Earnings Report /
Sri Lanka

Lion Brewery Ceylon: Adverse weather hits Q3; volume recovery in Q4

    Asia Securities
    19 February 2020
    Published byAsia Securities

    With minimal changes to our estimates, we maintain our DCF valuation (WACC 12.9%) based target price of LKR 680/share. Including a dividend of LKR 4.00/share, we derive a total return of +12.1%. HOLD. LION reported a recurring net profit of LKR 1.1bn, down 1.8% YoY. Revenues were up 5.7% YoY aided by the price increase in March 2019, while EBIT margins declined by 1.3pp due to higher cost of sales (higher excise duties). In addition, lower interest income due to lower rates, also led to the earnings dip. Looking at 4Q, we expect volumes to grow at a low-single-digit level. With regard to impact from excise duties, we expect the next revision to come through the 2020 budget reading during 2H CY20E. As such, any duty revisions will result in revisiting our estimates and target price.

    Despite key selling season, top line muted by adverse weather conditions

    3Q FY20 revenues were up 5.7% YoY, driven by the price increase in March 2019. Similar to 2Q, volume growth in 3Q saw a decline YoY as adverse weather affected sales. On-premise sales (hotels/restaurants) improved QoQ but remained low compared to the previous year as a result of a lower number of tourists. This, to some extent was offset by volumes at wine stores and the modern trade. Exports on the other hand continues to show robust growth with volumes up double digits YoY. Coming into 4Q FY20E, LION noted that demand is relatively better than 3Q due to more favourable weather conditions and some pickup in spending. We note that despite the VAT reduction in December, the government concurrently increased excise duties for beer. As a result, LION was unable to take a price reduction. Hence, once the price increase from March 2019 annualise in 4Q FY20E, topline will be predominantly driven by volumes. On excise duties, we expect the next revision to come through the 2020 budget reading during 2H CY20E. This will result in a change to our earnings estimates for LION. We believe duty revisions are inevitable amidst the government being pressured for revenue collections given the numerous incentives given to consumers and corporates. However, provided these increases are not detrimental as seen in 2015, we believe LION earnings will continue to remain stable.

    Higher excise duties hurt gross margins; LION borrows for working capital

    COGS as a percentage of sales increased by 1.1pp due to higher excise duties (both March 2019 and December 2019) and as a result, EBIT margins declined by 1.3pp to 13.6%. While interest expenses declined by c27.0%, we note that LION borrowed c3.0bn of short-term debt (for excise duty related payments and working capital). However, LION expects to have this settled by 4Q. As a result, we believe there could be somewhat higher interest costs in 4Q. That said, we note that LION also paid off LKR 2.1bn in debentures during the quarter. All-in-all, LION expects to have a minimal level of net debt by end 4Q.

    We maintain our target price at LKR 680/share and Hold rating

    The share is up c1.0% YTD and up c3.0% YoY, and is trading at 11.2x our FY21E earnings estimates. With minimal changes to our estimates, we maintain our DCF valuation based (WACC 12.9%) target price at LKR 680/share and including a FY21E DPS of LKR 4.00, we arrive at a total return of +12.1%. Hold.