Values/ MPI

0.28

0

50

100

150

200

250

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

Rs.

Shar

e V

olu

me

LLUB.N0000 Movement

Volume Closing Price**

Source: LLUB Annual Report 2011

Source: CSE

Source: PUSL Source: PUSL

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-0.05

0

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0.1

0.15

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12000

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rce

tan

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ven

ue

Rs.

Mn

Segementational Revenue of LLUB

Industrial Export Automative Revenue growth %

Company Financial Performance

Top line Growth

LLUB has 3 main revenue generating sources: Automotive, Industrial

and Exports which contribute approximately 62%, 33%, and 5 %

respectively to the total group revenue .

The automotive sector -The transport and communication sector of Sri

Lanka grew by 11% in 2011 in comparison to 11.9% growth in 2010.

Considerable growth was posted by transport sector accounting to

1.3%. The Growth of the transport sub sector could be directly

attributable to the increase in new motor registration by 46.3% in 2011. As automotive sector is LLUB’s largest revenue

generating segment Sri Lanka’s Transport sector growth directly affects LLUB’s main stream of revenue.

The automotive Sector consists of the retail industry; the main factor that influences automotive revenue is the number of vehicle population in Sri Lanka. And KICL is expecting LKR 6865.75 Mn revenue from this sector in 2013.

The industrial sector will see a 10% growth considering the current economic development of the country. Reflecting the continued expansion of the domestic and external demand, the industry sector recorded a 10.3 % growth in 2011, the highest since 2002. And KICL is expecting LKR 3339.6 Mn revenue from this sector in 2013.

The export sector consists of LLUB lubricant exports to

Maldives and Bangladesh and revenue is forecasted to grow by 25% year each from this sector. However currency volatility and increased competition in the respective countries will play a huge part in revenue growth from this sector. From this sector KICL is expecting LKR 1725 Mn revenue in 2013.

Overall Total Revenue of LLUB has increased from LKR 8,654 in 2007 to LKR 11,040 Mn in 2011 and forecasted total revenue of LKR 11930.35 Mn in 2013. LLUB increased the prices of all ranges of products in order to keep prices par with the increase in raw material prices in the world market. Other Factors that have contributed to the growth in LLUB revenue are the change of product mix and product portfolio strategy, export growth, global synergies, enhanced operational efficiencies and the stable parity rate.

Further the growing awareness witnessed in the recent years of vehicle emissions as a source of air pollution is driving environment regulation, which has forced commercial fleet across the region to modernize. This in turn has created a small but growing demand for higher performance engine oils. This enabled chevron to increase the revenue contribution from its premium brands. KICL believe that with rapid growth in sectors such as power and energy, agriculture, fisheries, ports and infrastructure will contribute to top line growth of LLUB.

Total Revenue

Industrials 33%

Exports 5%

Automotive 62%

0.00

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6,000.00

8,000.00

10,000.00

12,000.00

14,000.00

16,000.00

0

1000000

2000000

3000000

4000000

5000000

6000000

2007 2008 2009 2010 2011 2012 2013 2014 2015

Re

ven

ue

Rs.

Mn

Ve

hic

le U

nit

s

Vehicle Population LLUB Sales

Forecasted

Fall in new vehicle registration by 64,682 vehicles in 2009

A 157% increase of new vehicle registatrions from 2009 to

Fall in import duty in 2010 increased SL vehicle population (+17% in 2010

0.117

0.118

0.119

0.615

0.620

0.625

0.630

0.635

MV

R

BD

T

Bangladesh (BDT) and Maladivian (MVR) against LKR movement

BDT MVR

Source: LLUB Annual Report 2011 & KICL Research

Source: Forex report & KICL Research


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Bottom Line Growth

LLUB enjoys a 9% tariff benefit from blending

their products locally, an advantage they share

with their competitor Lanka IOC who currently

has an 8.4% percent market share of the Sri

Lankan Lubricant Market.

