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Hemas Holdings PLC

Hemas Holdings PLC is a family run diversified conglomerate with business interests in
FMCG, healthcare, transportation and leisure.

Price Target : LKR78


DATE

Well positioned to grab untapped market share in the private healthcare sector
With its unique strategy of locating the hospitals in sub urban areas with high population
density away from Colombo, Hemas will have a competitive advantage over other players

: 23rd October 2014

SHARE INFO:
Sector

: Diversified Holdings

mas hospitals throughout the past few years especially with high end surgeries succeed-

CSE Ticker

: HHL.N0000

ing at the Wattala hospital. This is further strengthened by the partnership with the Kerala

Price as at 23-Oct-2014 : LKR65

who are located in the capital of Colombo. Increased confidence has been seen on He-

Institute of Medical Sciences for staff training providing an unparalleled experience to


customers resulting in improved profitability and revenue.

12 Month (High/Low)

: LKR65.10/LK32.00

Price Chg (1m/ 1Q/1Y) : 10.2%, 33.7%, 101.2%

Strong demand for personal care products

Market Cap. (LKR)

: 32.9b

of 19.2% from FY2012-14. With rising per capita income, demand for personal care prod-

Market Cap. (USD)

: 253.7mn

ucts has been on the rise which saw considerable volume growth as well as price in-

Free Float (%)

: 28.25%

Avg. Daily Vol (1M).

: 367,284

Despite heavy competition from similar products, Hemas FMCG revenue grew at a CAGR

creases favoring the manufacturers. We expect this trend to continue in to the future and
expect FMCG revenue to grow at a CAGR of 13.3% through FY2015E-17E.

Issued Ordinary Shares : 515,290,620

Group revenue to grow at a CAGR of 13.9% through FY2015E-17E


With the highest contribution to growth arising from the leisure segment. we expect leisure segment revenue to grow at a CAGR of 21.5% from FY2014-17E with the new 154
room luxury hotel to be opened in FY2016E. Further, with recent refurbishment carried out

MAIN SHARE HOLDERS:


A Z Holdings (Pvt) Ltd

: 17.61%

pancy to improve to 80% by FY2017E from current 75%. The acquisition of J. L. Morison

Saraz Investments (Pvt) Ltd

: 16.77%

Son and Jones (Ceylon) PLC (JLM) should also contribute to increased revenue.

Bluberry Investments (Pvt) Ltd

: 16.65%

EBITDA to grow at a CAGR of 15% through FY2015E-17E

Amagroup (Pvt) Ltd

: 16.65%

Employees Provident Fund

in two hotel properties, Club Hotel Dolphin and Hotel Sigiriya, we expect average occu-

The acquisition of JLM should bring about efficiencies in the manufacturing plants and
the distribution network to improve profitability. The divestment of the loss making power
sector should also contribute to improved profitability.

5.29%

VALUATION SUMMARY:

Valuation
We have used the SOTP method as the primary valuation method to arrive at a per share

TTM EPS

: LKR4.91

price of LKR78 which is further justified by our EV/EBITDA valuation which gives a per

TTM P/E (x)

: 13.2x

Latest BVPS

: LKR28.05

PBV (x)

: 2.3x

share price of LKR80 based on a EV/EBITDA multiple of 10.1x. Buy

LKR '000
Revenue
EBIT
EBIT Margin
Net Profit for equity
Net Profit Margin
EPS - LKR
Net Operating Cash Flow
Gearing
Price to earnings (P/E)
Price to book (P/B)

FY2012

FY2013

FY2014

FY2015E

FY2016E

FY2017E

21,532,503 26,098,362 32,833,249 29,550,370 34,311,545 38,340,415


1,783,950

2,436,994

3,378,598

3,256,852

3,829,979

4,331,622

8.3%

9.3%

10.3%

11.0%

11.2%

11.3%

1,164,525

1,659,660

2,409,276

2,235,628

2,862,617

3,357,634

5.9%

7.4%

7.8%

8.2%

9.3%

9.6%

2.45

3.76

4.97

4.72

6.17

7.16

1,507,983

1,863,616

2,895,800

3,872,027

3,511,183

4,246,482

15.5%

16.7%

22.9%

16.6%

12.7%

9.8%

10.7x

7.2x

13.1x

13.8x

10.5x

9.1x

1.3x

1.1x

2.3x

2.1x

1.8x

1.5x

Lead analyst: Nathasha Peiris | nathasha@nlequities.com| Mobile: +94779826558


Co analyst: Tharindu Kaduruwewa | tharinduk@nlequities.com | Mobile: +94775924545

