Nestlé Lanka PLC (NEST.N0000) - Colombo Stock Exchange · PDF fileA capital market...

Sri Lanka | Food, beverage and tobacco EQUITY RESEARCH

Initiation of coverage 27 February 2014

Nestlé Lanka PLC (NEST.N0000)

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A capital market development initiative by the Colombo Stock Exchange in association with Copal Amba

Milking growth in consumerism Nestlé Lanka PLC (NEST) is the Sri Lankan subsidiary of the global fast moving consumer goods (FMCG) giant Nestlé S.A. It is the third-largest company listed on the Colombo Stock Exchange (CSE) by market capitalization. NEST manufactures and distributes a range of culinary, dairy and beverage products. We believe the country’s strengthening macro fundamentals should support further revenue growth and forecast a 9.3% revenue CAGR over 2014E-2016E, underpinned by growing consumerism and purchases of convenience products. However, escalating cost pressures, particularly from rising commodity prices, may hinder any significant margin improvement; we expect NEST’s EBITDA margin to expand 95bps to 16.1% in 2016E. NEST currently enjoys a zero long-term debt position, which allows it to finance further capex outlays if required. Our valuation analysis uses two P/E-derived ranges, one based on NEST’s historical forward P/E range and the second using peer P/E multiples, to arrive at a combined valuation range of LKR1,725-1,955.

Improving macro environment and growing consumption to drive revenue. We

expect NEST to grow its revenue at a 9.3% CAGR through 2016E, reaching LKR40.3bn. We anticipate the domestic food and beverage (F&B) sector to gain traction as disposable income growth, increasing consumerism and the rise of modern retailing spur demand for packaged and ready-to-consume food and beverages. NEST’s firmly established position in the local food retail sector, its island-wide distribution network and optimized product range that caters to local tastes and preferences should all continue to support the company’s revenue growth.

Rising costs may restrict further substantial margin expansion. In 2013, NEST

posted a 66bps YoY improvement in its EBITDA margin to 15.2%, primarily on the back of favorable global commodity prices and sourcing its milk requirements, a key input for NEST, locally. However, we believe the soft global commodity cycle for F&B industries is bottoming out, with the major commodities relevant for NEST showing signs of a recovery through 2014E-2016E. We also believe the company’s local sourcing strategy for fresh milk may not yield a significant further margin upside, with demand set to outstrip supply in the medium term. We forecast that the EBITDA margin should grow modestly, expanding 95bps to 16.1% in 2016E.

Low debt allows for future capex outlays; dividend returns undiminished. NEST

has historically generated strong free cash flow (FCF) (FCF to net profit [%] has averaged 83% over the past five years) and has managed to operate free of any long-term debt, despite significant capex during 2011 and 2012. The company has also maintained a payout ratio of around 99% over 2009-2013, which we assume to continue at 98% through 2016E. We expect NEST to grow FCF at a 9.0% CAGR through 2016E, while the company’s dividend yield reaches 4.2% in 2016E at its current share price.

We establish a valuation range of LKR1,725-1,955 for NEST, compared with the current share price of LKR2,017. We analyzed NEST’s historical P/E range to show

that the company currently trades at a 2014E P/E multiple of 28.8x – an 8% premium to its two-year historical average multiple of 26.6x. We considered optimistic and conservative scenarios to arrive at a valuation range of LKR1,769-1,955. We also used the average P/E multiple of a group of close peers to arrive at a range of LKR1,725-1,906. When considering our valuation range, it is important to take into account NEST’s significant share price rally over the recent past – the stock’s price has appreciated 126% in the past two years as investors continue to view it as a strong dividend play and foreign buying interest drove up the price.

Key statistics CSE/Bloomberg tickers

Share price (26 Feb 2014)

No. of issued shares (m)

Market cap (USDm)

Enterprise value (USDm)

Free float (%)

52-week range (H/L)

Avg. daily vol. (shares,1yr)

Avg. daily turnover (USD

‘000)

NEST.N0000/NEST SL

LKR2,017

54

826

824

9%

LKR2,545/1,617

2,883

46

Source: CSE, Bloomberg Note: USD/LKR=129.8 (average for the one year ended 26 February 2014)

Share price movement

Source: CSE, Bloomberg

Share price performance

3m 6m 12m

NEST 4% -7% 25%

S&P SL 20 1% -4% -1%

All Share Price Index 2% 0% 3%


Summary financials

LKRm (year end 31 December) 2013 2014E 2015E

Revenue 30,913 33,777 36,905

EBITDA 4,686 5,259 5,848

EBIT 4,135 4,704 5,289

Net profit 3,305 3,757 4,186

Recurrent EPS (LKR) 61.51 69.93 77.92

ROE (%) 82.8 88.3 96.6

P/E (x) 34.2 28.8 25.9

Source: NEST, Copal Amba estimates

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NEST ASPI S&P SL 20

Nestlé Lanka PLC

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Table of Contents

NEST’s revenue to grow at a 9.3% CAGR over 2014E-2016E, driven by improving macro factors ................................... 3

Disposable income and consumption levels are on the rise ................................................................................................................. 3 NEST has established a strong position in the domestic food retail sector .......................................................................................... 4 Product portfolio geared to changing consumer demand ..................................................................................................................... 4 Downside risks to NEST’s forecast revenue ......................................................................................................................................... 7

EBITDA margin to expand 95bps to 16.1% in 2016E, limited by escalating cost concerns ................................................ 8

Increasing cost pressures may weigh on medium-term profit potential ................................................................................................ 8 Downside risks to NEST’s margin ...................................................................................................................................................... 11

Net cash position could fund future expansion while strong FCF sustains high dividend payout ..................................... 12

We arrive at a valuation range of LKR1,725-1,955 for NEST shares ................................................................................ 14

P/E analysis using historical average yields a valuation range of LKR1,769-1,955 per share ............................................................ 14 P/E-based relative valuation against peers leads to a valuation range of LKR1,725-1,906 ................................................................ 16

Share price performance .................................................................................................................................................... 18

Earnings release focus areas ............................................................................................................................................. 19

Appendix 1: Company overview......................................................................................................................................... 20

NEST’s business structure ................................................................................................................................................................. 20 Management strategy, transparency and governance ........................................................................................................................ 21 Shareholding structure ....................................................................................................................................................................... 21 Board of directors ............................................................................................................................................................................... 22

Appendix 2: SWOT analysis .............................................................................................................................................. 23

Appendix 3: Key financial data ........................................................................................................................................... 24

Fact Sheet .......................................................................................................................................................................... 26

Nestlé Lanka PLC

Nestlé Lanka PLC

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NEST’s revenue to grow at a 9.3% CAGR over 2014E-2016E,

driven by improving macro factors

We forecast NEST to post a revenue CAGR of 9.3% over 2014E-2016E to reach LKR40.3bn in 2016E, slightly below its 2009-2013 CAGR of 10.1%. We expect NEST’s historical top-line momentum to continue throughout our explicit forecast period, spurred by growing consumption of packaged food and beverage products on the back of rising disposable income levels. We believe the company is also optimizing its product range to meet the growing consumer appetite for convenience and wellness products and focusing more on its high-revenue-generating products.