The main driver of LLUB cost of sales are the

base oil prices, where base oil is the main

ingredient in lubricants, and has a strong

correlation with crude oil prices with a lag of a

few months.

LLUB Cost of Sales was LKR 6,368 Mn in 2007

and increased to LKR 7,565 Mn in 2011( a

growth of 19%), with slight volatility in the

years in-between attributable to the volatility

experienced of the crude oil prices from US $

72.34 per barrel in 2007 to US$ 94.89 in 2011.

We forecast LLUB Cost of sales to further

increase to LKR 9719 Mn in 2015.

Gross profit margins could come under

pressure if base oil prices rise which could

lower LLUB’s gross profit margin in the future.

However base oil prices and crude oil prices have a strong correlation, with a lag of only a few months. Chevron’s global

sourcing capabilities give rise to LLUB to benefit from pricing opportunities that arise as a result of this lag.

However according to KICL forecast we believe that Crude oil prices will be stable around US $ 90 levels from 2013 to

2015, which will stabilise LLUB’s gross profit margins at 33.33% during the period from 2013 to 2015. Since any changes

in crude oil prices that affect LLUB cost of sales will be partially passed on as price increases to its customers.

LLUB recorded a Gross profit of LKR 3,475 Mn in 2011 an increase of 14% compared to LKR 3,045 Mn recorded in

2010.However gross profit margin has fallen from 32.15% in 2010 to 31.48% in 2011,an approximate fall of 4.14% fall in

gross profit margin when compared with 2009. This is mainly due to the rise in crude oil prices from US $ 61.95 in 2009

to US $ 94.89 in 2011.

With regard to LLUB Earnings before interest and taxation (EBIT), the company has done well to manage its EBIT margins despite the increase in its distribution networks. The company recorded an EBIT margin of 24.68% in 2011 compared to 23.94% in 2010.

The company has managed ito maintain its SG&A at low levels, resulting in its EBIT margins remaining healthy.

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120.00

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8,000

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US

$ P

er

Bar

rell

LKR

Mill

ion

Cost of Sales Average Yearly Cost of Crude Oil per Barrel

FORECASTED

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

0

1000

2000

3000

4000

5000

6000

2007 2008 2009 2010 2011 2012(E) 2013(E) 2014(E) 2015(E)

Pe

rce

nta

ge

LKR

Mill

ion

Gross Profit Gross profit margins on revenue

Fall in base Oil Prices

Stable GP margin at 33.33%

4.31%

19.98%

-8.58%

-3.60%

15.44%

6.02% 5.86%

5.90%

-0.15

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0.25

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2000

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2007 2008 2009 2010 2011 2012(E) 2013(E) 2014(E) 2015(E)

LKR

MN

Operating Profit(EBIT) Gross Profit

Distribution and Administration Cost Growth YoY % EBIT Margins

Source: Oil Report& KICL Research



5


Overall EBIT grew by 24.68% YoY to LKR 2,725 Mn in 2011. KICL forecast an EBIT of LKR 3,830 Mn in 2015. KICL further foresee an EBIT margin of 26.27% in 2015.Positive Volume growth coupled with price increases are expected to drive EBIT margins.

LLUB’s healthy cash position paid off with a finance income of LKR 52.5Mn in 2007 to a high of LKR 99 Mn in 2009 and thereby a sudden fall to LKR 43 Mn in 2011, attributable to a fall in interest income from LKR 79 Mn in 2010 to LKR 35 Mn in 2011.

The company achieved a net profit of LKR 2,001 Mn in 2011, which

was the highest net profit recorded during LLUB’s presence in the SL lubricant market. This is partially attributable to the reduction in the corporate tax from 35% in 2010 to 28% in 2011.

In line with our forecasts we foresee net profits of LLUB to increase

to LKR 2,408Mn in 2012, LKR 2,553Mn in 2013, LKR 2, 703Mn in 2014 and LKR 2,862 Mn in 2015.

LLUB net profit margins increased from 12.46 % in 2007 to 18.13% in 2011. We foresee net profit margins of LLUB to be stable around the level of 19% for the year 2012 and going into 2015.