SHARE PRICE CHART:


LKR
70.00
60.00
50.00

40.00
30.00
20.00
10.00
-

28-Oct-11

28-Apr-12

28-Oct-12

Source: Bloomberg, NLE

28-Apr-13

28-Oct-13

28-Apr-14
Pg
|

Company Overview
Hemas Holdings PLC quoted in 2003, is a family run diversified conglomerate with LKR32.9bn (USD253.6mn) market capitalization and focuses on five key sectors i.e. FMCG, healthcare, transportation and leisure. The group was founded as a
pharmaceuticals and trading enterprise in 1948.
The status of Hemas as the largest private organization in the healthcare industry and the dominant distributor of pharmaceuticals, surgical & diagnostic products in Sri Lanka was further strengthened by the acquisition of J. L. Morison Son and
Jones (Ceylon) PLC (JLM) recently. Hemas hospitals focus on the middle income population in suburban areas gaining a
competitive advantage over other players centered in Colombo.
Hemas personal care product range offers trusted products to consumers contributing significantly to growth in group
revenue which are exported directly to 12 countries including Malaysia, New Zealand and Bangladesh.
Hemas is the leader in airline General Sales Agency (GSA) business in Sri Lanka for both passenger and cargo and also
has significant interest in Sri Lankas largest ship owning company (Mercantile Shipping Company PLC).
The group, under its leisure segment owns 4 hotels offering diversity to customers which will be further strengthened with
the investment in the luxury 5 star resort expected to commence operations in FY2016E.
The group recently announced the divestment of the power segment (Hemas Power PLC) with the aim of concentrating
on more profitable business ventures.
Figure 1: Business Interests

Hemas Group

FMCG

Healthcare

Leisure

Transportation

Other

Own Brands

Hospitals

Hotels

Aviation

Vishwa BPO

International

Healthcare
Distribution

Destination
Management

Logistics

N-Able

Contract
Manufacturing

Maritime

Source : HHL

Pg | 2

SWOT Analysis
Strengths

Weakness

Position as Sri Lankas leading pharmaceutical importer and distributor for over 6 years

Expanded chain of laboratories

Economies of scale from vertical integration

High end surgeries at Wattala hospital and increasing

Being located away from Colombo, attracting specialist doctors can be difficult

confidence (increasing surgical patients)

Well trained staff (partnership with the Kerala Institute


of Medical Sciences for staff training)

Focus on value-addition, expansion of existing ser


vices and specialization

Strong distribution network for pharma

Well known and trusted brand in baby care products

Owns reputed international hotel brand Avani

Opportunities

Increasing ageing population resulting in higher demand for healthcare (rising longevity and low fertility

Threats

Increasing per capita income resulting in increased

Increasing non communicable diseases

Increasing tourist arrivals and high demand for luxury

Technological changes requiring frequent upgrades


to infrastructure

demand

for

FMCG products

rates)

Competition from other established brands

Price regulation by the Consumer Affairs Authority


for pharmaceuticals

boutique type hotels

Govt expenditure on health as a % of GDP at lower


levels cf. region indicating potential demand for private
health care

Pg | 3

Investment Highlights
Diversified into growing and profitable segments of the economy
HHL has been operating in key fast growing segments of the economy such as healthcare, pharmaceuticals and personal care. The well experienced management team of the company regularly assesses profitability and growth aspects of
the current segments as well as other rewarding segments of the economy and decides upon the strategies to capitalize
on the opportunities available through divestment of unprofitable segments (e.g. Hemas Power PLC, Skynet Worldwide
Express (Pvt) Ltd) and acquisition of profitable segments (e.g. J. L. Morison Son and Jones (Ceylon) PLC). This would assist Hemas in expanding their portfolio to remain profitable and to offer higher returns to investors.

Healthcare sector to benefit from increasing demand for private healthcare services and lucrative synergies through
the acquisition of JLM
With increasing demand for private healthcare in Sri Lanka and its unique strategy of locating the hospitals in sub urban
areas with high population density away from Colombo, Hemas will have a competitive advantage over other players
who are located in the capital of Colombo. The newly opened hospital in Thalawathugoda should also contribute to increased revenue and profitability. Hemas group integrated vertically during FY2014 with the acquisition of J. L. Morison
Son and Jones (Ceylon) PLC (JLM) expanding the pharmaceuticals distribution network and the product portfolio. With
this acquisition we expect efficiencies in the manufacturing plants and the distribution network to improve. With these
improvements we expect healthcare sector revenue to grow at a CAGR of 11.0% over FY2015E-17E.

