Equity Analysis /
Sri Lanka

Ceylon Cold Stores: 1Q FY23 - Results remain resilient; poised for a recovery in 2H

  • Retail to witness conversion from GT channel; margins to recover in 2H

  • Price to drive FMCG revenues; full absorption of high import costs by 2H

  • We use a 3-stage DCF model and arrive at a fair value of LKR 53.00/share

Asia Securities
6 September 2022
Published byAsia Securities

We use a 3-stage DCF valuation for CCS and arrive at a fair value of LKR 53.00/share (+51.9% upside; +55.9% TSR). CCS reported an EPS of LKR 0.97 for 1Q FY23, down 23.1% QoQ (+726.4% YoY). Group revenues of LKR 30.3bn were up 17.7% QoQ (+67.0% YoY), with Retail segment revenues up 22.9% QoQ and Manufacturing segment revenues up 1.6% QoQ. Overall, CCS benefitted from 1) demand conversion from the general trade channel due to better product availability in supermarkets and 2) inflation driving up prices of essentials amid a slowdown in discretionary spending. We expect short-term demand pressure in 2Q FY23E followed by a pickup in volumes during 2H amid a recovery in the tourism and agriculture sectors. Group EBIT margins of 6.3% were down 3.2pp QoQ; we expect further short term margin pressure in 2Q FY23E as higher cost inventory is utilised. Following a recovery in 2H, we forecast FY23E EBIT margins at 6.4% up 0.8pp YoY.

Retail to witness conversion from GT channel; margins to recover in 2H

Retail revenues of LKR 23.9bn were up 58.4% YoY (+22.9% QoQ); strong growth in footfall (+52.2% YoY) drove the result while basket values were up marginally from a high base (+1.4% YoY). Looking ahead, we expect footfall to drive revenues as 1) customers switch from the general trade channel due to better product availability and 2) strong retail penetration in urban areas mitigates the impact of fuel shortages as in 1Q. Further, we expect basket values to remain elevated due to inflation even as consumers cut back on discretionary purchases. Same store sales will drive revenues in FY23E; JKH noted that new store openings will be halted temporarily once outlets currently under construction are completed. EBIT margins of 4.8% were down 1.6pp QoQ; we expect some downward pressure in 2Q FY23E followed by a recovery in 2H.

Price to drive FMCG revenues; full absorption of high import costs by 2H

Manufacturing revenues of LKR 6.4bn were up 1.6% QoQ (+110.0% YoY). Mixed performance was recorded across product lines with frozen confectionery revenues up 10.7% QoQ and beverages revenues down 9.9% QoQ. In the current quarter (2Q FY23E), 1) CCS has continued to increase prices while 2) we expect further demand pressure as consumers cut back on discretionary spending. However, we expect volumes to improve during 2H FY23E with improved economic conditions amid a recovery in the tourism and agriculture sectors. EBIT margins of 14.7% were down 13.4pp QoQ; given CCS’ reliance on imported raw materials, we expect some margin pressure to continue in 2Q FY23E as newer inventory is utilised. Once these costs are fully absorbed, we factor in a recovery in margins during 2H FY23E.

We use a 3-stage DCF model and arrive at a fair value of LKR 53.00/share

We use a 3-stage DCF valuation to reflect the uncertain macro environment and arrive at a fair value for CCS of LKR 53.00/share (+51.9% upside; +55.9% TSR). This target price corresponds to an implied P/E multiple of 13.0x FY23E EPS, at a sizable discount to CCS’ 10-year P/E multiple average of approx. 24.0x. BUY. Key risks: 1) prolonged recovery in discretionary spending, 2) delayed recovery in the tourism and agriculture sectors and 3) further steep currency depreciation leading to margin pressure from higher raw material costs.