2007 2008 2009 2010 2011 2012(E) 2013(E) 2014(E) 2015(E)

(LKR ' Mn) (LKR ' Mn) (LKR ' Mn) (LKR ' Mn) (LKR ' Mn) (LKR ' Mn) (LKR ' Mn) (LKR ' Mn) (LKR ' Mn)

Turnover Rs. 8654.30 8900.30 8691.00 9,471.00 11,040.00 12265.96 13,004.09 13,765.85 14,578.06

Net Profit Rs. 1078.30 948.00 1495.00 1501.00 2001.61 2408.49 2553.42 2703.00 2862.48

YoY % - -12.08% 57.70% 0.40% 34.25% 19.52% 6.02% 5.86% 5.90%

EPS Rs. 8.99 7.9 12.46 12.51 16.79 20.07 21.28 22.53 23.85

YoY % - -12.08% 57.70% 0.40% 34.25% 19.52% 6.02% 5.86% 5.90%

PER – at LKR 212 /= (X) 26.84 12.46 16.95 12.71 10.56 9.96 9.41 8.89

PEG (X)

-2.22 0.22 42.23 0.38 0.52 1.66 1.61 1.51

DPS Rs. 6.25 5.25 12.00 12.25 9.00 10.04 18.09 20.27 21.47 Dividend yield at LKR 212/=

% 33.92 40.38 17.67 17.31 23.56 21.13 11.72 10.46 9.87

ROE % 0.00 0.44 0.68 0.67 0.63 0.55 0.54 0.54 0.54

Book value per share Rs. 15.28 17.93 18.39 18.65 26.32 36.36 39.55 41.80 44.19

PBV (X)

8.05 5.83 5.36 5.07 4.80

Profitability ratios

Gross Margin % 26.41% 23.53% 35.62% 32.15% 31.48% 33.33% 33.33% 33.33% 33.33%

EBIT Margins % 18.55% 15.56% 25.83% 23.94% 24.81% 26.27% 26.27% 26.27% 26.27%

EBT Margins % 19.16% 16.66% 26.97% 24.64% 25.20% 27.27% 27.27% 27.27% 27.27%

Net Profit Margins % 12.46% 10.65% 17.20% 15.85% 18.25% 19.64% 19.64% 19.64% 19.64%

26%

33%

12%

20%

0%

5%

10%

15%

20%

25%

30%

35%

2007 2015 (E)

Gross profit margins on revenue Net Profit Margins

0%

20%

40%

60%

80%

100%

120%

1 2 3 4 5 6 7 8 9

Rs.

Mn

Retention ration Dividend payout

Fall in Dividend payment and rise in Retention rate due to the movement of the Lubricant Blending Plant.

0.00

10.00

20.00

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40.00

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60.00

70.00 R

s.

EPS DPS Book value per share

Fall in dividend payout rate




6


Chevron Lubricants Lanka Financial Performance for the Year 2012 Quarter 1 – Quarter 3.

Top line reduced by 2.87 %

LLUB revenue fell by 2.87% from 3QFY11 (LKR.3, 184 Mn) to

3QFY12 (LKR 2, 995 Mn). The reduction in the top line was

primarily due to high competition faced in the lubricant market as

well as due to macro economic factors that affected the market.

Vehicle purchases are comparatively lower than other economies

due to high taxation policies introduced by the government.

Limited access to fuel station has also had an impact on revenue.

This has directly affected their top line. However we foresee that

LLUB will increase its revenue stream in the last quarter in 2012

due to increase in tourism and also seasonal effects where people

tend to travel more during the last quarter of the year which will

have a positive impact on the top line.

Gross profit reduced by 8.66% due to high cost of sales

Even though LLUB’s top line has decreased by 2.87% the cost of sales remain at almost same levels (Q32012).LLUB was

unable to reduce their heavy cost of sales due to high fixed cost and running cost in order to maintain their blending plant

situated at Kolonnawa (Which is producing 50000 MT capacity).Further LLUB has increased inventory by 20% (as at Sep

30th 2012) compared to last year. This is a clear indicator that their stocks are not moving as swiftly as during periods

when they were operating as a monopoly.

