Earnings Report /
Sri Lanka

Ceylon Cold Stores: Demand to stabilise from Q2 onwards

  • Manufacturing volumes to begin recovery from Q2 FY 21e

  • Panic buying to normalise by end Q1; traffic to drive SSS from Q2 onwards

  • We revise our target price to LKR790/share and lower our rating to a Hold

Asia Securities
27 May 2020
Published byAsia Securities

We incorporate the impact on earnings for FY21E and value CCS at LKR 790/share (previously LKR 995/share) based on our DCF-based valuation. With a dividend of LKR 15.00/share, we expect a total return of +13.4%. Hence, we revise our rating to a HOLD from a BUY. CCS reported a 4Q FY20 net profit of LKR 834mn, up ~66.0% YoY. Revenues were up 17.0% YoY while EBIT margins improved by 1.6pp YoY. With the lockdown only being lifted in mid-May, we expect 1Q FY21E earnings to see significant pressure. However, beyond 1Q, we expect demand and earnings to stabilize from mid-2Q FY21E, with somewhat cautious spending.

Manufacturing volumes to begin recovery from 2Q FY21E

With the COVID-19 lockdown starting in mid-March, manufacturing (soft drinks/frozen confectionery) revenues were down 1.5% YoY in 4Q. Beverage volumes were up just 1.0% while frozen confectionary volumes were down 12.0% YoY, as the lockdown began in a key selling period ahead of the April festive season. In Jan/Feb, volumes were up 20.0-30.0% YoY. However, margins improved by 4.9pp YoY due to operating leverage in Jan/Feb and lower taxes. With the lockdown only being lifted in mid-May, we expect a significant impact on volumes in 1Q FY21E. While products were available through online and PickMe, the volumes sold were negligible compared to store sales. Looking forward, we expect demand to stabilize from 2Q FY21E onwards, with somewhat cautious spending. We also show some caution on the FX impact on raw material imports from 2Q onwards. CCS currently imports 60.0-70.0% of its raw materials, and the LKR depreciated ~4.0% over the past three months.

Panic buying to normalize by end 1Q; traffic to drive SSS from 2Q onwards

Retail (Keels stores) revenues were up 23.2% YoY, driven by new store sales. Same-store sales (SSS) were up 1.7%, driven by a 6.2% decline in traffic while average basket values (ABV) were up 8.4%. Traffic took a hit due to the lockdown, while ABV improved due to panic buying in March. During the lockdown there were minimal store operations, with Keells eventually switching to online orders. While online orders coming through remained encouraging, it did not match regular store sales. With stores now back in full operation, we expect panic buying to ease out by end 1Q, and expect SSS to remain in the +LSD range till end 3Q and thereafter grow by MSD, driven mainly by footfall. Excluding the stores currently under construction, CCS has halted planned store expansions in the short-run. In the meantime, we expect CCS to shift more focus to its online operations going forward. On a positive note, with its 109 stores located in key, high-income earning urban areas, we expect faster earnings recovery at CCS compared to its key competitor CARG.

We revise our target price to LKR 790/share and revise our rating to a HOLD

The stock is down ~10.7% YTD and up 19.2% YoY and is currently trading at 44.5x our FY21E earnings, ~17.0% above its 3-yr trading average. We cut our FY21E earnings by 28.0% to account for the COVID-19 impact, and given the volatile market conditions, shift our valuation to DCF (WACC of 17.4%). Our TP goes to LKR 790/share (previously LKR 995/share). With a DPS of LKR 15.00, we expect a total return of +13.4%. We revise our rating to a HOLD from a BUY.