Earnings Report /
Sri Lanka

Ceylon Cold Stores: 2Q FY23 - Higher demand and lower costs to support 2H results

  • Normalising footfall offset by improving volumes, supporting Retail revenues

  • Price growth to taper down; volumes to drive Manufacturing revenues in 2H

  • Lower cost base and higher prices to support margin expansion in 2H

Asia Securities
5 December 2022
Published byAsia Securities

We maintain our target price of LKR 53.00/share and our BUY rating based on a 3-stage DCF valuation (+39.8% upside; +43.0% TSR). CCS witnessed continued revenue growth while margins faced pressure in 2Q FY23E. However, in 2H FY23E, CCS stands to benefit as 1) consumption levels improve from a low base and 2) declining cost pressures support margin expansion. Our target price of LKR 53.00/share corresponds to an implied P/E multiple of 19.7x FY23E EPS, at a discount to CCS’ 10-year P/E multiple average of 24.1x. BUY.

Normalising footfall offset by improving volumes, supporting Retail revenues

Retail revenues were up 4.0% QoQ (+77.2% YoY) to LKR 24.9bn, supported by 1) strong footfall growth and 2) basket values maintained due to inflation. Looking ahead, with improving availability of lower priced grocery produce through the GT channel, we expect some moderation of footfall. However, with overall consumption levels improving from a low base, we expect a pickup in volumes purchased to support revenue growth. Income tax changes including reintroduction of PAYE at a lower income threshold will come into effect from 1Q FY24E; however, we do not expect a material demand impact. Furthermore, we believe a pickup in the agri and tourism sectors will support a broad-based expansion in spending.

Price growth to taper down; volumes to drive Manufacturing revenues in 2H

Successive price increases offset a decline in volumes, with Manufacturing revenues up 10.0% QoQ (+90.1% YoY) to LKR 7.0bn in 2Q. However, in 3Q FY23E, we expect price growth to taper down across CCS’ product categories. Amid improving economic conditions and a recovery in key sectors, we expect FMCG manufacturers to be among the first to benefit from a pickup in discretionary spending. Supported by continuing shortages of imported products, we expect improving volumes to drive revenues during 2H FY23E.

Lower cost base and higher prices to support margin expansion in 2H

Amid multiple cost pressures, Retail EBIT margins were down 1.1pp QoQ to 3.6%. Reflecting its higher dependence on imported raw materials, Manufacturing EBIT margins were down sharply by 6.1pp QoQ to 8.6%. Heading into 3Q FY23E, 1) global commodity prices have declined, 2) domestic inflation is rising at a slower pace while 3) fuel and electricity price hikes have already been absorbed into costs. With CCS’ cost base declining, we expect price increases taken in 1H to support margin expansion in 2H FY23E. Although we adjust our estimates downwards to account for higher interest and tax charges, we expect an improvement in the bottom line over the coming quarters.

We maintain our target price of LKR 53.00/share and our BUY rating

We maintain our target price of LKR 53.00/share and our BUY rating on CCS based on a 3-stage DCF valuation (+39.8% upside; +43.0% TSR). This target price corresponds to an implied P/E multiple of 19.7x FY23E EPS, at a sizable discount to CCS’ 10-year P/E multiple average of 24.1x. Key risks: 1) prolonged recovery in discretionary spending, 2) delayed pickup in the tourism and agriculture sectors and 3) further steep currency depreciation.