Equity Analysis /
Sri Lanka

Hemas Holdings: A Vastly Underestimated Consumer Play With Lucrative Upside Potential

  • We use a 3 stage DCF methodology to value HHL, arriving at a fair value of LKR 84/share

  • A regional peer integration could potentially unlock significant value in HHL’s consumer unit

  • Despite a superior growth profile, HHL trades at a sizable discount to regional consumer peers

Asia Securities
19 August 2022
Published byAsia Securities

Underappreciated and undervalued HHL Consumer business offers compelling upside bet…

  • Hemas is one of the few Sri Lankan consumer names capable of achieving regional scale and presence.

  • We believe the company is well positioned to execute value accretive regional acquisitions in the consumer space and pursue an aggressive internationalization strategy given its strong consumer portfolio and balance sheet strength, in line with its stated internationalization and export strategy.

  • Further, we expect the new government will fast track the enacting of regional trade liberalization policies over the next 12 months, including pursuing an expanded trade framework with India. In this backdrop, we see tremendous value to be unlocked in undervalued Sri Lankan business assets in certain sectors, which will be attractive to large regional peers mainly based in India.

  • The Sri Lankan consumer goods market is currently valued at roughly LKR 400bn, with the HPC market alone accounting for around LKR 100bn in value (Kantar, 2022). Hemas holds market leadership positions in 8 product categories and its products reach more than 90% of Sri Lankan households.

  • To better illustrate the value of Hemas Consumer, we consider a hypothetical M&A scenario, to gauge how attractive Hemas Consumer would be for a large regional consumer company. Our analysis indicates that with significant scale benefits, and access to regional supply chains and networks the potential margin accretion at EBIT level for Hemas ’ Consumer unit is a minimum of 500bps.

  • We use a 3 stage DCF valuation to reflect the uncertain macro environment and the potential increase in taxes and arrive at a fair value for HHL of LKR 84.00. Hemas currently trades at 6.0x our FY 23E EPS estimates. Our target price for HHL of LKR 84.00/share, implies the share trades at 10.0x our FY23E EPS estimate. Including a FY 23E dividend of LKR 4.85/share, we expect a total return of 77.7%.