Figure 1: NEST’s top line should grow at a 9.3% CAGR over 2014E-2016E, beating forecasts for macro growth

Source: World Bank, Central Bank of Sri Lanka (CBSL), Copal Amba estimates

Note: NEST revenue for 2013 is an actual figure

Disposable income and consumption levels are on the rise

We believe that the expected uptake in the Sri Lankan macroeconomic environment, following a period of sluggish consumer sentiment, should bode well for domestic F&B manufacturers given the potential boost in consumer demand. With a stable average economic growth rate of 6.7% forecast by the World Bank in the medium term and inflation to remain around 7%, disposable income should continue to grow at moderate levels.

Therefore, from a macroeconomic perspective, consumption and disposable income levels are steadily growing in Sri Lanka; in fact, per capita sales in the country for NEST specifically are higher than in regional peers such as India and Bangladesh. However, this growth could be tempered by consumer spending cutbacks mainly due to recent price hikes on widely-consumed food items, fuel and electricity.

Expenditure on food, beverages and tobacco in Sri Lanka recorded a 16.6% CAGR over 2007-2012 to LKR610.9bn, according to the CBSL, while overall private consumption grew 15.5% YoY in 2012, slowing from 25.1% in 2011; food, beverages and tobacco constitute the largest consumption expenditure. We believe that growth in the segment will be driven by the evolving consumption patterns and increasing consumerism of the middle- and upper-income demographic, who are progressively brand conscious, buy more convenience and processed foods, and continually demand better quality. Rapidly changing lifestyles that are becoming increasingly fast-paced and constrained for time are also driving the increased demand for and consumption of instant food and ready-to-drink beverages such as NEST’s Maggi noodles and Milo malt drinks.

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Increasing disposable income and growing consumerism to drive top-line growth

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NEST has established a strong position in the domestic food retail

sector

The Sri Lanka food retail sector is dominated by traditional trade outlets, such as local grocers, outdoor markets and roadside stalls, which account for about 85% of the market. These informal stores are the main distribution outlets for retailers such as NEST, particularly in smaller, less urbanized cities and towns. Organized food retail (i.e., supermarkets), on the other hand, is accreting market share, albeit slowly, by operating a low-margin, high-volume model, enticing customers with a larger range of products and a more comfortable shopping environment. This form of food retail is forecast to continue expanding its reach and establishing a presence in suburban and developing cities, while encouraging the increasing use of packaged convenience items, which are the mainstay of its shelf offerings.

NEST holds a key advantage in that its products can be found in both forms of retail outlets, small mom-and-pop-type grocery stores and in large supermarkets, which allows the company and its brands to hold a strong presence island-wide and gives it access to the full range of consumer demographics. Furthermore, the majority of NEST’s products is meant for, or could be used on, a daily or fairly regular basis, making them almost a staple in the average consumer’s shopping basket.

Figure 2: Sri Lanka’s lower modern food retail penetration implies significant growth potential for branded products

Source: World Bank, JP Morgan, PWC

Product portfolio geared to changing consumer demand

As mentioned previously, food and beverage manufacturers have witnessed a secular increase in demand from domestic consumers for convenience products, driven by changing lifestyles and rising health consciousness. To capitalize on these trends, NEST is continuing to invest heavily in R&D in order to develop such products, in addition to spending on marketing to build awareness of its new offerings.

Nestlé S.A., NEST’s parent company, is also boosting investments and product development in Asia, including Sri Lanka, to help create region-specific offerings in a bid to stimulate sales. The attention being given to local tastes and preferences reflects surging regional demand for packaged foods. Through its position as a nutrition and wellness company and its initiatives to introduce products that are healthier for consumers, NEST has consistently capitalized on this health trend.

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NEST has established a widespread presence in both organized retail outlets such as supermarkets and in smaller grocery stores

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Figure 3: NEST’s main product lines and brands

Product category Brands

Food

Maggi - noodles Maggi - coconut powder Maggi - soup Maggi - seasoning powder Cereals Koko Krunch Corn Flakes Milo Honey Stars Chocolate and confectionery Kit Kat Polo

Beverages Nestomalt - malt drink Milo - energy drink Nescafé - coffee

Dairy Nespray - milk powder Milkmaid - sweetened condensed milk Coffee-mate - powdered non-dairy creamer Shaktigen - glucose drink

Source: NEST

In 2013, the company introduced multiple products to ensure that its product portfolio continued to be relevant to local taste buds and changing lifestyles. Products such as Nangrow (a premium growing-up milk for toddlers), Shaktigen (a locally formulated milk-based glucose drink) and Maggi chicken flavored seasoning were all aimed at satisfying the demand for nutritious but convenient beverages and food.

The company is assessing and making progress in improving the nutritional value of its products through methods such as reducing sugar and sodium content. NEST is also focused on identifying nutritional gaps in consumers’ diets and fortifying its products with essential micronutrients such as iron, vitamin A and zinc as a measure to lower micronutrient deficiencies in the country.

NEST regularly enhances its product portfolio with new products or flavors aimed at local palettes and lifestyles

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Price comparison shows NEST’s products are competitively priced

Figure 4 shows a brief comparison of NEST’s best-known and highest volume brands and products, versus several popular substitutes distributed by peers in the domestic market.

