Lanka Floortiles Plc - (Tile) - q4 Fy 15 - Buy

Earnings Review Q4 FY 15

20 July 2015

65, Braybrooke Place, Colombo 2, Sri Lanka

[email protected], +94 11 5220200

Lanka Floortiles PLC (TILE:LKR 116.70) Subsidiaries preserve overall margins : BUY

Valuation Summary

Trading Snapshot

BRS Research

Lower CoGs, finance costs and higher contribution from PARQ made TILEs Q4FY15s EPS rise

53% to LKR 5.78. PARQ has been a consistent contributor to TILEs performance in FY 2015,

pushed by subsidiary Swisstek Aluminum. PARQ contributed LKR 111mn for FY 2015

(+112.6% YoY). However, revenue for the year was a modest 5.1% (FY 2015) on the back of

intense competition encountered in both local and export sales. We feel TILE would grow as

a proxy to national growth and more to workers remittances. We have arrived at a TP of

LKR 126 with a total return of LKR 131 (+11.9% to CMP) and maintain BUY.

Local sales are still key and will do so in the forecast period

Local sales continued to dominate TILE revenue with a contribution of 96% for FY 2015. How-

ever, the growth in local sales has contracted since last year, from 12.7% YoY in FY 2014 to

4.4% YoY in FY 2015. Despite intense competition TILE has successfully retained its market

share at 23% in FY 2015. Focus on brand building and loyalty schemes such as Tiler Club and

Lanka Tiles Plus Schemes has gained the TILE brand much popularity during the year. The com-

pany intends on targeting 4 new branches each in FY 2016 and FY 2017 respectively. Export

sales grew 4.1% YoY to LKR 243mn in FY 2015. However, growth in sales and revenue was con-

stricted due to certain delays in exports and a decline in the Australian forex market. TILE

would continue to focus on export performance going forward.

Margins supported by lower costs

EBIT margins for the quarter increased to 25.7% (Q4 FY 15) from 17.7% in Q4 FY 14. The growth

was supported by a 8.2% YoY decline in CoGS. Overall EBIT margin improved during the year

owing to the continuous focus on cost reduction and lower global energy prices in FY 2015.

However, we expect admin costs to escalate on the back of aggressive marketing by the com-

pany. The reduction in gearing from 26% in FY 2014 to 15% in FY 2015 resulted in lower finance

cost, thereby improving net profit margins to 15.7% in FY 2015 (FY 2014 - 12.8%). To remain

competitive in the market TILE would continue to focus on energy and general efficiency in

their product lines.

Valuation: 11.9% total upside with forecasted dividend of LKR 4.50

We see TILEs diversity as a positive given how the variations has added to the overall margin

preservation. Based on a DCF valuation we arrived at a TP of LKR 126.04 (+8.0% to CMP). The

counter is trading at a PER of 7.4x FY 2016E.The sector PER and PBV stands at 20.1x and 2.7x as

at 17.07.2015 respectively.

EPS Trend

For analyst certification and other important disclosures, please refer to the Disclosure and

Disclaimer section at the end of this report.