Strong demand for personal care products


Despite of heavy competition from other similar products Hemas FMCG revenue grew at a CAGR of 19.2% from FY201214. Domestic retail trade grew at a CAGR of 13.3% over the same period suggesting HHLs ability to outpace the market.
With rising per capita income, demand for personal care products has been on the rise which saw considerable volume
growth as well as price increases favoring the manufacturers. Further, direct exports to countries with capacity for further
demand growth should assist Hemas in expanding volume and revenue further. Hence, we expect FMCG revenue to
grow at a CAGR of 13.3% through FY2015E-17E.

Focus on more profitable segments divestment of Hemas Power


The company recently entered into an agreement to sell its entire holding in the power generating sector, a healthy move
towards improving profitability of the group. The thermal power plant which contributed to c. 90.0% of the power segment
revenue will cease operations in FY2015E with the Power Purchase Agreement being expired which is unlikely to be renewed. The company has already started impairing the assets which resulted in a loss of LKR162mn in FY2014E. With the
divestment, even though there will be a negative impact on the top line, we expect group profitability to improve in the
succeeding years.

Internationally recognized brands to boost leisure sector performance


Hemas leisure sector offers a diverse experience to its customers ranging from luxury resorts to activity oriented. Hemas
portfolio currently consisting of 4 hotels will be widened with the investment in the luxury 5 star resort in the Southern
coast in partnership with the Thailand based renowned Minor hotel group. This will expand the group hotel room count to
550 from current 410 which is expected to commence operations in FY2016E. Further, we expect Club Hotel Dolphin and
Hotel Sigiriya to post improved results which were refurbished during the last year. We expect, leisure segment revenue
to grow at a CAGR of 26.4% from FY2015E-17E and contribution to EBIT to increase to 7.8% by FY2016E.

Pg | 4

Hemas Healthcare and Pharmaceuticals


Hemas is the largest private organization in the Sri Lankan healthcare industry with the largest distribution network of
pharmaceuticals, surgical & diagnostic products. In addition it operates three hospitals and a chain of diagnostic laboratories. The sector contributes to 37% of the group revenue and 42% of the group EBIT.

Figure 2: Healthcare Segment

Figure 3: Health Sector Contribution

Hemas Healthcare

Wattala
Galle

Hospitals

Thalawathugoda
Medical Laboratories

37%

Healthcare

Revenue

Pharmaceuticals
Healthcare Distribution

42%

vs Group

Healthcare

vs Group
63%

EBIT

58%

Surgicals and Diagnostics


Wellness

Source : HHL

Group

Healthcare

Group

Healthcare

Source : HHL

Hospitals
Hemas operates 3 multi-specialty family hospitals with full international accreditations at Wattala (Hemas Hospital, Wattala), Thalawathugoda (Hemas Hospital, Thalawathugoda) and Galle (Hemas Southern Hospital). In addition it operates 11
laboratory and channeling service branches.
Hemas Hospital - Wattala
Opened in 2008, the Wattala hospital is a 100-bed multi specialty general hospital and offers a wide array of services including emergency care, ICU, laboratory, CT, MRI, surgery and maternity. Over 150 specialist consultants visit the hospital
and records around 15,000 out-patient visits and 900 in-patient visits per month.
Hemas Southern Hospital - Galle
Opened in 2009 the hospital consists of 50 bed hospital consists of operation theatres, labor rooms, an Endoscopy unit, an
ICU, a modern diagnostic laboratory and a radiology unit.
Hemas Hospital - Thalawathugoda
Openned in 2013 Hemas hospital Thalawathugoda has a 60 bed capacity with around 200 visiting consultants.
Healthcare Distribution
Through its fully owned subsidiaries Hemas Pharmaceuticals (Pvt) Ltd, Hemas Surgical & Diagnostics (Pvt) Ltd and J L
Morison Son & Jones (Ceylon) PLC, M. S. J. Industries (Ceylon) (Pvt) Ltd Hemas healthcare distribution segment holds a
market share of 21% and records over LKR9bn turnover. This segment is referred to as Sri Lankas leading pharmaceutical
importer and distributor representing more than 25 international and regional pharmaceuticals manufacturers.