Due to high cost of sales LLUB was unable to maintain profit margins. By looking at past trends LLUB has always been

able to pass on the increase in cost of the inputs to their customers in terms of higher prices. But in 3QFY2012 LLUB

might have not been able to pass these above mentioned costs due to high competition in the Sri Lankan market which

created high amount of stagnant inventory.

LLUB Quarterly Financial Performance 2012

3QFY12 3QFY11 Change % 1-3QFY12 1-3QFY11 Change %

Revenue 2,995,884.00 3,084,346.00 -2.87 8,892,260.00 8,065,848.00 10.25

Cost of Sales -2,066,055.00 -2,066,357.00 -0.01 -5,982,627.00 -5,500,742.00 8.76

Gross profit 929,829.00 1,017,989.00 -8.66 2,909,633.00 2,565,106.00 13.43

- Distribution costs -129,225.00 -100,798.00 28.20 -302,706.00 -305,216.00 -0.82

- Administrative expenses -127,625.00 -97,600.00 30.76 -357,415.00 -292,858.00 22.04

Other income 2,528.00 104.00 2,330.77 6,676.00 12,837.00 -47.99

Operating profit 675,508.00 819,695.00 -17.59 2,256,188.00 1,979,869.00 13.96

Finance income 46,647.00 15,547.00 200.04 134,360.00 22,595.00 494.64

Finance costs -230.00 -291.00 -20.96 -17,261.00 -11,004.00 56.86

Profit before Income tax 721,925.00 834,951.00 -13.54 2,373,287.00 1,991,460.00 19.17

Income tax expense -199,938.00 -231,509.00 -13.64 -657,025.00 -552,283.00 18.97

Profit for the period 521,987.00 603,442.00 -13.50 1,716,262.00 1,439,177.00 19.25

Total comprehensive income for the period 521,987.00 603,442.00 -13.50 1,716,262.00 1,439,177.00 19.25

Basic earnings per share 4.35 5.03 -13.52 14.30 11.99 19.27

0.00

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8.00

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10.00

3QFY11 3QFY12 1-3QFY11 1-3QFY12

Mill

ion

s

Revenue Performance

-2.87% QoQ

10.25% QoQ Sharp duty increases on vehicles, and price increases to recover cost escalations

Source: LLUB Quarter 3 report & KICL Research

Source: LLUB Quarterly Report 2012 & KICL Research

7


High Distribution and Administrative expenses

LLUB was unable to reduce the cost structure along with drop in revenue due to high cost of sales. The operational cost is

high due to higher volume handling cost as well as high distribution cost which were unable to pass on to the customers

which resulted in low revenue in 3QFY2012.

Operating Profit has reduced by 17.6%

compared to 2.87% reduction in revenue.

Despite the economic situation in the

country LLUB was unable to increase

operating profit margins in 3QFY2012

compared to 3QFY2011 period. But

considering the 1-3QFY2012 LLUB has

managed to increase profit margins by

13.96%.Contribution from the 3QFY2012 to

the 2012 operating margin accounted only

for 30% compared to 41% contribution in the

previous year during the same quarter. This

clearly indicates that LLUB has a challenge in

retaining their customers and to maintain

market share.

Finance income grew by 200%.

LLUB was able to increase finance income by a considerable percentage due to upward movement of the current

interest rates in Sri Lanka during the 3rd quarter of 2012

Considering the current movement in Sri Lanka interest rates we can expect an upward trend of the interest rates in the

short term which will have a positive impact on LLUB’s finance income.

Profit for the period and net profit

margins has reduced.

Due to negative impact created in the

market share and macro economic

factors, LLUB was unable to achieve

expected profit target in 3QFY2012.

Considering the cumulative

performance in 2012, LLUB has

managed to increase their net profit by

19.25% which is a positive outlook for

the company’s performance in 2012.