Source: Company data and BRS Research

TILE Price Vs ASPI Movement

Head of Research- Nikita Tissera

Asst. Manager - Nusrath Mohideen

Market cap (LKR mn) 6,191

Market cap (USD mn) 46

Outstanding equity shares (mn) 53.1

Public Holding (%) -Mar 15 29.15%

52-week High/Low (LKR) 119.40/87.00

YTD ASPI return (%) -3.73%

YTD Stock return (%) 6.09%

Beta 0.94

All figures in LKR (mn) 2012 2013 2014 2015 2016E 2017E

Revenue 3,567 4,559 5,091 5,350 5,705 6,047

Revenue growth (%) 18.8% 27.8% 11.7% 5.1% 6.6% 6.0%

Gross profit 1,145 1,305 1,639 1,928 2,071 2,176

EBIT recurring 760 787 900 980 1,014 1,058

EBIT margin (%) 21.3% 17.3% 17.7% 18.3% 17.8% 17.5%

Profit attributable to equity holders 598 632 652 839 842 864

BRS EPS Adjusted (LKR) 11.28 11.92 12.29 15.82 15.87 16.28

NAV per share (LKR) 52.25 59.67 66.88 77.40 88.77 100.55

DPS (LKR) 4.00 4.10 4.00 4.50 4.50 4.50

Dividend yield (%) 6.1% 5.9% 5.0% 3.9% 3.9% 3.9%

P/E (x) 5.8 x 5.8 x 6.5 x 7.3 x 7.4 x 7.2 x

P/BV (x) 1.2 x 1.2 x 1.2 x 1.5 x 1.3 x 1.2 x

ROE % 26.9% 21.3% 19.4% 21.9% 19.1% 17.2%

Debt/equity (%) 24.7% 44.0% 35.3% 18.1% 16.8% 15.6%

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

20

40

60

80

100

120

140

14-Jul-13 14-Jan-14 14-Jul-14 14-Jan-15 14-Jul-15

LKR

TILE ASPI

4

6

8

10

12

14

16

18

2012 2013 2014 2015 2016E 2017E

LKR

CMP (LKR) 116.70

Intrinsic value (LKR) 126.04

DPS (LKR) 4.50

Target price based on total return (LKR) 130.54

Valuation method DCF

Total return % 11.9%

Rating Buy

Lanka Floortiles PLC (TILE)

Company profile

Company Information Note

20 July 2015

Source: TILE Annual Reports and BRS Research

65, Braybrooke Place, Colombo 2, Sri Lanka

[email protected], +94 11 5220200

Lanka Floortiles PLC (TILE) is engaged in the manufacture

and sale of glazed ceramic floor tiles. The ownership of

the company which belonged to the CT Holdings group

under its subsidiary Lanka Ceramics (CERA) was divested

(76.11%) to Royal Ceramics Lanka PLC (RCL) on the 6th

of

May 2013.

3,567

6,047

28%

12% 5%

7% 6%

2012 2013 2014 2015 2016E 2017E 2017E

Revenue LKR'mn % Growth (2012-2017E)

505

598 6% 3%

29% 0.28% 3%

2012 2013 2014 2015 2016E 2017E 2017E

Profit attributable to equity holders LKR'mn Growth

(2012-2017E)

864

Year Ending 31 March 2012 2013 2014 2015 2016E 2017E

Summary Information

BRS EPS (LKR) adjusted 11.28 11.92 12.29 15.82 15.87 16.28

BRS EPS growth (%) 18.5% 5.7% 3.1% 28.7% 0.3% 2.6%

P/E (x) 5.8 x 5.8 x 6.5 x 7.3 x 7.4 x 7.2 x

Reported EPS (LKR) 11.28 11.92 12.29 15.8 x na na

P/E on reported EPS (x) 5.8 x 5.8 x 6.5 x 7.3 x na na

Sector P/E (x) 17.3 x 10.2 x 13.6 x 21.1 x na na

NAV per share LKR adjus ted 52.25 59.67 66.88 77.40 88.77 100.55

P/BV (x) 1.2 x 1.2 x 1.2 x 1.5 x 1.3 x 1.2 x

Sector P/BV (x) 1.0 x 1.7 x 1.8 x 2.6 x na na

DPS LKR 4.00 4.10 4.00 4.50 4.50 4.50

Dividend yie ld (%) 6.1% 5.9% 5.0% 3.9% 3.9% 3.9%

FCFF (LKR mn) (237) (191) 437 1,559 570 772

FCFE (LKR mn) 199 125 164 1,165 569 759

CFPS LKR (3.34) (1.71) (1.34) 17.43 4.35 6.99

P/CFPS (x) nm nm nm 6.6 x 26.8 x 16.7 x

Mkt price 65.10 69.50 79.80 115.00 116.70 116.70

Weighted a vera ge sha res (mn) 53.1 53.1 53.1 53.1 53.1 53.1

Average mkt ca p (LKR mn) 3,454 3,687 4,233 6,101 6,191 6,191

Enterpri s e value (LKR mn) 3,842 4,729 5,102 5,505 5,313 4,887

EV/Sa les 1.1 x 1.0 x 1.0 x 1.0 x 0.9 x 0.8 x

EV/EBITDA 4.3 x 4.9 x 4.7 x 4.6 x 4.4 x 3.9 x

Income Statement (LKR mn)

Revenue 3,567 4,559 5,091 5,350 5,705 6,047

Gross profi t 1,145 1,305 1,639 1,928 2,071 2,176

EBITDA recurring 895 967 1,093 1,194 1,199 1,241

Deprecia tion a nd a morti s ation (134) (180) (193) (214) (185) (183)

EBIT recurring 760 787 900 980 1,014 1,058

Interest income - - - 24 - -

Interest expense (29) (120) (126) (49) (46) (57)

Share of a ssocia tes /(los s) 10 9 52 111 97 99

Exceptiona ls/non-recurrings - - - - - -

Ta x expense (142) (75) (174) (226) (224) (237)

Net income 598 632 652 839 842 864

Minori ties & preference dividends - - - - - -

Profi t attributable to equi ty holders 598 632 652 839 842 864

Statement of Financial Position (LKR mn)