Pg | 5

Sri Lankan Healthcare Industry


The public sector dominates the Sri Lankan healthcare in-

Figure 4: Revenue Shares of Leading Hospitals

dustry with a wide spread network of infrastructure and es-

8%

tablishments. The private sector on the other hand is still


relatively insignificant, yet exhibits strong demand growth
despite higher cost due to a multitude of factors such as

18%

35%

overcrowding, long waiting times service quality disparities

2014

and the limited availability of medicines in government hospitals.

20%

The private healthcare sector caters largely to high and mid

19%

income earners and individuals with access to medical insurance. Accordingly demand for private healthcare stems
from urban areas especially with a significant contribution
from Colombo where disposable incomes are high.

Asiri

Durdans

Nawaloka

Lanka

Hemas

Source: Annual Reports

The industry experiences a shortage of skilled work force


and substantial brain drain. Therefore private hospitals are

Figure 5: Bed Capacity in Leading Hospitals

heavily dependent on visiting specialists to attract patients,


thus has lead to a doctor-centric system rather than institu-

Hemas

tion-centric. Hence demand is mainly dependent on the

Lanka Hospitals

The Central

number and quality of the consultants visiting a hospital.

Asiri Surgical

Supply of private healthcare in Colombo largely lies with few

Asiri Hospital

large players such as Asiri, Lanka Hospitals, Nawaloka and

Durdans

Durdans Hospitals. The private sectors presence is seen

Nawaloka

largely in out-patient care. The industry is relatively capital

intensive, given the high costs of medical equipment, infrastructure and technology.

75

150

225

300

375

450

Bed capacity
Source: Annual Reports, NLE

Key factors driving competition apart from the number and


quality of resident and visiting doctors include quality of services offered, hospital charges and room rates. In this context private hospitals attempt to offer innovative products in
order to differentiate themselves from other players. Moreo-

Figure 6: Health Sector Indicators


1,500

ver some operators seems to specialize in a particular area

1,200

of medicine. Further operators appear to strengthen their

900

competitive position through consistent capacity expansions

600

and geographical expansions. Providing appropriate quality


and care to preserve brand name in the private hospital
business is of paramount importance.

38,000

36,000
34,000
32,000

300
-

30,000

2009

2011

2012

2013

Patients per doctor (LHS)

The capital intensive nature of the business, brand name

Patients per bed (LHS)

and high startup costs precludes new entrants to a certain


extent and at the same time provides cushion for existing

2010

Patients per hospital (RHS)


Source: CBSL

operators.

Pg | 6

Pharmaceuticals Industry
The pharmaceutical market in Sri Lanka is worth approximately LKR50bn. Around 70% of the market share is held by

Figure 7: Health Sector Expenses


LKRmn.

LKRmn

the private sector while the remaining market share is held

140,000

. 140,000

by public sector institutions. (SLCPI). The local manufactur-

120,000

120,000

ing accounts for cf. 15% with over 200 products in 2013.

100,000

100,000

(SLPMA). The Cosmetics, Devices and Drugs Authority

80,000

80,000

(CDDA) regulates all pharmaceuticals, surgical products,

60,000

60,000

diagnostic products and health supplements both locally

40,000

40,000

manufactured and imported.

20,000

20,000

Since the public sector dominates the healthcare sector, the


main focus of local pharmaceutical manufacturers and im-

2010

2011

2012

2013

Capital expenditure on health

porters have been the public healthcare sector. Therefore

Current expenditure on health


Imports of medical and pharmaceutical products (govt. & private)

competition for government tenders have become fierce.


In addition the popularity in outpatient care of the private

0
2009

Source: CBSL

sector and the tendency of people to buy drugs from pharmacies due to the shortage of drugs in the public hospitals
and service quality disparities, supply of pharmaceuticals to

Figure 8: Non Communicable Diseases Growth

the private sector also demonstrates growth. In this context

Population mn.
5.4

suppliers enjoy relatively more pricing flexibility and bargain-

4.5

ing power.

3.6

Despite the large number of operators, competitors attempt


to specialize or gain monopolies in particular products. In
addition established operators seems to promote their products through medical practitioners in the industry.

2.7
1.8
0.9
0

1990

We believe demographic changes such as increasing ageing population, rising of chronic diseases, increasing health
awareness will drive demand for healthcare and pharmaceuticals. This is further reinforced by the increasing dispos-

1995
2000
2005
2007
Neoplasms
Mental and behavioural disorders
Diseases of the circulatory system
Diseases of the respiratory system
Injury, poisoning and other

2009

Source: Ministry of Health

able income, overcrowding and inadequate capacity of government hospitals. Further we expect competition in the private healthcare sector to rise in the medium term with ca-

Figure 9: Aging Population in Sri Lanka

pacity expansions especially in urban areas resulting in

2013

downward pressure on prices.

