Earnings Report /
Sri Lanka

Lion Brewery Ceylon: Q1 FY 20 – Price increases drive growth; downgrade to Hold on valuation

    Asia Securities
    19 August 2019
    Published by

    With minimal changes to our estimates, we maintain our DCF valuation-based (WACC 12.9%) target price of LKR 650/share. Including a dividend of LKR 4.00/share, we derive a total return of +14.7% and revise our rating to a Hold from Buy. Excluding one-off items, LION reported a recurring net profit of LKR 926mn, up 25.6% YoY. Revenues were up 27.6% yoy aided by the price increase in March 2019 due to an excise duty hike, while EBIT margins declined by 2.8ppts due to higher COGS and admin expenses. However, lower interest expenses and higher interest income offset some of this impact. Looking forward, we expect volumes to grow at a mid-single-digit level, with a pickup in late Q3  FY 20e given the upcoming festive season. Also, with the 2020 budget reading being delayed, we do not expect the usual price increase in November. That said, we note that LION still enjoys a price advantage in hard liquor, helping it maintain volume growth.

    Top line driven by price increases; volumes to remain pressured

    Q1 FY 20e revenues were up 18.7% yoy, driven by the price increase in March 2019 due to excise duty increase. In Q1, volume growth was at mid-single-digit (MSD) levels with the impact on sales at restaurants and hotels, particularly around the tourist-heavy areas, post events in April. Demand at the modern trade and wine shops remained relatively stable. Coming into Q2 FY 20e, demand has begun to pickup, particularly at mid-range restaurants, which did not see much volume movement in Q1. We also note that LION’s focus on exports is now bearing fruit with exports accounting for c3.0%-4.0% of top line vs 1.0%-2.0% a year ago. For the year, we expect volumes to grow at a MSD level, with a pick-up in late Q3 FY 20e from the upcoming festive season. Top line will be mostly aided by the price increase. Also, with the 2020 budget reading being delayed, we do not expect the usual price increase in November. That being said, we note that LION still enjoys a price advantage over hard liquor, helping it maintain volume growth even at a low level despite a volume decline in hard liqour.

    Higher opex hurt margins in Q1; interest costs continue to decline

    COGS as a percentage of sales increased by 3.8ppts as a result of higher excise duties, while admin expenses picked up on payment of incentives/bonuses. As a result, excluding one-off items, EBIT margins declined by 2.8ppts to 13.9%. On the other hand, interest expenses continue decline, down c13.0% yoy as a result of a further paydown of cLKR2.0bn in debt. In addition, interest income increased by c52.0% yoy, offsetting some of the impact from lower operating margins. However, we note that we’re yet to see an impact from implementation of SLFRS 16 on interest costs.

    We maintain our TP at LKR 650/share and revise rating to Hold

    The share is flat YTD and down c10.0% yoy, and is trading at 12.2x our FY 20 earnings estimates. With minimal changes to our estimates, we maintain our DCF valuation-based (WACC 12.9%) target price LKR 650/share and including a FY 20e DPS of LKR 4.00, we arrive at a total return of +14.7%. As a result, we revise our rating to a Hold from Buy.