Figure 4: Price comparison across key product categories

Category Nestlé product Price (LKR) Others Manufacturer/importer Price (LKR)

Malt powder Nestomalt 285 Viva GSK 285

(400g) Milo 325 Horlicks GSK 350

Ovaltine (450g) C.W. Mackie 750

Ready-to-drink beverage Nespray (milk shake) 40 Daily Activ (milk) Lanka Dairies 40

(180-200ml) Milo (malt drink) 40 Ambewela (milk) Lanka Milk Foods 40

Nescafé (coffee drink) 45 Kotmale Chox (malt drink)

Kotmale 40

Smak (fruit drink) Country Style Foods 45

Kist (fruit drink) Cargills 45

Coffee grounds Nescafé 675 Bru Unilever 550

(100g jar)

Milk powder Nespray 325 Anchor Fonterra 386

(400g) Ratthi Fonterra 386

Maliban Maliban 400

Candy Sha Lanka Trading 386

Infant formula Lactogen 440 Cerelac Cerelac 355

(400g) Pedia Pro Anchor 625

Noodles Maggi 47 Prima Prima Group 48

(individual packet)

Coconut milk powder

(300g)

Maggi 295 Renuka Renuka Agri Foods 300

Source: keellssuper.com

Prices are as of 25 February 2014

As illustrated in Figure 4, the majority of NEST’s products are quite competitively priced when compared with close substitutes. However, NEST has in the past not shied away from increasing prices of its products in order to boost revenue and cushion margins from rising costs. In February 2014, the government allowed an increase in the price of powdered milk by 19% – an increase of LKR61 and LKR152 for 400g and 1kg packs, respectively – giving NEST the option to raise the price of Nespray milk powder if the company requires. In addition, the price of Nestomalt, a malt-based beverage and one of NEST’s highest-grossing products, was increased in 2Q13 followed by another hike in 4Q13.

Additionally, exports make up a sizeable component of NEST’s top line; export revenue accounted for about 12% of NEST’s revenue in 2012, growing at a 12.1% CAGR over 2009-2012. The company’s main export is its locally manufactured Maggi coconut milk powder, which is distributed to over 60 countries. We expect exports to continue to grow and make a notable contribution to NEST’s future revenue streams.

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Downside risks to NEST’s forecast revenue

Consumption levels growing sluggishly. NEST’s operational performance is broadly tied to

Sri Lanka’s economic growth, particularly in consumer-related indicators such as disposable income. An unexpected downturn or sustained period of slow economic growth may affect our existing revenue expectations for NEST.

Consumers favoring lower-priced substitutes in the wake of price hikes. While our

sample price comparison in Figure 4 illustrates that NEST’s products are not premium priced compared with close substitutes, the company’s strategy of hiking prices to soften the effect of inflating costs may cause increasingly price conscious consumers to shift to other, lower priced, substitutes. Although, NEST has built strong brand loyalty for many of its products and it may take a notable price differential for consumers to stop buying the company’s offerings, the company may face competition from other FMCG multinationals and local manufacturers of similar products.

Downturn and increased competition in largest export destination countries. Exports

account for 12% of NEST’s total revenue – a notable contribution. The main regions NEST exports to include South Asia, the Middle East and Europe. A dip in consumer sentiment or decline in economic growth in these geographies may translate to reduced demand for NEST’s exported products, thereby adversely impacting revenue growth.

In addition, NEST faces stiff competition in the export of coconut powder from the Philippines and Indonesia – the two largest exporters of the item. The silver lining is that in the event of a downturn in production in the two countries, NEST should be able to capitalize and fill the demand gap. For example, in 2011, coconut production in both countries was significantly affected by inclement weather, allowing NEST to boost its exports and results during the period.

Outbreak of disease. In 2013, the global dairy market was severely impacted by the

dicyandiamide (DCD) and botulism scares surrounding imported milk products, primarily milk powder, from New Zealand. This also affected the domestic market, with almost all brands of milk powder yanked off store shelves while samples were tested and cleared. While we believe the company was not greatly affected, these two scares serve as a possible warning of the impact another scare or disease outbreak could cause for NEST’s operations.

Slower-than-expected growth in consumption is one of the most significant risks NEST faces to its revenue upside potential

Nestlé Lanka PLC

Nestlé Lanka PLC

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EBITDA margin to expand 95bps to 16.1% in 2016E, limited

by escalating cost concerns

We expect NEST to grow its EBITDA margin to 16.1% in 2016E from 15.2% in 2013, driven by the company’s improved product mix and increasing focus on its higher-margin products (mainly in its beverages and food segments). However, NEST continues to face cost pressure from increasing commodity prices and energy costs, which may offset the positive impact from our predicted improved volumes. Further, one of NEST’s main product lines – milk powder – has government-mandated maximum retail prices (MRPs), perhaps limiting the effectiveness of price increases to protect margins. However, as mentioned previously, the government allowed prices to be increased by 19% as recent as February 2014, indicating that these MRPs can be intermittently pushed upwards.

Figure 5: Gross and EBITDA margins to remain stable through 2014E-2016E


Increasing cost pressures may weigh on medium-term profit

potential

NEST has been able to expand its gross margin to 34.5% in 2013, the highest figure posted in the past three years, up 153bps YoY from 33.0% in 2012, mainly supported by enhancing its product mix to focus on higher-margin products, soft commodity prices for its key inputs in the global market and the switch to local sourcing of milk. However, we believe that the latter two factors may not continue to be in NEST’s favor in the medium term. Firstly, global commodity futures prices for sugar, cocoa, milk powder and malt, among NEST’s largest inputs, indicate a bottoming out of the previous soft cycle. When we examine the futures prices for these commodities, it can be observed that prices for all the commodities except cocoa show a modest forecast increase over 2014E-2017E, in contrast to the past 18-24 months, once again pressuring margins in the medium-term. Secondly, the majority of the tailwinds from local sourcing of milk are already accounted for, with limited potential for significant improvement in the short term, in our view, due to the capacity restraints in domestic fresh milk supply.

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Prices for NEST’s main raw material inputs show a modest upward trend through 2014E-2017E, indicating possible margin pressure in the medium term

We believe NEST may have limited potential for further significant margin expansion, mainly due to rising commodity prices

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Figure 6: Sugar prices – Historic Figure 7: Sugar prices – Forecast

Source: Bloomberg Source: Bloomberg

Figure 8: Cocoa prices – Historic Figure 9: Cocoa prices – Forecast


Figure 10: Wheat prices – Historic Figure 11: Wheat prices – Forecast


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Figure 12: Whole milk powder prices have also been on the rise from the dip in 2012

Source: Bloomberg

When we look at milk specifically, a key input for many of NEST’s key products, the company has progressively been reducing the amount of fresh milk it imports and now sources its entire requirement locally, contributing to the improved margin posted throughout 2013. NEST bought 62m liters of local fresh milk in 2013, an increase of 15% YoY and compared to 30-35m liters five years ago. This strategy has helped the company somewhat shield itself from volatility in the global dairy industry, particularly in regard to milk powder prices; milk powder imports to Sri Lanka are subject to high taxes in a bid to limit the amount being imported, and the price of milk powder sold in the local market is regulated by the government. NEST’s brand of powdered milk, Nespray, is believed to hold 8% of domestic market share, behind New Zealand dairy giant Fonterra’s Anchor and Ratthi brands (60%) and Sri Lanka-based Lanka Milk Foods PLC’s Lakspray (12%).