2007

The pharmaceuticals industry would experience modest

2001

growth in volumes due to aforementioned facts and also


face stringent regulations in the medium term.
We expect the doctor centric nature of the industry to continue supported by powerful unionization.

1996

1986
1978
1963
0%
20%
0 - 14 Years

40%
60%
80%
100%
15 - 54 Years
55 Years and Over

Source: CBSL

Pg | 7

FMCG
Hemas FMCG sector includes a range of well-known and

Figure 10: FMCG Sector Contribution

established products for all age categories in hair care, skin


care, toiletries, fragrances, feminine hygiene, home care and
oral care.

29%

The products are available in nearly 140,000 outlets island


wide ranging from small scale retail stores to large super-

33%

FMCG vs

Group

Group

Revenue

markets. A selected number of Hemas brands are directly

FMCG vs
EBIT

71%

67%

exported to Maldives, Lebanon, Bangladesh, Belize, New


Zealand, Zambia, Malaysia, Pakistan, Australia and Middle
East as well as indirectly exported through Sri Lankan Export
Development Board (SLEDB) approved exporters.

Group

FMCG

Group

FMCG

Source: HHL

Contract Manufacturing
Hemas acts as a contract manufacturing partner in the development and manufacture of FMCG products for several
leading companies. This segment has lucrative prospects especially with the trend of supermarket chains promoting own
branded goods.
Major Brands
Brand
Baby Cheramy
Clogard
Kumarika
Velvet

Description
The companys flagship brand with over 50 years of trusted excellence continues to be market
leader and has been the preferred choice of Sri Lankan mothers.
Re-launched successfully and has recorded significant growth, despite heavy competition and
low over all market growth.
Maintains position as the market leader in the branded hair oil segment in Sri Lanka which
has seen significant demand from the Bangladesh market as well.
The brand was re-launched as an improved product with dual ingredients to make its proposition more appealing to the consumers, supported by new attractive packaging.
The companys washing powder continues to provide strong value to the consumers. Diva

Diva

was re-launched with improved perfume, enhanced washing functionalities and attractive
packaging.
Under this new brand name the company launched two variants of Eau De Toilette Spray

PRO

tapping into the premium male fragrances category. Pro hair gel is a well-known for its unique
features.

Gold
The Cheramy Touch range
Paris, Goya and Capri

Male fragrance and grooming product range; re-launched to cater to evolving consumer
needs.
This brand has been launched to exploit opportunities in the growing adult Skin Care category.
Female fragrance product range catering to different market segments.

Pg | 8

FMCG Industry in Sri Lanka


The LKR133bn Fast Moving Consumer Goods (FMCG) mar-

Figure 11: FMCG Sector

ket in Sri Lanka is highly competitive and fast changing. The


personal care and household care segment is largely dominated by MNCs. The FMCG market growth is mainly driven
by higher disposable income, new channels and choices of
new products for consumers to choose from and importantly, price since consumers are very value conscious in this
segment.

22%
Personal care
Household care
Food and Beverages
OTC products

13%
63%

The personal care industry growth exceeded food & beverage and household care driven mainly by price increases,
while the growth of household care was below the inflation

Source: HHL

rate during the past 3 years. The food and beverages segment experienced a noticeable decline with the increase in
substitutes and changes in lifestyle.
The emerging lifestyle and personal care products, that appeal to younger consumers demonstrates the highest potential growth. In a trend perspective, the lucrative target of marketers have been the consumers born in the 1980s and
1990s; the reality TV show era since they represent a significant 3.5mn of the population and are becoming increasingly
more influential. In addition to being a group with growing
spending power, Millennials tend to be more optimistic than

Figure 12: FMCG Sector Growth


8.00%
6.00%
4.00%
2.00%

0.00%
-2.00%

FMCG-All

the average consumer and exhibits the highest consumer


All Island

confidence. They also tend to spend more on themselves


when it comes to discretionary purchases.

Food &
Beverages
All Island (R)

Household Personal Care


Care
All Island (U)

Source: HHL

Further, package size is a primary consideration in the industry. Retailers and companies have been offering products in
medium-sized packs to provide a price-conscious option
when consumers did not have the economic bandwidth to

Figure 13: Per Capita GDP Growth


LKR

spend for larger, higher-cost packages. However, in recent

250,000

times, consumers tend to use these options less. Moreover,

200,000

more and more consumers tend to gradually shift to either

150,000

larger or smaller sizes even when prices for smaller packs


increase. Furthermore the value added branding culture
seems to become more prominent with the influence by
social media networks.