Ca sh a nd ca sh equiva lents 35 81 75 847 1,078 1,448

Inventories 782 1,464 1,474 1,137 1,516 1,607

Trade receiva bles 690 1,006 1,148 899 1,137 1,339

Investment property - - - - - -

Long term investments - - - - - -

Fixed as sets 2,260 2,486 2,584 2,533 2,520 2,488

Goodwi l l - - - - - -

Inta ngible as sets - - - - - -

As socia tes 261 270 309 493 590 690

Tota l ass ets 4,284 5,539 5,725 6,012 6,944 7,675

Trade paya bles 575 659 464 536 695 669

Interest bearing debt -short term 305 876 764 361 382 404

Interest bearing debt -long term 379 517 488 384 407 430

Tota l l ia bi l i ties 1,512 2,374 2,177 1,906 2,234 2,341

Shareholders equi ty 2,772 3,166 3,548 4,106 4,709 5,334

Minori ties - - - - - -

Tota l equi ty 2,772 3,166 3,548 4,106 4,709 5,334

Net debt (cas h) 649 1,312 1,177 (102) (288) (614)

Tota l capi ta l employed 3,456 4,559 4,800 4,851 5,499 6,169

Casf flow (LKR mn)

Ca sh flow from operations 260 125 567 1,685 596 716

Net working capi tal (412) (687) (348) 573 (458) (318)

Ca pi tal expendi ture (659) (408) (237) (129) (171) (151)

Free cas h flow (399) (283) 330 1,556 425 564

Investing ca sh flows (837) (404) (237) (197) (171) (151)

Equi ty capi tal - - - - - -

Dividends pa id (53) (239) (244) (212) (239) (239)

Net borrowings 462 427 (157) (349) 45 45

Net cas h flow (177) (91) (71) 925 231 371

Key ratios

Revenue growth (%) 18.8% 27.8% 11.7% 5.1% 6.6% 6.0%

EBIT growth (%) 7.7% 3.5% 14.4% 8.8% 3.5% 4.3%

Gross profi t margin (%) 32.1% 28.6% 32.2% 36.0% 36.3% 36.0%

EBITDA margin (%) 25.1% 21.2% 21.5% 22.3% 21.0% 20.5%

EBIT margin (%) 21.3% 17.3% 17.7% 18.3% 17.8% 17.5%

ROCE % 28.7% 19.6% 19.2% 20.3% 19.6% 18.1%

ROE % 26.9% 21.3% 19.4% 21.9% 19.1% 17.2%

Pa yout ra tio (%) 35.5% 34.4% 32.5% 28.4% 28.4% 27.6%

Debt/equi ty (%) 24.7% 44.0% 35.3% 18.1% 16.8% 15.6%

Net debt/equi ty (%) 23.4% 41.5% 33.2% -2.5% -6.1% -11.5%

Gea ring (%) 19.8% 30.6% 26.1% 15.3% 14.4% 13.5%

Interest cover (x) 26.5 x 6.5 x 7.1 x 19.9 x 22.1 x 18.5 x

1,058

760 3%

14%

9% 4%

4%

2012 2013 2014 2015 2016E 2017E 2017E

EBIT LKR'mn Growth (2012-2017E)

www.bartleetreligare.com

Based on a free cash flow valuation we have arrived at a target price of LKR

126.04 Our valuations are based on the following estimates:

WACC 12.0%

Terminal growth rate 1.5%

Risk free rate 8.24%

Beta 0.94 (based on TILE vs. ASPI share price movement)