However, the supply of local fresh milk is a concern given NEST’s and other peers’ growing requirements and also due to the increased efforts in the country to create awareness of the benefits of fresh milk consumption over powdered milk. We believe that in the medium term, demand for fresh milk in the local market may outweigh domestic supply, exerting upward pressure on prices for local fresh milk. The national requirement for fresh milk is about 1.7m liters daily, although only 390,000 liters are produced domestically. Additionally, as discussed before, since NEST already sources the entirety of its fresh milk needs from the local market, this may reduce the potential for significant further margin upside.

Another important concern with regard to NEST’s margin is the performance of the Sri Lankan rupee (LKR) against the main currencies the company uses for imports, namely the US dollar (USD), Singapore dollar (SGD) and the Australian dollar (AUD). In the 12 months to date, the LKR has depreciated 3% versus the USD, 1% compared with the SGD, but appreciated 10% against the AUD. If the LKR depreciates significantly against these currencies in the future, this will make imports even more expensive for NEST, translating to weaker margins.

Further, NEST also has to contend with other inflated operating costs, particularly higher fuel and energy tariffs (increased again in April 2013), as well as with the possibility of further hikes due to the high electricity generation costs in the country.

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Figure 13: Sri Lanka energy tariff for industrial users increased in 2012 and 2013 (LKR/unit)

Source: Ceylon Electricity Board

However, we do not expect NEST to see significant erosion in its margin in the medium term, and forecast the EBITDA margin to grow to 16.1% in 2016E compared with 15.2% in 2013. We believe NEST is taking measures to protect its margin, including optimizing its product range to shift focus to and push volumes of its higher-margin items in the beverages and food segments in particular. The company has also enforced price increases for some of its bestselling items such as Nestomalt and Maggi, further bolstering the margin in the face of the above cost pressures.

Downside risks to NEST’s margin

The following risks may also impact our margin forecasts for NEST:

Higher-than-expected commodity price increases. As discussed before, with raw materials

accounting for the majority of NEST’s cost of sales, any higher-than-expected increases in the prices of its key commodity purchases such as milk, sugar and cocoa would almost certainly impact margins. While NEST does have hedging contracts in place to minimize the cost of such an event, NEST’s margin is likely to feel the pinch if prices were to rise considerably.

Hikes in taxes on raw material and other key imports. Several commodities or products

that NEST imports are already taxed by the local government. The risk of these taxes being raised is always present and would adversely impact NEST’s margin, as most of these items are key inputs for the company’s manufacturing process.

Limitations in the supply of domestic milk. While sourcing milk locally has significant cost

benefits and has contributed to NEST’s improved margin in the recent past, the company may face difficulty in procuring the growing quantity of fresh milk it will require due to constraints in local supply on the back of domestic consumer and industrial demand consistently rising. A supply scarcity may result in milk prices increasing, thereby once again pressuring NEST’s margin.

Further depreciation of the LKR versus key foreign currencies. NEST is exposed to

foreign currency risk on import of raw materials and exports of goods for sale, among others. If the LKR depreciates further against these currencies, particularly the USD, SGD and AUD, it may temper margin expansion.

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Steep price increases in NEST’s key raw materials, increased taxes on imports and constraints in the supply of fresh milk locally all pose a potential threat to NEST’s margin

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Net cash position could fund future expansion while strong

FCF sustains high dividend payout

NEST’s balance sheet carries zero long-term debt – a trend we expect to continue – that allows the company to benefit from a low risk profile and leverage if needed to fund its capex plans. In addition, FCF generation also remains favorable, ensuring the high payout ratio of almost 100% can be maintained and that the company will remain a good dividend play; we expect FCF to grow at a CAGR of 9.0% over 2014E-2016E, compared with the historical CAGR of 10.6% over the 2010-2013 period.

Figure 14: NEST’s debt levels have remained steady over the past five years


NEST has not held any long-term debt in its balance sheet throughout the historical period we have considered (since 2008), but instead has financed any significant capital expenditure through internally generated funds and short-term debt. This gives NEST the twofold advantage of having a low credit risk profile as well as the opportunity to leverage its no debt position when considering large investments or capex outflows. NEST’s gearing level (debt/capital) declined to 7.7% at the end of 2013, having averaged 21.6% over the past four quarters.

With regard to NEST’s capex plans, the company announced in late-2010 its intention to spend LKR10bn over the next several years, mainly to expand capacity. As of end-2013, we believe roughly LKR3bn of this amount has already been invested and we expect this figure to rise further by the end of 2014. NEST has tended to space out any significant capex over a period of time in order to better assess the prevailing market conditions and to allow it to source the funds to finance the next capex cycle.

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NEST’s low debt level should allow the company to obtain funding for future investments, while favorable FCF generation ability should help support high dividend payout

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Figure 15: NEST has maintained its high payout, supported by sound FCF, since 2008


NEST is also seen as a good dividend play with payouts averaging around 99% over the past five years; however, the company’s dividend yield slipped to 2.9% in 2013 from 7.2% in 2009 due to the stock’s price appreciation of 394% over the period. We estimate NEST to maintain its payout at 98% throughout our explicit forecast period (through 2016E). Helping NEST maintain this high payout is its favorable FCF generation. NEST has generated an average of about LKR2.3bn in FCF annually in the past three years at an average FCF yield of 2.8%; the yield figure again appears depressed due to the share price rally during the period. We forecast NEST to grow its FCF at a 9.0% CAGR through 2016E, further supporting the company’s ability to sustain its dividend payout.

The above considerations put NEST in a relatively steady position, enabling it to easily finance any further investments. The company could use a combination of internally generated funds and external debt funding, if required, for such investments. With its global brand name and backing from its parent, NEST is in a favorable position to borrow at more attractive rates and with greater ease.

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We arrive at a valuation range of LKR1,725-1,955 for NEST

shares

For NEST, we establish a 12-month valuation range of LKR1,725-1,955, compared with its current share price of LKR2,017, based on our current earnings outlook. We believe NEST’s current price reflects investors’ expectation for sustained relatively high levels of dividend payout, particularly in the backdrop of declining interest rates. Our valuation range analysis is based on two P/E-based relative valuation techniques, one using NEST’s historical forward P/E range and the second using a set of relevant regional peers, and we set out the most important factors that could provide an upside/downside to our valuation range.

Figure 16: Valuation range analysis provides a range of LKR1,725-1,955 (current share price: LKR2,017)

Source: NEST, Bloomberg, Copal Amba estimates

P/E analysis using historical average yields a valuation range of

LKR1,769-1,955 per share

NEST’s 12-month forward P/E has averaged 26.6x over the past two years. The stock currently trades at 28.8x its 12-month 2014E forward EPS (based on our forecasts) – an 8% premium to its two-year historical average.