100,000
50,000
2012 2013 2014 2015 2016 2017 2018 2019

We believe the increasing per capita income of the consum-

Per Capita GDP-current prices (LKR)

ers, increasing standards of living of the rural population,


expanding middle income segment in the economy, influ-

Source: IMF

ence of social media and massive influx of tourists into the


country would drive the industry growth further.

Pg | 9

Leisure Sector
The Serendib Leisure Group of Hotels and Diethelm Travels-

Figure 14: Leisure Sector Contribution

make up the Hemas Leisure Sector. The Serendib Leisure


group comprises of four hotels. i.e. Avani Bentota, Avani

5%

13%

Kalutara, Club Hotel Dolphin and Hotel Sigiriya and is located on the south and west coast and within the heart of the

Leisure vs

cultural triangle. Diethelm Travels is the local branch of a


group revenue and 11% of the group profit.

EBIT
87%

95%

Leisure structure

ies of Hemas Holdings PLC. Serendib Hotels PLC is the ma-

vs Group

Revenue

international travel group. The sector accounts for 5% of the

Serendib Hotels PLC and Dolphin Hotels PLC are subsidiar-

Leisure

Group

Group

Leisure

Group

Leisure

Source: HHL

jor shareholder of Hotel Sigiriya PLC (Hotel Sigiriya in Dambulla) and also holds a stake in Dolphin Hotels PLC (Club
Hotel Dolphin and Miami Cottages in Waikkal). It also has a
19.9% stake in Jada Resort & Spa (Pvt.) Ltd. (associate)
which owns Avani Kalutara Resort in Kalutara Serendib Hotels fully owned subsidiary Serendib Leisure Management
Ltd. manages all of the above properties. Serendib Leisure is
in partnership with Minor International A Thailand based
hotel group which owns the Avani and Anantara brands.
Hotel Sigiriya
Hotel Sigiriya has 79 rooms 1 restaurant and was last renovated in 2013. It records an average occupancy of 70% in

Figure 15: Top Hotel Financials


LKR mn
700

600
500
400
300
200
100
0

Avani Bentota
Revenue

Dolphin hotels
Gross Profit

Hotel Sigiriya
Net Profit

Source: HHL

2013.
Club Hotel Dolphin
Is located in Waikkal, Negombo and is positioned as an all inclusive club hotel that offers a range of sporting and recreational activities and also allows for time out and relaxation. It is equipped with 151 rooms which include 99 deluxe rooms
and 50 beach villas. In addition it as 2 restaurants and 5 bars. The hotel was renovated in 2013 with new additions such as
a night club and a karoke bar. The hotel achieved an average occupancy of 84% in 2013.
Avani Kalutara
Located in the southwest coast Avani Kalutara is equipped with 105 rooms and was last renovated in 2012.
Avani Bentota Resort & Spa
It is a beachfront accommodation with 75 rooms, 2 restaurants and 2 bars. It was last renovated in 2011. The hotel
achieved an average occupancy of 68% and posted revenue of LKR429mn.

Pg | 10

Sri Lankan Tourism


Tourism is a fast-developing industry in Sri Lanka and one of
the main sources of foreign exchange earnings. The island

Figure 16: Peer Country Tourist Arrivals


Growth YoY
30%

20%

15

15%

10

10%

5%

0%

yond the traditional beach and sand focus.


Commendable support from the government is noticeable
by way of infrastructure development and active promotion
of the country as a holiday location. Further, 45 tourism
zones have been introduced by SLTDA as a means of

2011

streamlining the development of the industry and attracting


foreign direct investments.
Significant foreign interest is apparent in the leisure sector
with many international hotel brands entering the country
which will in turn uplift the industry standards and stimulate

Growth

Figure 17: Arrivals by Market


Arrivals '000
600

existing operators of expertise and international brand pres-

500

ence in gaining competitive advantage.

400
300

dustry with substantial development from non traditional

200

markets such as India, China and Middle East which we

100

believe helps reduce the seasonality experienced in the in-

dustry.

