Earnings Report /
Sri Lanka

Ceylon Cold Stores: Q1 FY 20 – Stock still expensive; raise TP and reiterate Hold

    Asia Securities
    2 August 2019
    Published by

    We recommend Hold and revise our target price to LKR 690/share (previously LKR 553/share) with a total return of -9.6%. CCS reported Q1 FY 20 net profit of LKR 412mn, up 72.5% yoy, with revenues up 19.8% yoy and EBIT margins improving by 3.1ppts to 6.4%. Manufacturing net profits were up c50.0% yoy driven by double digit volume growth at both frozen confectionery and beverages, and lower sugar taxes. In retail, both footfall and average basket value (ABV) saw positive growth resulting in a 1.7ppts expansion in EBIT margins. However, higher interest expenses due to implementation of SLFRS 16, hurt retail net profits. 

    We continue to expect earnings improvement at CCS through margin recovery in manufacturing and steady footfall in retail. However, we expect ABV to taper down. We also note that the interest expense impact from SLRFS 16 adjustments will suppress the bottom line of CCS going forward.

    Manufacturing benefits from double digit volume growth

    Manufacturing (soft drinks/frozen confectionery) was up 25.3% yoy, while EBIT margins improved by 5.4ppts, mainly on the back of double-digit volume growth at both frozen confectionery and beverages, and lower sugar taxes compared to last year. We believe overall consumption was mainly driven by at-home consumption as consumers lowered dining out during the quarter amid security concerns following the Easter attacks. In addition, schools were also closed for nearly half the quarter, which we believe resulted in the c50.0% volume growth in the ice cream impulse range. Looking forward, we expect these volume growth rates to somewhat normalise as consumers have begun to dine out since late June. However, we expect margin recovery to continue in FY 20e, with sugar taxes being lower compared with FY 19.

    Basket values recover in retail; higher exposure to Western Province helps

    Retail (Keels stores) was up 18.3% yoy, driven by new store sales. Same-store sales (SSS) were up 3.6%, driven by a 2.0% growth in traffic while ABV was up 1.6% (first time since 3Q18). The chain now operates 98 stores. Similar to manufacturing, we believe basket value growth came as a result of consumers increasing spending on non-essentials, as many stayed at home during the quarter. We also believe CCS’s exposure concentrated on the Western Province also helped it benefit from additional spending. While footfall will remain steady, we believe ABV growth will taper down as consumers get back to regular purchase patterns.

    We revise our TP to LKR 690/share and maintain our Hold rating

    While the stock price saw a sharp increase over the past few weeks, it remains expensive trading at a premium of c92.0% to its five-year trading average. Also, CCS is trading at 40.5x our FY 20e earnings. Including a strong Q1 result, we expect the remainder of the year to see positive earnings growth from steady store footfall, at least low-to-mid teen volume growth in manufacturing, and lower sugar taxes. However, we do note that the interest cost impact from SLFRS 16 will hit overall earnings going forward. With revisions to our estimates, our sum of the parts valuation-based TP goes to LKR 690/share (previously LKR 553). Including a dividend yield of 1.9%, we expect a total return of -9.6%. Hold.