Equity risk premium- 5%

BRS Equity Research

Local Vs. Export Sales Performance Q4 FY 15

Valuation estimates

Q4 FY 15 Performance

Sensitivity of Target Price to Risk Free Rate

3% 3%

97% 97%

0%

20%

40%

60%

80%

100%

120%

Q4 FY 14 Q4 FY 15

Local Sales Export Sales

All figures in LKR 'mn Q4 FY 15 Q4 FY 14

Revenue 1,426.8 1,392.7

YoY Growth % 2.4% 11.7%

QoQ Growth % -10.4% -5.5%

Gross profit 589.7 480.7

Gross profit margin % 41.3% 34.5%

Recurring net profit to equity holders 305.9 199.8

YoY Growth % 53.1% -22.6%

QoQ Growth % 21.4% 1.5%

BRS EPS as adjusted (LKR) 5.77 3.77

NAV per share (LKR) 77.40 66.88

Net debt/ equity (%) -2.5% 33.2%

Gearing (%) 15.3% 26.1%

EV/Sales (x) 0.9 1.0

EV/EBITDA (x) 4.2 4.5

Risk free rate

126.04 7.00% 7.50% 8.24% 8.50% 9.00% 9.50%

1.0% 136.35 130.51 122.69 120.15 115.55 111.27

Terminal growth 1.5% 140.70 134.41 126.04 123.33 118.43 113.89

2.0% 145.53 138.73 129.72 126.82 121.58 116.74


Financial Analysis

BRS Equity Research

Income Statement- Lanka Floortiles PLC

Year Ending 31st March

LKR mn 2012 2013 2014 2015 2016E 2017E

Revenue net of tax 3,567 4,559 5,091 5,350 5,705 6,047

YoY growth % 18.8% 27.8% 11.7% 5.1% 6.6% 6.0%

Cost of sales (2,422) (3,253) (3,452) (3,422) (3,634) (3,871)

YoY growth % 25.4% 34.3% 6.1% -0.9% 6.2% 6.5%

Gross profit 1,145 1,305 1,639 1,928 2,071 2,176

YoY growth % 14.0% 25.5% 17.6% 7.4% 5.1% 0.0%

Gross profit margin % 32.1% 28.6% 32.2% 36.0% 36.3% 36.0%

Other operating income 3 38 33 25 27 31

SG & A Expenses (388) (556) (772) (972) (1,084) (1,149)

YoY growth % 1.4% 43.3% 38.8% 26.0% 11.5% 6.0%

Depreciation and amortisation (134) (180) (193) (214) (185) (183)

EBIT including non-recurring items 760 787 900 980 1,014 1,058

Non-recurring items - - - - - -

EBIT excluding non-recurring items 760 787 900 980 1,014 1,058

YoY growth % 7.7% 3.5% 14.4% 8.8% 3.5% 4.3%

EBIT Margin % 21.3% 17.3% 17.7% 18.3% 17.8% 17.5%

EBITDA excluding non-recurring items 895 967 1,093 1,194 1,199 1,241

YoY growth % 4.7% 8.1% 13.0% 9.2% 0.5% 3.5%

EBITDA Margin % 25.1% 21.2% 21.5% 22.3% 21.0% 20.5%

Finance cost (30) (82) (126) (25) (46) (57)

Share of results of associates 10 9 52 111 97 99

Profit before tax 741 715 827 1,065 1,065 1,100

Taxation (142) (75) (174) (226) (224) (237)

Net profit 598 632 652 839 842 864

YoY growth % 18.5% 5.7% 3.1% 28.7% 0.3% 2.6%

Net profit margin % 16.8% 13.9% 12.8% 15.7% 14.8% 14.3%

Reported EPS (Note 1) 11.28 11.92 12.29 15.82 15.87 16.28

BRS EPS adjusted (Note 2) 11.28 11.92 12.29 15.82 15.87 16.28

Source: Company Financial Reports and BRS Equity Research

Note 1: Based on earnings as reported (unadjusted for non-recurring) share data adjusted for splits

Note 2: EPS adjusted for share split, consolidations and non recurring information