Westurn Eastern
Europe

Europe

North

Asia

Australia

Other

America

2012

Notably hotel operators attempt to improve online presence


and encourage online reservations. Also seems to enrich

2012

Source: UNWTO

healthy competition. Further, this signifies the importance for

Europeans have been the largest source market in the in-

Maldives

ayurveda, wildlife, heritage culture and festivals, moving be-

Thailand

of offerings to include entertainment, recreation, sports,

Cambodia

20

ways and means to attract tourists by widening its portfolio

Indonesia

25%

Malaysia

25

Vietnam

its key tourist attractions. It is continuously on the lookout for

Srilanka

Arrivals mn
30

Millions

boasts beautiful natural surroundings and historical sites as

2013

Source: SLTDA

their offerings to include more innovative activities such as


water sports, hot air ballooning and safaris, with the intention of increasing average stay of tourists.
At present the lack of international grade resorts and comparatively higher room rates discourage tourist to visit the
country to some extent and favor countries such as Malaysia, Indonesia and Thailand.
Further skilled labor in the industry experiences a shortage
and we expect this to further worsen in the future with international brands entering the Sri Lankan hotel industry.

Figure 18: Average Occupancy


100%

80%
60%
40%
20%
0%
Club Hotel Dolphin Avani Bentota avg. Hotel Sigiriya avg.
avg. occupancy

occupancy

occupancy

Ancient cities avg. occupancy


Greater Colombo avg. occupancy
Source: SLTDA, HHL

Pg | 11

Transportation Sector
The groups transportation sectors business portfolio in-

Figure 19: Transportation Sector Contribution

cludes aviation, maritime and logistics services. The sector


accounts for 5% of the group revenue and 18% of the group

5%

18%

EBIT.
Transportation

Aviation Services

vs Group EBIT

Revenue

Aviation services include air line representation and outbound travel. It represents Emirates, Malaysia, Maldivian

82%

95%

airlines in both passenger and cargo services as well as


Ukraine international, Druke, Alithalia airlines in the passenger only services segment.

Transportation

vs Group

Group

Group

Transportation

Transportation

Source: HHL

In its outbound travel segment Hemas Travels operates trav-

1,500

-60

improvement with several new airlines entering the country.

2012

We expect the segment to grow especially through im-

2013

Growth YoY

Other

-40

Malaysian

500

CAGR during 2011-13 along with commendable capacity

proved GSA sales supported by increased corporate, incen-

-20

1,000

Singapore

Passenger arrivals demonstrate a steady increase of 9.2%

20

2,000

Air Arabia

Associates

2,500

Cathay Pacific

agent for Royal Caribbean Cruise Lines, & Gulliver's Travel

40

3,000

Jet Airways

Globus and Cosmos worldwide tours. Further, it is also local

60

3,500

Fly Dubai

tions. It also operates coach tours and is the local agent for

80

4,000

Qatar

The leisure arm offers both packaged and customized vaca-

Passenger traffic '000


4,500

Mihin

organization headquartered in the UK.

Figure 20: Airline Operations, Growth and Market Share

Emirates

Hogg Robinson Group, an international corporate services

SriLankan

el agencies. The corporate travel services is partnered with

Market share (2013)

Source: AASL

the tourist industry, improved disposable income and the

Figure 21: Flight, Cargo and Passenger Movement

efforts and focus of the government to position Sri Lanka as

'000
250

200

7,000

150

6,500

100

6,000

50

2013

5,500
2012

0
2011

velopment.

2010

an aviation hub through promotions and infrastructure de-

'000
7,500

Thousands

tive and leisure travel. This is well supported by the boom in

International flight movements nos.


Cargo movement M.T.
Passenger movement nos.
Source: AASL

Pg | 12

Maritime
The sector acts as a shipping agent, provides maritime services and is involved in strategic investments. Far Shipping
Lanka (FSL) acts as the exclusive shipping agent for Far Shipping Lines (FSL) Singapore, a leading feeder service to the
Indian subcontinent. In addition it provides shipping agency services including crew changes, import and export (Sea/Air)
shipments of ship spares, CTM (Cash To Master), ship repairing (ashore and anchorage), periodic and annual inspection
and certification of life saving equipment on board amongst other services to vessels calling at ports at Colombo, Galle,
Hambantota and Trincomalee. Furthermore the group has a strategic investment in Mercantile Shipping PLC.
Globally the maritime industry is yet being impacted by sluggish growth in trade volumes due to the economic situation in
the west and the prevalent over-capacity situation in the industry. However Sri Lankan container handling throughput
exhibits satisfactory development (2.8% in 2013) and we expect this to continue with the expected gradual recovery in the
western economy, governments pursue towards making the country a maritime hub and Hemas maritime sector being
positioned with strong partnerships such as with Far Shipping Singapore.
Logistics

Figure 22: Colombo Port Cargo Handling

talks with Hellman Worldwide Logistics for a mutual parting.


