Earnings Report /
Sri Lanka

Ceylon Cold Stores: Tax revisions and recovery in spending drive earnings

    Asia Securities
    5 February 2020
    Published byAsia Securities

    We maintain our sum-of-the-parts valuation-based target price at LKR 995/share. With a DPS of LKR 15.00, we expect a total return of +27.8%. BUY. CCS reported a 3Q FY20 net profit of LKR 569mn, up ~62.0% YoY. Revenues were up 17.6% YoY while EBIT margins improved by 3.4pp YoY. With the uptick in sentiments following the election results and the subsequent revisions to Nation Building Taxes (NBT) and Value Added Taxes (VAT), consumer spending saw a rebound starting in late November 2019. Looking at 4Q, with adverse weather conditions having subsided and salary revisions kicking in, we expect further improvement in earnings. Should the proposed corporate tax rate revisions pass through, we will revisit our estimates which could lead to further earnings upside in FY21E.

    Manufacturing recovers as expected; tax revisions aid margins

    Manufacturing (soft drinks/frozen confectionery) revenues were up 5.4% YoY with both beverages and frozen confectionaries volumes up 4.0% YoY for 3Q. Margins improved by 3.3pp benefitting from 1) revisions to VAT and NBT as CCS did not make immediate selling price reductions, 2) lower sugar taxes vs 3Q FY19, and 3) higher impulse mix in frozen confectionary which generates higher margins. Looking at 4Q, we expect a high-single-digit growth in volumes for both categories as 1) price cuts in Jan 2020 comes to in effect, 2) demand benefits from better weather conditions and 3) salary revisions kick in. Our channel checks indicate that overall volumes are running mid-single-digits QTD. We note that competitor activity remains high. Coca-Cola continues to spend heavily on marketing and has launched a 250ml PET bottle which has gained notable traction. We also see that Arpico has launched a take-home ice cream range which is on average priced LKR 20-30 below CCS and LKR 10-20 below CARG. That said, CCS continues to hold strong market share in both categories. Separately, the government recently proposed corporate tax revisions with manufacturing taxes to dip to 18.0% from 28.0%. Should the revisions be passed through, our calculations show atleast a LKR 3.50/share EPS upside in FY21E.

    New stores drive Retail topline; SSS still driven by footfall

    Retail (Keels stores) revenues were up 20.8% YoY, driven by new store sales. Same-store sales (SSS) were up 5.4%, the strongest since 3Q FY18. SSS was driven by a 6.1% growth in traffic while average basket values (ABV) were down 0.6%. Due to adverse weather conditions starting early August, food inflation came in at 5.9% during 3Q (vs. -1.6% in 3Q FY19) leading to lower purchases at a higher frequency. CCS noted that food inflation is expected to settle down in 4-6 weeks. However, we expect ABV to remain low in 4Q with SSS driven by footfall. We estimate footfall to run at 5.0-6.0% and ABV to be down ~0.5% in 4Q. The chain now operates 107 stores and we expect 7-8 more stores to be opened in 4Q. Over the next two years, CCS plans to open 50-60 new stores.

    We maintain our target price at LKR 995/share and BUY rating

    The stock is down ~1.0% YTD and up 27.0% YoY and is currently trading at 35.4x our FY21E earnings, relatively in line with its 3-yr trading average. We maintain our sum-of-the-parts valuation-based target price of LKR 995/share. Including a DPS of LKR 15.00, we expect a total return of 27.8%. BUY.