Figure 17: NEST has traded at a P/E of between 12.0x and 39.0x over the past three years

Source: NEST, Bloomberg

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52-week range

P/E analysis - peer average

P/E analysis - historical average

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500

1,000

1,500

2,000

2,500

3,000

Feb-11 Jul-11 Nov-11 Apr-12 Aug-12 Jan-13 May-13 Oct-13 Feb-14

LKR

12.0x 18.8x 25.5x 32.3x 39.0x MPS

Nestlé Lanka PLC

Nestlé Lanka PLC

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In arriving at our P/E valuation range, we apply two scenarios:

Optimistic scenario: In this scenario, we applied an improved valuation outlook that could stem from a number of positive developments, such as rising levels of consumerism and urbanization leading to an uplift in revenue growth. We apply a 5% premium to the two-year average historical P/E of 26.6x, and arrived at a forward multiple of 28.0x. NEST’s continuing level of high dividend payout could also justify this premium. Applied to our forecast 2014E EPS figure of LKR69.93, this yields a value of LKR1,955 per share.

Conservative scenario: Here we assume a 5% discount to NEST’s P/E average multiple, implying a forward multiple of 25.3x. This could be driven mainly by slower-than-expected or stagnating consumer spending growth weighing down revenue growth. This scenario also accounts for higher-than-anticipated increases in raw material and overhead costs, which would exert pressure on margins. Applying this multiple to our 2014E EPS estimate gives us a value of LKR1,769 per share.

Nestlé Lanka PLC

Nestlé Lanka PLC

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P/E-based relative valuation against peers leads to a valuation

range of LKR1,725-1,906

Figure 18 compares NEST’s historical and forecast P/E multiples relative to its peers which includes FMCG companies in Asia and Nestlé S.A.’s subsidiaries in the Asian region. It is challenging to find a closely comparable local peer for NEST as one of its largest competitors, Fonterra Brands Lanka, the local office of the global dairy giant, is not listed, and other locally listed dairy companies, such as Lanka Milk Foods PLC and Kotmale Holdings PLC, are too small in size comparatively.

Figure 18: NEST trades at a 2014E P/E of 28.8x

Company name

P/E EPS CAGR FCF yield

2011 2012 2013 2014E 2015E 2013-2015E 2011 2012

Nestlé Lanka 17.9x 29.1x 34.2x 28.8x 25.9x 12.5% 2.9% 2.7%

FMCG peers

Unilever Indonesia 34.4x 32.9x 39.3x 36.0x 33.2x 9.8% 2.7% 2.6%

Dutch Lady Milk (Malaysia) 13.9x 24.1x 23.0x 22.1x NA NA 10.2% 6.0%

Indofood Sukses Makmur (Indonesia) 13.1x 15.8x 18.1x 14.6x 12.4x 15.2% 5.1% 5.2%

Mayora Indah (Indonesia) 23.2x 21.0x 28.8x 27.4x 23.2x 17.3% -14.3% 0.7%

NEST peers

Nestlé Malaysia 30.9x 29.1x 28.3x 26.2x 23.7x 8.8% 3.6% 4.4%

Nestlé Indonesia 18.2x 18.6x 20.8x 18.6x 17.2x 5.0% 2.9% 5.5%

Nestlé Pakistan 34.9x 36.6x 58.4x NA NA NA -2.1% -2.7%

Nestlé India 41.1x 45.1x 45.7x 37.0x 31.6x 13.5% -0.9% 1.5%

Mean 26.2x 27.9x 32.8x 26.0x 23.5x 11.6% 0.9% 2.9%

Mean (Asian FMCG peers) 21.2x 23.4x 27.3x 25.0x 22.9x 14.1% 0.9% 3.6%

Mean (Nestlé subsidiaries) 31.3x 32.3x 38.3x 27.2x 24.2x 9.1% 0.9% 2.2%

Median 27.0x 26.6x 28.6x 26.2x 23.4x 11.6% 2.8% 3.5%

High 41.1x 45.1x 58.4x 37.0x 33.2x 17.3% 10.2% 6.0%

Low 13.1x 15.8x 18.1x 14.6x 12.4x 5.0% -14.3% -2.7%

Source: NEST, Bloomberg, Copal Amba estimates

NEST has traded at a premium to the average of the peer group set out in Figure 18 (both FMCG peers and other Nestlé subsidiaries) since 2012. The company currently trades at a 2014E P/E multiple of 28.8x, based on our forecast EPS for 2014E, at an 11% premium to the peer average; most likely due to the share’s significant price rally in the last two years; the stock appreciated 126% in the period driven by increased foreign buying interest and the company being perceived as a strong dividend play by investors. We use the peer average P/E multiple of 26.0x and, as before, apply a 5% premium and 5% discount to account for the optimistic and conservative factors listed above, which yields a range of LKR1,725-1,906.

Nestlé Lanka PLC

Nestlé Lanka PLC

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As NEST is seen as a strong dividend play, we have compared the company to other listed entities on the S&P SL 20 index that also have high payout ratios in Figure 19 below.

Figure 19: NEST’s dividend yield in comparison to other strong dividend paying companies listed on the S&P SL 20

Company name

Dividend yield Dividend payout

2012 2013 2014E 2015E 2016E 2012 2013 2014E 2015E 2016E

Nestlé Lanka PLC 3.4% 2.9% 3.4% 3.8% 4.2% 99% 98% 98% 98% 98%

Ceylon Tobacco Company PLC (CTC)

5.6% 4.1% 4.8% 5.3% 5.7% 104% 100% 97% 97% 97%

Chevron Lubricants PLC (LLUB)

4.1% 5.6% 6.3% 8.0% 8.6% 58% 71% 75% 90% 90%

Source: NEST, CTC, LLUB, Bloomberg, Copal Amba estimates

DCF analysis leads to a valuation range of LKR1,180-1,500 per share

We also applied a DCF approach in valuing NEST’s share and made explicit EBIT forecasts for the company as a whole. Our base-case assumptions assume a risk-free rate of 9.0% and a market risk premium of 6.0%. We have also adjusted these assumptions to consider bull- and bear-case scenarios, yielding a valuation range of LKR1,180-1,500.

Other elements of our valuation approach include the following:

NEST’s current capital structure comprises 99.7% equity and 0.3% debt. We have assumed a 85% equity and 15% debt target capital structure, and a terminal growth rate of 3.0%.

We have estimated the following:

EBIT and FCF figures throughout the explicit and fade periods.

Terminal value at 2022E, which was calculated by applying a terminal growth rate to unleveraged FCF, as of 2022E.

Finally, we arrived at our enterprise value (EV) by discounting the unleveraged FCF values over the explicit and fade periods at WACC.

