Earnings Report /
Sri Lanka

Ceylon Cold Stores: Retail leads growth; weather dampens manufacturing

    Asia Securities
    8 November 2019
    Published byAsia Securities

    We maintain our Hold rating and our sum-of-the-part valuation-based target price at LKR 690/share. With a DPS of LKR 15.00, we expect a total return of -7.4%. CCS reported a Q2 FY 20 net profit of LKR278mn, down 9.3% yoy (excluding one-off items in Q2 FY 19). While revenues were up 13.3% yoy and EBIT margins improved by 1.1ppts yoy, higher interest expenses due to SLFRS 16 led to the earnings dip. 

    Manufacturing earnings were impacted in September as adverse weather affected distribution resulting in a 1.0-2.0% volume growth and a 29bps margin contraction in Q2. At retail, average basket value (ABV) declined marginally as expected while footfall saw strong growth resulting in a c2.0ppts expansion in EBIT margins. However, higher interest expenses due to implementation of SLFRS 16 hurt retail net profits. 

    Looking at Q3, we expect volume recovery in manufacturing (October volumes up) and retail to see steady footfall due to the festive season. However, we expect the interest expense impact from SLRFS 16 adjustments to impact overall earnings of CCS in H2 as well.

    Q2 manufacturing volumes hurt by adverse weather; recovery in 3Q3

    Manufacturing (soft drinks/frozen confectionery) revenues were flat yoy. CCS noted that July and August saw double digit volume growth in both categories, albeit at a slower pace compared to Q1 20. However, adverse weather conditions in many parts of the country in September hindered distribution and as a result, volumes for both categories were up only 1.0-2.0% yoy in Q2. Due to this reason, EBIT margins also contracted marginally by 29bps, despite the reduction in sugar taxes. On products, as a result of the new production facility, CCS continues to see double digit volume growth in the impulse segment as it continues to introduce new products to the market. Looking forward at Q3, CCS noted that volumes have already picked up in October. With Q3 being a key selling season, we expect stronger revenues and EBIT margin expansion for the segment as volumes bounce back to regular levels.

    Footfall drives Q2 while basket values taper down as expected

    Retail (Keels stores) revenues were up 17.5% yoy, driven by new store sales. Same-store sales (SSS) were up 5.1%, driven by a 5.7% growth in traffic while ABV was down 0.6%, indicating that the stores in general saw lower purchases at a higher frequency. EBIT margins improved by c2.0ppts yoy. The chain now operates 100 stores and we expect 15 more stores to be opened in FY 20e. Looking at Q3 FY20e, we expect similar growth in footfall given the festive season ahead. However, we do note that food inflation saw a hike in October due to adverse weather (vegetables and big onions). We expect some of this impact to trickle into November as well with some easing in December. As a result, we remain cautious of the impact on basket values for the quarter.

    We maintain our target price at LKR 690/share and our Hold rating

    CCS is currently trading at 47.6x our FY 20e earnings and the stock remains expensive trading at a premium of c19.0% to its 3-yr trading average. While we do make revisions to our estimates due to higher-than-expected interest costs, we maintain our sum-of-the-parts valuation-based TP of LKR 690/share. Including a DPS of LKR 15.00, we expect a total return of -7.4%. Hold.