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Ceylon Tobacco: 1Q CY21 - Strong dividend play with a rebound in earnings

  • 4Q volumes recover QoQ; we expect double digit topline growth in CY21E
  • RM secured for CY21E & part CY22E; we expect GPM to be maintained
  • A strong dividend play with upside potential; we maintain TP of LKR 1,250

Following slight adjustments to our estimates, we maintain our target price of LKR 1,250/share. Including a CY21E dividend of LKR 96.00/share, we arrive at a total return of +39.2%. BUY. CTC reported EPS of LKR 20.92 for 1Q CY21, coming below our estimate of LKR 24.22/share for the quarter. Gross revenues picked up as demand recovered under a more normalised operating environment. Looking into CY21E, we expect the rebound in economic activity and income levels to continue to support CTC’s volumes. Furthermore, our expectations of less pricing volatility amidst more stable tax policies will enable CTC to gain market share from its cheaper substitutes. The current trading price coupled with our expectations of a rebound in earnings features CTC as a strong dividend play, thereby providing an apt entry point to the stock.

4Q volumes recover QoQ; we expect double digit topline growth in CY21E

Gross revenues picked up significantly by 19.3% QoQ (+1.5% YoY) to LKR 34.8bn. The strong increase came as 1) a more normalised environment prevailed during the quarter with no lockdowns, and 2) excess inventory held by distributors was depleted. Looking ahead, despite the near-term impact from the 3rd wave lockdowns, we expect a rebound in economic activity and income levels in CY21E to continue to support CTC’s volumes. With the market currently dominated by the beedi industry (67.0% of combustible market), higher incomes will provide a strong catalyst for CTC to gain market share from its cheaper substitute. To this end, we note that CTC has recently introduced shorter length cigarettes at more affordable prices. Coming from a lower base, we expect CTC to post double-digit topline growth in CY21E.

RM secured for CY21E & part CY22E; we expect GPM to be maintained

On the costs side, FX depreciation is the threat to packaging costs (45.0% of COGS excluding excise duty). However, management notes that sourcing of tobacco leaves takes place one year in advance; as such requirements for CY21E and part of CY22E have been secured. Therefore, we do not expect a material impact on leaf supply from the inclement weather and proposed chemical fertiliser ban. We expect GPM to be maintained at 91.0-92.0%.

A strong dividend play with upside potential; we maintain TP of LKR 1,250

Following slight adjustments to our estimates, we maintain our DCF valuation-based target price (20.0% WACC) of LKR 1,250/share. Incorporating a CY21E dividend of LKR 96.00/share, we derive a total return of +34.8%. BUY. With its near 100.0% pay-outs, we highlight CTC as a strong dividend play with a CY21E dividend yield of 9.6% at current prices. Key risks: 1) prolonged impact from current lockdowns, 2) ad hoc tax increases and 3) sharp currency depreciation.


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