Earnings Report /
Sri Lanka

Cargills (Ceylon): Strong Q3 amid improved consumer sentiment

    Asia Securities
    25 February 2020
    Published byAsia Securities

    We maintain our sum of the parts valuation-based target price at LKR 226/share, and including a dividend of LKR 2.00/share, we expect a total return of +20.0%. BUY. CARG reported a 3Q FY20 recurring net profit to equity shareholders of LKR 554mn (in line with our estimate), up 77.8% YoY. All three segments performed well with EBIT up 66.6% YoY and margins expanding by 1.9pp. Looking forward, we expect 4Q to see a relatively strong growth, albeit at a less robust rate compared to 3Q as it comes out of a key selling season. Also, should the proposed corporate tax rate changes pass through, we assume rate changes in the FMCG business could add LKR 1.75-1.80/share to our FY21E group EPS estimate.

    Retail records a strong footfall, driving SSS in 3Q

    Retail revenues in 3Q were up 19.1% YoY while EBIT more than doubled YoY. EBIT margins expanded by 1.9pp YoY. Interestingly, same store sales (SSS) for the quarter were up 10.7% YoY (low-single-digit in 2Q), driven by a 8.4% growth in footfall for the quarter. Basket values were up 2.3% YoY which we believe was driven by high vegetable prices as a result of adverse weather conditions towards the latter part of 2019. Food prices have begun to reduce, however, is still up YoY. All-in-all, stronger consumer sentiment post-elections is also reflected in purchases towards the latter half of the quarter. 3Q closed with 402 stores and we expect FY20E to end with ~410 stores. Looking at 4Q FY20E, we expect SSS to run at mid-single digit levels.

    FMCG driven by Dairy; reduction in corporate tax rates could boost EPS

    Including sales to CARG stores, FMCG topline was up 18.8% YoY and EBIT margins up 73bps to 15.4%. CARG noted that with its butter and cheese category expansion, and to some extent even in milk, led to Dairy being the strongest performing FMCG segment during the quarter. Our channel checks indicate that the general trade saw a stronger pickup in 3Q compared to 1H FY20, as consumer sentiment picked up across all regions post-elections. 3Q was also aided by regular festive season demand. CARG’s new products, mainly in the Dairy category, continue to gain traction. We note that the segment is eligible for the new 18.0% tax rate (down from 28.0%) as per the new corporate tax proposals. Should these proposals get passed through, our calculations show a LKR 1.75-1.80/share upside to our group FY21E estimates.

    Restaurants see a strong recovery; COVID-19 may hurt footfall in 4Q

    The restaurant business mainly consisting of KFC, was up 16.2% YoY with EBIT margins improving by 5.4pp YoY. Earnings were mainly led by strong footfall during the quarter. However, we note that with concerns surrounding COVID-19, there has been a slowdown in footfall in 4Q so far.

    We maintain our target price at LKR 226/share and Buy rating

    The stock is down 1.6% YTD and 5.0% YoY and is currently trading at 17.6x FY21E earnings, a ~18.0% premium to its 3-yr trading average. With 3Q earnings in-line with our estimates, we make minimal changes to our estimates. As such we maintain our SOTP valuation-based target price at LKR 226/share. Including a dividend of LKR 2.00/share, we expect a total return of +20.0%. Buy.