Equity Analysis /
Sri Lanka

Melstacorp: SPEN earnings dip again; new investments in place

  • DIST volumes to slowdown in 4Q amidst low demand conditions

  • Leisure recovery prolonged at SPEN; turnaround in 2H FY21E

  • We revise our TP to LKR 37.70/share and maintain the HOLD rating

Asia Securities
5 March 2020
Published byAsia Securities

With earnings pressures expected at SPEN and DIST, our sum-of-the-parts valuation based TP moves to LKR 37.70/share (previously LKR 47.70/share). Including a forecasted dividend of LKR 1.00/share, we derive a total return of +9.3%. HOLD. MELS reported a 3Q FY20 recurring net profit to equity shareholders of ~LKR 1.3bn, down 19.5% YoY with revenues down 1.0% YoY while EBIT margins improved by 70bps YoY. Looking forward, we remain cautious of earnings at DIST and SPEN with lower than expected earnings from both Services and Strategic Investments in addition to the earnings downside expected from Leisure. We also continue to remain cautious of MELS’s leverage position and the corresponding impact from interest costs. On the other hand, MELS acquired Browns Hospital on 19th Feb 20, while its cement business, Melsta Gama, will commence operations in mid-1Q FY21E.

DIST volumes to slowdown in 4Q amidst low demand conditions

DIST reported a 3Q FY20 recurring net profit to equity shareholders of ~LKR 1.5bn, up 14.5% YoY, in line with our estimates. Gross revenues were up 6.4% YoY, mainly aided by price. Gross margins improved by 3.0pp YoY as DIST sourced more local ethanol which is relatively less costly. Looking at 4Q, demand remains somewhat slow and we expect flat to down low single digit volume growth in 4Q FY20E.

Leisure recovery prolonged at SPEN; turnaround in 2H FY21E

SPEN reported a 3Q FY20 recurring net profit to equity shareholders of LKR 787mn (down 37.9% YoY), below our estimates. Net earnings declined as a result of lower than expected earnings at Leisure and Strategic Investments. In addition, higher interest expenses due to SLFRS 16 and high borrowings at AHUN also added to the group earnings decline. Looking at 4Q FY20E and 1H FY21E, we expect stable earnings at Logistics, yet remain cautious of earnings from 1) Leisure given the impact of COVID-19 and refurbishments in Maldives and 2) low earnings in Strategic Investments due to the investments in the printing business in Fiji. We expect earnings recovery to begin from 2H FY21E.

Melsta Gama to commence operations in mid-1Q FY21E

Melsta Gama is the joint venture agreement between MELS and Pyramid Gama (Private) Limited for importation, processing, packaging and distribution of cement in Sri Lanka. As per our channel checks, operations are expected to begin in mid-1Q FY21E, with a 900,000 MT capacity and a focus on the retail segment (residential). While MELS has not provided us with further details, and given that the operation is a joint venture, our initial estimates show that Melsta Gama will add around LKR 150-170mn to MELS’s bottom-line in FY21E.

We revise our TP to LKR 37.70/share and maintain the HOLD rating

The stock is down 18.6% YTD and down 21.3% YoY, and is currently trading at 7.7x our FY21E earnings. With earnings pressures expected at SPEN and DIST, our SOTP valuation-based target price moves to LKR 37.70/share (previously LKR 47.70/share). Including a forecasted dividend of LKR 1.00/share, we arrive at a total return of +9.3%. HOLD.