We use a 3-stage DCF model and arrive at a fair value of LKR 750.00/share (+45.6% upside; +53.5% TSR). LION reported a recurring EPS of LKR 25.13 for 1Q FY23 up 14.8% QoQ (+229.3% YoY). Revenues of LKR 21.3bn were up 12.1% QoQ (+101.9% YoY) mainly as successive price increases offset the impact of declining volumes. Following some near-term demand pressure, we expect a recovery in 2H FY23E with 1) improving economic conditions and 2) a pickup in tourist arrivals. EBIT margins of 12.7% were up 2.5pp QoQ (+4.1pp YoY); we expect some pressure on margins in 2Q followed by a pickup in 2H FY23E. LION trades at a sizable discount to its 3-year P/E multiple average; we rate BUY based on attractive valuations.
Price increases offset volume loss in 1Q; poised for a recovery in 2H FY23E
Revenues of LKR 21.3bn were up 12.1% QoQ (+101.9% YoY), despite legal alcohol consumption in the country declining amid rising inflation. Several factors benefitted LION in 1Q; these include 1) successive price increases and 2) increased consumption of local products by high/middle income consumers amid lower availability of imports. We believe these factors helped offset the impact of higher illicit alcohol consumption among lower income consumers. Similar to DIST, LION is well positioned to weather near term demand pressure due to 1) its market leadership in the beer segment (approx. 85.0% share) and 2) lower availability of imported alcohol in the market. Looking ahead we expect a pickup in volumes during 2H FY23E with improved economic conditions and increasing tourist arrivals.
Exports to benefit from a tourism pickup in key market Maldives
LION noted that exports benefitted from 1) double-digit volume growth and 2) steep currency depreciation during 1Q FY23. Exports currently contribute approx. 10.0% to LION’s overall volumes. In FY23E, LION stands to benefit from a pickup in tourism in the Maldives which is a key market for its products. Amid the ongoing FX shortage, higher export revenues will reduce LION’s dependence on borrowings to finance its imports (exports can cover approx. 30.0%-40.0% of import expenditure at present).
Near-term margin pressure to be offset by improving volumes in 2H
Gross margins of 21.4% were up 4.5pp QoQ (+3.4pp YoY), benefitting from successive price increases. Looking ahead, we expect near-term pressure on gross margins in 2Q FY23E mainly as inventory purchased at a higher cost is utilised. Operating costs picked up in 1Q reflecting the impact of fuel price increases; however, the benefit of higher gross margins trickled through. EBIT margins of 12.7% were up 2.5pp QoQ (+4.1pp YoY) in 1Q FY23. Amid factors such as the recent hike in electricity tariffs, we expect a pickup in operating costs during 2Q FY23E; however, to be offset by improving volumes during 2H FY23E. We forecast EBIT margins at 12.0% up 2.2pp YoY in FY23E.
Tax increases on alcohol manufacturers likely through budget reading
Given the increased financing needs of the government, we believe LION faces a strong likelihood of further tax increases in FY23E. We do not factor in a tax increase at this stage; we will revisit our estimates with further visibility.
We use a 3-stage DCF model and arrive at a fair value of LKR 750.00/share
We use a 3-stage DCF valuation to reflect the uncertain macro environment and arrive at a fair value of LKR 750.00/share (+45.6% upside; +53.5% TSR). This target price corresponds to an implied P/E multiple of 8.2x FY23E EPS, at a sizable discount to LION’s 3-year P/E multiple average of 15.8x. We rate LION a BUY on attractive valuations. Key risks: 1) prolonged recovery in discretionary spending, 2) delayed pickup in the tourism and agriculture sectors and 3) further steep currency depreciation which will impact raw material costs.