We have also constructed bull- and bear-case scenarios to supplement our base-case DCF valuation, mainly based on adjustments to our projections for NEST’s revenue and margin trends during the explicit and implicit forecast years. The key distinguishing factors of these are as follows:

Bull-case scenario: Here, we assume that consumer sentiment will improve better than expected, underpinned by NEST’s efforts to optimize its product range, driving higher volume growth and boosting both revenue and the margin above our forecasts. These factors would grow the revenue CAGR to 11.9% through 2016E, compared with our base-case assumption of 9.3%, leading us to a value of LKR1,500 per share.

Bear-case scenario: Under this scenario, consumer spending may continue to show sluggish growth, thereby depressing sales and NEST’s margin below our estimates. The margin may also be negatively impacted by the forecast increase in commodity prices. This would lead to a marginally lower revenue CAGR compared with the projected figure in our base case, yielding a per share value of LKR1,180.

Nestlé Lanka PLC

Nestlé Lanka PLC

18


Share price performance

NEST’s share closed at LKR2,017 on 26 February 2014, an increase of LKR399, or 25%, compared with 12 months earlier, versus a 1% decrease in the S&P SL 20 and a 3% increase in the All Share Price Index (ASPI).

Figure 20: In the past three years, NEST has significantly outperformed the main indices


As shown in Figure 21, over the past three years, NEST’s share price has appreciated significantly, particularly compared to the CSE’s two main indices. However, its more recent performance (over the past six months) indicates a slowdown in the share’s price rally.

Figure 21: NEST vs. key indices

3m 6m 1 year 2 years 3 years

NEST 4% -7% 25% 126% 197%

S&P SL 20 1% -4% -1% 8% -22%

ASPI 2% 0% 3% 7% -25%


0%

100%

200%

300%

400%

Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14

NEST S&P SL 20 ASPI

Nestlé Lanka PLC

Nestlé Lanka PLC

19


Earnings release focus areas

Here is a checklist of items that investors should track in the next – and subsequent – quarterly earnings releases. We will closely track NEST’s performance across these key areas, and revise our forecasts and update our valuation range in future earnings update notes.

For the company as a whole

1. Have there been any price increases across NEST’s product range?

2. How have key commodity prices (milk, wheat and sugar) trended during the period?

3. Have any new products been introduced?

4. Has NEST changed its sourcing strategy – does it now import more/less raw materials?

5. How have export sales performed during the period – has there been any increase or decrease as a percentage of total revenue?

6. Has the cost of electricity or fuel been increased?

7. Has NEST increased the quantity of fresh milk it is sourcing from local farmers? Was the company able to procure the total required quantity of milk from local farmers?

8. Has NEST assumed any further significant capex or other investment activity?

Nestlé Lanka PLC

Nestlé Lanka PLC

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Appendix 1: Company overview

Nestlé Lanka PLC (NEST), a subsidiary of Nestlé S.A. based in Switzerland, is involved in manufacturing, marketing, selling and distributing food and beverage (F&B) products in Sri Lanka. The company manufactures a variety of products at its factory in Kurunegala, in the northwestern region of Sri Lanka, under the permission of the Nestlé brand trademark owner. NEST manufactures internationally renowned brands such as Nestomalt, Milo, Nestum, Milkmaid, Cerelac and the Maggi range of products, namely Maggi bouillon cubes, Maggi noodles and Maggi coconut milk powder in Sri Lanka; 90% of the company’s products sold in Sri Lanka are manufactured domestically.

The company’s Nestomalt and Nespray brands were recognized by Nielsen, a global market research firm, as being among the top ten most valuable FMCG brands in Sri Lanka in 2013, while according to LMD, a local business magazine, NEST’s brand itself was ranked the 10th most valuable in the country and first in the food sector in 2013. With a market capitalization of LKR108.3bn (USD826m) as of 26 February 2014, NEST is the second-largest listed company in the beverage, food and tobacco category, behind cigarette giant Ceylon Tobacco Company, and is the third-largest listed company on the CSE.

NEST recorded LKR30.9bn in revenue for 2013, with a CAGR of 12.3% over 2010-2013. The group generated EBITDA of LKR4.7bn in 2013, representing a 15.5% CAGR over 2010-2013.

NEST’s business structure

The entire business is organized as one segment for making operating decisions; as a result, there are no identifiable operating segments within the company.

The company reports its revenue as the portion derived from local markets and the share of export revenue; the former accounts for the majority, contributing 88% of total revenue in 2012 (the figure for 2013 will only be available once the annual report for the year is published).

In terms of product categories, NEST derives its revenue from three main product portfolios: beverages, food and dairy. The beverages portfolio includes established brands such as Milo, Nestomalt and Nescafé, which are currently demonstrating the strongest growth and enjoy a dominant position in the market. The food portfolio includes products such as Maggie noodles and the bouillon range, whilst the dairy range includes milk powder consisting primarily of Nespray.

NEST’s export segment, which accounts for about 12% of total revenue, chiefly comprises of Maggie coconut milk powder, and also includes Nestomalt, Milo and other re-exported products.

Figure 22: NEST’s revenue grew at a 12.3% CAGR over 2010-2013

Figure 23: NEST’s EBITDA grew at a 15.5% CAGR over 2010-2013

Source: NEST Source: NEST

0%

5%

10%

15%

20%

0

8,000

16,000

24,000

32,000

2009 2010 2011 2012 2013

YoY growth

LKRm

Revenue (LHS) YoY growth (RHS)

-5%

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15%

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2009 2010 2011 2012 2013

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LKRm

EBITDA (LHS) YoY growth (RHS)

Nestlé Lanka PLC

Nestlé Lanka PLC

21


Management strategy, transparency and governance

NEST is known for manufacturing products that have previously been successful in developed countries and customizing them to suit local taste buds. The company also introduces new products that are specifically influenced by local cuisine. Aided by its parent, a global F&B manufacturing giant, the company also invests in research and development to ensure that its products are healthier and meet government requirements for nutritional content.

However, NEST typically does not release much information regarding its business operations. We believe improved articulation regarding the company’s operations and objectives as well as a higher level of operational disclosure could help investors better understand the company.

In our view, NEST’s disclosure can be improved by publishing revenue and margin details on a segment basis. While NEST currently operates as a single segment business, its brands are broadly classed into three product categories: food, beverages and dairy. Investors could better understand the company's profitability and which of its product groups contribute the most revenue and margin if this information was available.

Shareholding structure

Domestic investors hold 5.9%, and institutional investors (both domestic and international) hold 94.9% of NEST’s shares. Nestlé SA Limited is the largest shareholder with a 90.8% stake in NEST.

