Equity Analysis /
Sri Lanka

Ceylon Cold Stores: Current consumer sentiment to dampen recovery

    Asia Securities
    29 May 2019
    Published by

    For 4Q FY19, CCS reported a net profit of 503mn, down 9.5% YoY as the rate of decline slowed down in 4Q compared to the previous quarters. Revenues were up 16.7% YoY with EBIT margins improving by 100bps, the first time in nine quarters. While Retail margins remained slightly pressured due to low basket values, Manufacturing margins improved on the back of lower sugar taxes and better volumes. Looking forward post April events, we see some impact on the business from a slowdown in consumer spending, particularly the Manufacturing business. However, the Retail business will remain somewhat less pressured with CCS’s exposure limited to the Western province. As such, we lower our TP to LKR 553/share (previously LKR 590) which results in a TSR of -1.2%. HOLD.

    Manufacturing business on the recovery path, but slower than expected

    In 4Q, Manufacturing (soft drinks/frozen confectionery), was up 7.1% YoY, while EBIT was up 14.3% YoY, with margins up 193bps YoY. This was the first time in seven quarters an improvement was shown. Frozen confectionary volumes were up 21.0%, with the growth in volumes in the impulse segment supported by operations of the new plant. As per CCS, the new business accounted for ~16.0% of Manufacturing topline in FY19. Beverage volumes on the other hand was down only 6.0% in the quarter due to the reduction of sugar taxes which allowed CCS to reduce prices by 20.0% by end March. This also resulted in improved margins for the quarter. Looking forward post April events, we believe the momentum of recovery in the business will slowdown again. With many of the restaurants and hotels seeing a low turnout, and less public/private social gatherings, we believe there will be hit on volumes, especially for beverages. As such, while we expect some recovery in FY20E, this will be slower than our previous expectations, particularly in 1H FY20E.

    Less impact on Retail from April events; yet, basket to remain subdued

    Retail (Keels stores) was up 20.2% YoY in 4Q, driven by new store sales. Same-store sales (SSS) were up 4.5%, driven by a 7.1% growth in traffic while basket values were down 2.4%. The chain opened 6 new stores during 4Q, bringing the total count to 96. Looking forward, CCS plans to open 50-60 stores over the next two years. While we expect consumer spending to slowdown post April events, we believe the impact on the Retail business will be less with CCS’s exposure contained to the Western Province. However, while we expect footfall to sustain SSS, basket values will remain subdued as consumers continue to only spend on essentials, a sentiment also aired by CCS.

    We revise our TP to LKR 553/share and maintain our HOLD rating

    The stock took a sharp dip late January, while the stock is now down 19.2% YTD and down 40.5% YoY. CCS is currently trading at 33.2x our FY20E earnings, and ~67.0% above its five-year trading average. We revise our estimates downwards on the above-mentioned events and as a result, our TP goes to LKR 553/share (previously LKR 590/share). Including a dividend yield of 2.6%, we expect a TSR of -1.2%. A faster than expected recovery in consumer sentiment and spending will result in changes to our TP and rating.