-

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2.00

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6.00

Q1 2012 Q2 2012 Q3 2012

Mill

ion

s

Revenue Gross Profit Net Profit

-19%

-19%

-23%

-2%

5%

17%

182.00 185.00

197.00

183.50

172.00

165.50

140.00

150.00

160.00

170.00

180.00

190.00

200.00

Q1 Q2 Q3

Rs.

LLUB Share Price Movement : Quartely

Highest Price 2012 Highest Pric 2011



8


LLUB: Risk Management

Loss of market share due to the competition

In the recent past LLUB has lost their conventional distributional channel which was refuelling stations which was one of

significant channels that gave LLUB the ability to increase their volumes. However, currently LLUB is

trying to increase their distribution network through their own automobile

service stations which will give an opportunity to other competitors to increase

their market share by looking at locations where LLUB has not entered yet such

as some parts of the North and East provinces.

Meanwhile the local government has opened up doors to foreign and local

lubricant providers which will have a direct impact on LLUB’s market share due to

low switching costs. Customers can always switch to another lubricant product

without any cost.

Unlicensed operators

Even though there are only 14 legal players in the market there are number of other sellers who sell lubricant products

without obtaining a license. This is a common issue faced by the industry as a whole. Still there is no effective regulatory

framework in order to stop these illegal operations.

Operational activities are outsourced

LLUB has outsourced most of their important operational activities such as warehousing, distribution as well as drum

fabrication in order to reduce administrative hassle as well as to obtain cost effective methods from economies of scale

obtained by outsourced party. However, there is always risk element attached with outsourced activities.

Improper service by one outsourced party will have a huge impact on the whole production process which will result in a

negative impact on LLUB’s performance in the long term. Smooth production processes are always expected in order to

face the strong competition. Therefore LLUB should maintain their strong and healthy relationship with outsourced

parties and also their contingent plans should be accurate and up to date in order to facilitate any emergency.

Exchange Rate Risk

Most of the raw materials for the production are imported and any exchange rate movements will directly impact to the

cost of production. Any depreciation of rupee would lead to increase cost of production which will ultimately result

reduction in bottom line. Therefore LLUB might require moving into hedging instrument in order to mitigate exchange

rate fluctuation risks.

Regional Warehouses

Sales Outlets Regional Outlets

9


LLUB: Future Direction

Currently LLUB owns 65% to 60% of the market share and still remains as market leader in the lubricant industry.

KICL assume that LLUB is focusing more on their profit margins rather than focusing on market share due to high competition created in the local market. KICL believe LLUB will maintain their market position in the near term due to high level of satisfaction of the customers and quality of the products.

With the expected increase in vehicle population, potential industrial growth as well as expected export growth, KICL assume that revenue will grow by 7% YOY up to 2015.

There are significant opportunities in the industrial business segment due to high expected foreign investments as well as future industrial expansion projects done by government.

Furthermore, with the economic crisis faced in developed countries KICL expect crude oil prices to dip in the world market which will directly impact to LLUB’s main raw material which is base oil. Due to high correlation with base oil and crude oil KICL expect a positive impact on LLUB cost structure in the near future.

However, KICL don’t expect any dramatic change on LLUB administrative and distribution activities in near future.

As a good dividend payer KICL does not expect any drastic change in the dividend policy in near future. Due to the movement of the manufacturing plant KICL expect reduction in the dividend payout ratio in order to facilitate investment requirements. KICL expect LLUB will maintain 90% levels retention ratio after 2014.

Valuation

KICL valuation is based on the Dividend Discount Model (DDM). We considered DDM model due to the high dividend payout ratio of LLUB. KICL expect that LLUB will continue to maintain the current dividend payout ratio because it is a one of the reasons why investors are attracted to this stock.

KICL has improved our forecast for year 2012(E), revenue to be LKR 12,265 Mn and to improve further to LKR 13,004Mn in 2013(E). KICL has anticipated that crude oil prices will remain at the same level or even dip in the world economy resulting in a favourable outcome for the lubricant market which will ultimately impact LLUB’s bottom line.