Figure 24: NEST’s international investor base accounts for 94% of its shares

Figure 25: Individual investors account for only 5% of NEST’s shareholder base

Source: NEST, as of December 2012

Source: NEST, as of December 2012

Resident 6% Other non-

resident 3%

Nestlé S.A. 91%

Individual 5% Other

institutional 4%

Nestlé S.A. 91%

Nestlé Lanka PLC

Nestlé Lanka PLC

22


The top five shareholders as of 31 December 2013 are presented below:

Name of shareholder Description Stake

Nestlé SA Parent company 90.8% Coupland Cardiff Fund PLC Open-end fund incorporated in Ireland 1.6% Wasatch Frontier Emerging Small Countries Fund

A fund focused on frontier markets and emerging markets 0.6%

Ms. Neesha Harnam Independent share owner 0.4% Deutsche Bank AG Singapore A/C No.1 Global investment bank 0.3%

Source: NEST

Board of directors

As of January 2014, NEST’s board comprised six directors. Their details are provided below:

Name of Director Description

Mr. Etienne Benet Chairman. He was appointed to this position in January 2014. He is also the head of Nestlé in South Asia and managing director of Nestlé India. He has been employed within the Nestlé Group since 1989.

Mr. Ganesan Ampalavanar Managing director. He was appointed in January 2013. He initially joined Nestlé Malaysia in 1991 and has held positions in the sales, brand and commercial management divisions. He has over 20 years of experience within the group.

Mr. Syed Saiful Islam Vice president – finance and control. He has previously worked at Ericsson and Citibank and initially joined Nestlé Bangladesh as a financial accounting manager in 1999.

Mr. Shobinder Duggal Non-executive director. He joined the board in January 2014. He is a chartered accountant and has been with the company since 1986. He is also the director - finance and control for Nestlé India.

Mr. Mahen Dayananda Independent non-executive director. He heads NEST’s remuneration committee, and chairs the monetary policy consultative committees of the Central Bank of Sri Lanka and the Sri Lanka Business Development Centre.

Mr. Ranjan Seevaratnam Independent non-executive director. He is the chairman of the company’s audit committee. He was previously a long-standing partner at KPMG and serves on the boards of several large local companies.

Source: NEST

Nestlé Lanka PLC

Nestlé Lanka PLC

23


Appendix 2: SWOT analysis

Strengths Weaknesses

Globally recognized brand name

Reputation for product customization to suit local tastes and needs

Robust R&D initiatives drive innovation of products

Exposure to the dairy sector increases risk in terms of changing regulations with regard to price control

Opportunities Threats

Increasing focus on nutritional and wellness products should appeal to health conscious consumers

Government intiatives and fiscal incentives to increase export earnings from the F&B sector to USD1bn by 2015E

Rising commodity prices for NEST’s key raw material input increases production costs and pressures margins

Intense competition in the domestic market, particularly from local manufacturers and FMCG importers, and multinational FMCG players

Further depreciation of the Sri Lankan rupee versus key exchange rates (USD SGD and AUD) would make imports more expensive

Nestlé Lanka PLC

Nestlé Lanka PLC

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Appendix 3: Key financial data

Summary group financials (LKRm)

INCOME STATEMENT 2011 2012 2013 2014E 2015E 2016E

(For the year ended 31 December)

Revenue 25,576 28,571 30,913 33,777 36,905 40,323

EBITDA 3,838 4,142 4,686 5,259 5,848 6,496

EBIT 3,443 3,613 4,135 4,704 5,289 5,922

EBT 3,444 3,468 4,083 4,756 5,299 5,947

Net profit 2,630 2,939 3,305 3,757 4,186 4,698

BALANCE SHEET 2011 2012 2013 2014E 2015E 2016E

(As at 31 December)

Current assets

Cash and cash equivalents 613 407 707 912 1,207 1,390

Accounts receivable 1,177 1,254 1,628 1,574 1,720 1,879

Inventories 2,341 1,872 2,604 2,429 2,685 2,849

Total current assets 4,320 3,739 5,166 5,150 5,868 6,396

Non-current assets

Property, plant and equipment 3,102 4,888 4,572 4,861 5,225 5,658

Total non-current assets 4,636 4,904 4,810 5,399 5,563 5,996

Total assets 8,956 8,643 9,976 10,550 11,430 12,393

Current liabilities

Short-term debt 542 530 350 350 350 350

Accounts payable 3,137 2,292 2,975 3,011 3,274 3,561

Total current liabilities 5,018 4,080 4,831 5,330 6,127 6,995

Non-current liabilities

Post-retirement benefit obligation 518 520 469 469 469 469

Total non-current liabilities 595 794 929 929 929 929

Equity

Common share capital 537 537 537 537 537 537

Retained profit 2,806 3,232 3,678 3,754 3,837 3,931

Total equity 3,343 3,769 4,216 4,291 4,375 4,468

Total liabilities and equity 8,956 8,643 9,976 10,550 11,430 12,393

Nestlé Lanka PLC

Nestlé Lanka PLC

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CASH FLOW STATEMENT 2011 2012 2013 2014E 2015E 2016E

(For the year ended 31 December)

Operating activities

Net cash flow from operating activities 3,530 3,145 3,823 4,521 4,689 5,269

Investing activities

Purchase of PPE and intangible assets (2,163) (814) (530) (844) (923) (1,008)

Net cash flow from investing activities (2,131) (797) (455) (758) (877) (948)

Financing activities

Dividends paid to common shareholders (1,844) (2,541) (2,890) (3,224) (3,682) (4,103)

Net cash flow from financing activities (1,844) (2,541) (2,890) (3,259) (3,717) (4,138)