BRS Equity Research

Financial Analysis

Statement of Financial Position- Lanka Floortiles PLC

As at 31st March

LKR mn 2012 2013 2014 2015 2016E 2017E

ASSETS

Non- current assets

Property, plant and equipment 2,260 2,486 2,584 2,533 2,520 2,488

Capital work in progress 87 65 24 23 23 23

Intangible assets - - - - - -

Investments in subsidiaries - - - - - -

Investments in associates 261 270 309 493 590 690

Goodwill - - - - - -

Related party loans 166 166 110 80 80 80

Finance lease assets - - 1 - - -

Total non current assets 2,774 2,988 3,028 3,130 3,213 3,281

Current assets

Inventories 782 1,464 1,474 1,137 1,516 1,607

Trade and other receivables 690 1,006 1,148 899 1,137 1,339

Short term investments 4 0.17 - - - -

Cash and cash equivalents 35 81 75 847 1,078 1,448

Total current assets 1,510 2,551 2,697 2,883 3,730 4,394

Total assets 4,284 5,539 5,725 6,012 6,944 7,675

EQUITY

Stated capital 901 901 901 901 901 901

Reserves 1,411 1,804 2,647 2,745 3,348 3,973

Amalgamation reserve 460 460 - 460 460 460

Total equity 2,772 3,166 3,548 4,106 4,709 5,334

LIABILITIES

Non-current liabilities

Borrowings 379 517 488 384 407 430

Deferred income tax liabilities 179 173 379 361 382 404

Retirement benefit obligations 63 78 88 111 122 132

Total non current liabilities 621 768 917 870 904 938

Current liabilities

Trade and other payables 575 659 464 536 695 669

Current income tax liabiities 11 70 33 140 253 329

Borrowings 219 508 379 361 382 404

Bank overdraft 86 368 385 - - -

Dividends payable - - - - - -

Total current liabilities 891 1,606 1,260 1,036 1,330 1,403

Total liabilities 1,512 2,374 2,177 1,906 2,234 2,341

Total equity and liabilities 4,284 5,539 5,725 6,012 6,944 7,675



BRS Equity Research

Financial Analysis

Cashflow Statement - Lanka Floortiles PLC

Year Ending 31st March

LKR mn 2012 2013 2014 2015 2016E 2017E

Cash flows from operating activities

EBIT 760 787 900 980 1014 1058

Depreciation 134 180 193 214 185 183

Gratuity charge 9 1 9 15 16 16

Profit/loss on disposal of property, plant and equipment (2) (4) 3 (1) - -

Provision for slow moviong inventories (31) - - 5 - -

Proportionate interest of the unrealized profit on SCP - - - - - -

and SAL inventories held by LFP 5 - - - - -

Reversal of provision for spares - - - - - -

Exchange loss from foreign currency loan - (12) - - - -

Operating profit before working capital changes 876 951 1,105 1,227 1,215 1,257

Changes in working capital (412) (687) (348) 573 (458) (318)

Cash generated from operations 464 264 758 1800 757 939

Interest paid (29) (120) (150) (49) (46) (57)

Interest received 2 - - 21 - -

Gratuity paid (2) - - (7) (5) (6)

Tax paid (174) (19) (41) (81) (110) (160)

(203) (139) (191) (115) (161) (223)

Net cash generated from operating activities 260 125 567 1,685 596 716

Cash flows from investing activities

Purchase of property, plant and equipment (659) (408) (237) (129) (171) (151)

Proceeds from sale of property, plant and equipment 37 4 - 2 - -

Purchase of shares in associates - - - - - -

Proceeds from sale of shares in associates - - - - - -

Expenditure incurred on capital work in progress (215) - - (35) - -

Purchance of shares on rights issue - - - - - -

Net cash generated from/(used in) investing activities (837) (404) (237) (197) (171) (151)

Cash flow from financing activities

Return from rights issue - - - - - -

Expenses on reserve capitalization - - - - - -

Dividends paid (53) (239) (244) (212) (239) (239)

Repayment of finance lease (10) - - (3) - -

Proceeds from borrowings 558 948 600 335 200 200

Repayment of borrowings (96) (521) (757) (683) (155) (155)

Net cash generated from/(used in) financing activities 400 188 (401) (563) (194) (194)

Net increase/decrease in cash and cash equivalents (177) (91) (71) 925 231 371



BRS Equity Research

Top 20 Shareholders as at 31st March 2015

Source: Q4 FY 15 TILE statements

Name of shareholder No. of shares %

1 Lanka Walltiles PLC 36,189,195 68.22%

2 Employees Provident Fund 5,295,602 9.98%

3 Mellon-Frontaura Global Frontier Fund LLC 3,255,228 6.14%

4 Royal Ceramics Lanka PLC 1,388,481 2.62%

5 Bank of Ceylon No.1 Account 973,200 1.83%

6 Mr. K.R. Kamon 537,628 1.01%

7 Mr. A. A. Page 433,939 0.82%

8 Rubber Investment Trust Limited A/C NO 1 259,765 0.49%

9 Pinnacle Trust (Pvt) Ltd 214,800 0.41%

10 Deutsche Bank AG-Comtrust equity fund 138,631 0.26%

11 The Sri Lanka Fund 131,267 0.25%

12 Aruna Enterprises (Pvt) Ltd 128,500 0.24%

13 Mr.S.M. Fernando 126,446 0.24%

14 Mrs.A.A. Merchant 125,000 0.24%

15 HSBC Intl nom Ltd - USB Ag Zurich 115,164 0.22%

16 Mr.Y.H. Abdulhessein 104,833 0.20%

17 Mr.S.N. Kumar 100,600 0.19%

18 Mr.H.N. Esufally 87,240 0.16%

19 Mr. M A H Esufally 87,217 0.16%

20 Mrs. B C Sansoni 63,000 0.12%


BRS Equity Research

DISCLAIMER

Important Disclosures

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Stock Ratings

Recommendation

Expected absolute returns (%) over 12 months

Buy

More than 10%

Hold

Between 10% and 0

Sell

Less than 0%

Expected absolute returns are based on the share price at market close unless otherwise stated. Stock recommendations are based on absolute upside (downside)

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Lanka Floortiles Plc - (Tile) - q4 Fy 15 - Buy

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