In our valuation model we have assumed that the company will have 5% long term growth considering LLUB retention ratio and return on equity. We have used 12.89% as cost of equity in order to discount the dividends. We have calculated 12.89% of cost of equity considering risk free rate, beta and market risk premium.

Risk free rate -10.74% (5 year Treasury bond rate) Beta -0.43 (based on ASPI and LLUB stock prices) Market risk premium - 5%

Based on forecasted values net profit of LKR 2408.49 Mn for FY12E amounts to a PE of 10.56 X at the current price of LKR

212.Based on 2013E and 2014E expected earning we expect a PE of 9.96X and PE 9.41 X respectively. The sector PE stands at 10.3X.Based on sector market capitalization almost 22% of the total sector market capitalization is contributed by LLUB which is the best contributor to the sector. This is a clear indicator that LLUB’s performance has had a direct impact to the Manufacturing sector index performance.

Based on KICL forecasted figures LLUB’s stock has a target value of LKR 245/=.Based on valuation KICL have concluded

that LLUB counter is undervalued. Considering the macro economic factors as well as qualitative and quantitative

factors KICL is likely to provide Long term buy recommendation.

0

1000

2000

3000

4000

5000

6000

7000

8000

0

1000000

2000000

3000000

4000000

5000000

6000000

Rs.

Mn

Ve

hic

le U

nit

s

Vehicle Population Automotive Revenue

Fall in Automotive revenue due to loss of marketshare

Source: KICL Research & ministry of Finance

10


Annexure 01

Shareholder Information

20 Largest Shareholders as at 30th

September 2012

Name of Shareholder Number of

Shares

%

Chevron Ceylon Limited 61,200,000 51.00

HSBC International Nominees Ltd-BPSS Lux -Aberdeen Global Asia Smaller

Comp

10,629,700 8.86

HSBC International Nominees Ltd-BPSS Lux -Aberdeen Global- EME 4,563,700 3.80

HSBC International Nominees Ltd-BP2S London -Aberdeen Asia Smaller Comp 3,580,800 2.98

Caceis Bank Luxembourg S/A Barca Global Master Fund LP 3,414,600 2.85

Employees Provident Fund 3,310,800 2.76

Cargo Boat Development Company Limited 2,000,000 1.67

Renuka Hotels Limited 1,400,000 1.17

National Savings Bank 1,155,135 0.96

Bank of Ceylon No 1 Account 1,144,800 0.95

Crescent Launderers & Dry Cleaners (Pvt) Ltd 1,000,000 0.83

HSBC INTL NOM LTD-BP2S LUXEMBOURG-ABERDEEN GLOBAL FRONT 953,597 0.79

Danske Invest- Global emerging markets small cap 874,000 0.73

Mellon Bank N.A.- Florida Retirement system 770,000 0.64

Danske Bank A/S 650,000 0.54

DFCC Bank- Account No 1 609,400 0.51

AVIVA NDB Insurance PLC A/C No 07 594,800 0.50

Northern Trust CO S/A National Westminister Bank PLC as trustee of Jupiter

India

500,000 0.42

Mr. Udabage 476,500 0.40

Bartleet Finance Plc 400,000 0.33

99,227,538 82.69

DISCLAIMER: This document is a research report prepared by Kenanga Investment Corp Ltd based on the information contained in the

document the report has been compiled from sources that we believe to be reliable: however we do not hold ourselves responsible for its

completeness or accuracy. All opinions and estimates included in this report constitute of our judgment to this date and are subject to change

without notice. Information contained in this document is not and should not be construed as an offer, or a solicitation of an offer, to buy or sell

any security or other financial instruments. Kenanga Investment Corporation Ltd, or its affiliates and/ or its directors, officers and employees

shall not be in any way be responsible or liable for loss or damage which any person or party may sustain or incur by relying on the content of

this document.

Source: LLUB Annual Report 2011

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