Net increase/(decrease) in cash and cash equivalents (446) (192) 479 505 95 183

Key ratios

2011 2012 2013 2014E 2015E 2016E

Growth

Revenue growth (%) 19.4 11.7 8.2 9.3 9.3 9.3

EBITDA growth (%) 25.4 7.9 13.1 12.2 11.2 11.1

EBIT growth (%) 23.9 4.9 14.5 13.7 12.4 12.0

Net profit growth (%) 38.3 11.7 12.5 13.7 11.4 12.2

Recurrent diluted EPS growth (%) 38.3 11.7 12.5 13.7 11.4 12.2

Margins

EBITDA margin (%) 15.0 14.5 15.2 15.6 15.8 16.1

EBIT margin (%) 13.5 12.6 13.4 13.9 14.3 14.7

Net profit margin (%) 10.3 10.3 10.7 11.1 11.3 11.7

ROE (%) 89.0 82.6 82.8 88.3 96.6 106.3

Liquidity and efficiency

Current ratio (x) 0.9 0.9 1.1 1.0 1.0 0.9

Total asset turnover (x) 2.9 3.3 3.1 3.2 3.2 3.3

Gearing and cash flow

Debt/capital (%) 14.0 12.3 7.7 7.5 7.4 7.3

Interest cover 138.6 21.1 51.5 134.3 151.0 169.1

Free cash flow (FCF) yield (%) 2.9 2.7 2.9 3.4 3.5 3.9

Net debt/FCF (x) 0.1 (0.1) 0.1 0.2 0.2 0.2

Valuation

P/E (x) 17.9 29.1 34.2 28.8 25.9 23.1

P/BV (x) 14.1 22.7 26.8 25.3 24.8 24.2

EV/sales (x) 1.8 3.0 3.6 2.5 2.3 2.1

EV/EBITDA (x) 12.3 20.7 24.0 16.3 14.7 13.2

EV/FCF (x) 34.4 36.8 34.2 23.3 22.8 20.1

Per share data (LKR) 2011 2012 2013 2014E 2015E 2016E

Recurrent diluted EPS 48.95 54.70 61.51 69.93 77.92 87.45

Common dividend 47.50 54.00 60.00 68.53 76.36 85.70

Book value 62.23 70.15 78.47 79.87 81.42 83.17

Net operating cash flow 65.70 58.54 71.17 84.16 87.27 98.07

Net cash flow (8.29) (3.58) 8.91 9.41 1.76 3.41


FX rates (USD/LKR): Y/E 31 December 2013 = 129.15

Y/E 31 December 2012 = 127.66

Y/E 31 December 2011 = 110.54

Nestlé Lanka PLC

Nestlé Lanka PLC

26


Fact Sheet

Sri Lanka investment environment overview

Sri Lanka’s economy has been on an upward trajectory since the end of the three-decade civil war in May 2009. Sri Lanka currently boasts South Asia’s highest GDP growth, conducive fiscal and monetary policy, and favorable socio-economic conditions, which together create an attractive investment destination.

Figure 26: Sri Lanka's GDP projected to increase at a 7% CAGR 2012-2016E

Figure 27: GDP per capita to increase 33% by 2016E

Source: Central Bank of Sri Lanka, Department of Census and Statistics Source: Central Bank of Economic and Social Statistics of Sri Lanka 2012, Road Map 2013 - Central Bank of Sri Lanka

Figure 28: Annual core inflation post-war has averaged 6.7%, government targeting mid-single digit levels in the medium term

Figure 29: CBSL expects the rupee to stabilize in the medium term despite recent volatility

Source: Department of Census and Statistics, Central Bank of Sri Lanka Source: Bloomberg

Figure 30: Fiscal deficit target of 5.2% of GDP for 2014E Figure 31: Debt-to-GDP to fall to 71% by 2015E

Source: Central Bank of Sri Lanka Source: Central Bank of Sri Lanka

6.8 6.0

3.5

8.0 8.2

6.4

7.5 8.0 8.3 8.5

0123456789

2007

2008

2009

2010

2011

2012

2013E

2014E

2015E

2016E

%

0

1,000

2,000

3,000

4,000

5,000

2005

2006

2007

2008

2009

2010

2011

2012

2016E

USD

8.5

7.7

13.6

7.0 7.0 6.9 5.8

0

2

4

6

8

10

12

14

16

2006 2007 2008 2009 2010 2011 2012

%

100

150

200

250

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Feb-12 Feb-13 Feb-14

LKR/USD LKR/EUR LKR/GBP

0%

4%

8%

12%

0

200

400

600

2006

2007

2008

2009

2010

2011

2012

2013E

2014E

LKRbn

Fiscal Deficit LKR bn As a % of GDP

102 102 91 88 85 81 86 82 79 79 78 75 71

0

20

40

60

80

100

120

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013E

2014E

2015E

%

Nestlé Lanka PLC

Nestlé Lanka PLC

27


The Sri Lankan equity market offers a rare and attractive alternative to investors in an investment era impacted by economic growth worries. Backed by the country’s robust economic growth, the Sri Lankan capital market is well set to offer attractive returns to investors who are keen to be a part of this emerging market success story. There are several strong incentives for entering the Sri Lankan capital market.

Figure 32: Post war, the ASPI has significantly outperformed global and developed market indices

Figure 33: Post war, the ASPI has also outperformed some of the best-performing regional indices

Source: Bloomberg *Note: All figures re-based to 1 July 2009

Source: Bloomberg *Note: All figures re-based to 1 July 2009

Figure 34: The CSE’s market capitalization has doubled since 2009

Figure 35: The government anticipates FDI inflows to reach USD2bn in 2013, a 19% CAGR 2009-2013E

Source: Bloomberg, Central Bank of Sri Lanka Source: Ministry of Finance and Planning, Board of Investment of Sri Lanka

Figure 36: Most sector P/Es are below market average and historical valuations

Figure 37: Trend is similar on a P/BV value

Source: Colombo Stock Exchange Source: Colombo Stock Exchange

0

80

160

240

320

400

Jul-09 Feb-10 Oct-10 Jun-11 Feb-12 Oct-12 Jun-13 Feb-14

ASPI Dow Jones FTSE 100

MSCI World DAX

0

100

200

300

400

Jul-09 Feb-10 Oct-10 Jun-11 Feb-12 Oct-12 Jun-13 Feb-14

ASPI Bombay (BSE 500)Jakarta (JCI) Philippines (PASHR)Thailand (SET) Hanoi (VNINDEX)MSCI Emerging Market Index

2,211 2,214 2,168

2,418

2,250

2,000

2,100

2,200

2,300

2,400

2,500

2010 2011 2012 2013 2014(February)

LKRbn

827 601 516

1,066 1,338

2,000

0

500

1,000

1,500

2,000

2,500

2008 2009 2010 2011 2012 2013E

USDm

0

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Nestlé Lanka PLC

Nestlé Lanka PLC

28


IMPORTANT DISCLAIMER

This document has been prepared on behalf of the Colombo Stock Exchange (“CSE”) by Amba Research Lanka Private Limited (“Amba”) and is sponsored by the CSE. The views expressed in this document are those of the authors based on available and accessible information from the public domain and do not represent those of the CSE. Please note, inter alia, that with the publication of this document on the CSE website, www.cse.lk, neither Amba , as author, nor CSE (as sponsor) intend to assume and are not assuming any responsibility or liability (including under contract, common law or tort) to any party arising out of or with respect to this document. This document is not intended to, and does not form part of any contract with anyone (including a contract between author and reader/recipient) and no one shall have any right (contractual or otherwise) to enforce any claim in relation to the document either directly or indirectly.

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