We believe the segment is more liner now with ACX international focusing on courier services and Hemas logistics focusing on general carries and warehousing.
Power
The group divested its investment in Hemas Power PLC to a

Thousands

has exited the joint venture with Skynet Worldwide and is in

Mn.

Mn.

services, general carries and warehousing. The company

68

66

64

62

60

58

2010

2012

2013

Total container traffic (TEUs mn) (LHS)


Transshipment containers (TEUs mn) (RHS)
Total cargo handled (MT mn) (LHS)

consortium of buyers recently. The power segment of Hemas contributed 20% of the group revenue in FY2014. However the contribution to EBIT fell to 3% in FY2014 cf. 13% in

2011

Thousands

The logistics business includes freight forwarding, courier

Source: CBSL

FY2013. Changing weather patterns have resulted in long


periods of drought and has lead to the dependence on thermal power in the industry.

Figure 23: Other Sector Contribution


5%
5%

Other

nology solutions, importing and distributing agro chemicals,

Group

Revenue

promotional activities and wharf clearing services.

95%

Group

Others

Other vs
Group EBIT

2014

development, Financial accounting BPO, information tech-

Other vs

2013

Hemas other business includes corporate services, property

-3%

Source: HHL

Pg | 13

Financial Analysis
Revenue

Group revenue increased 25.8% yoy in FY2014 to LKR32.8b cf. LKR26.1b in FY2013 crossing the LKR30b mark for the
first time. The acquisition of J. L. Morison Son and Jones (Ceylon) PLC (JLM) during FY2014 contributed significantly to
revenue growth with LKR2.7b.

Highest contributor to group revenue is the healthcare sector (36.7%) which increased 34.4% yoy to LKR12.1b in
FY2014. The growth was mainly attributable to the acquisition of JLM and new revenue from the hospital in Thalawathugoda.

FMCG and Power sectors followed with 29.1% and 19.7% in FY2014 respectively.

The leisure sector revenue declined 4.9% yoy in FY2014 due to 2 hotel properties being closed for refurbishment.

At group level revenue increased at a CAGR of 23.5% with the highest contribution to growth from the transportation
segment.

We expect group revenue to decline 10.0% yoy to LKR29.5b in FY2015E with the divestment of Hemas Power PLC
(which contributed to 19.7% of total revenue in FY2014).

Consequently the revenue share from the healthcare segment should increase to 44.1% in FY2015E from 36.7% in
FY2014 with 8.0% growth yoy.

However, we expect group revenue to increase at a CAGR of 13.9% from FY2015E-17E with the highest contribution to
growth arising from the leisure segment.

We expect leisure segment revenue to grow at a CAGR of 21.5% from FY2014-17E with the new 154 room luxury hotel
to be opened in FY2016E. Further, with recent refurbishment carried out in two hotel properties, Club Hotel Dolphin
and Hotel Sigiriya, we expect average occupancy to improve to 80% by FY2017E from current 75%.

Figure 24: Sector Wise Contribution to Revenue

Figure 25: Group Revenue

100%

50,000

80%

40,000

60%

30,000

40%

20,000

20%

10,000

0%

0
FY2013

Healthcare
Other
Source: HHL, NLE

FY2014

FY2015E

FMCG
Leisure

FY2016E

FY2017E

Transportation
Power

30%
25%
20%
15%

10%
5%
0%
-5%
-10%
-15%
FY2012 FY2013 FY2014 FY2015EFY2016EFY2017E

Revenue (LKRmn) (LHS)

YoY Growth (RHS)

Source: HHL, NLE

Pg | 14

Profitability

EBIT excluding the gain from change in fair value of

Figure 26: ROE, ROA and ROCE

investment property (LKR729mn) and share of profit of

20.0%

associates (LKR12mn) increased 11.3% yoy to LKR2.6b


in FY2014 with the highest contribution coming from the

15.0%

healthcare segment (41.6% yoy growth and 31.3% EBIT


margin).

The power sector made an operating loss of LKR75mn


with an impairment charge of LKR576mn upon the Power Purchase Agreement (PPA) of the thermal power
plant being ceased in December 2014, which is unlikely

10.0%
5.0%
0.0%

FY2012

to be renewed.

The closure of the 2 hotel properties also contributed to


reduced profitability with EBIT of the segment declining
32.6% yoy in FY2014.

Net profit increased 32.3% yoy to LKR2.6b in FY2014


(including one off items i.e. gain in change of fair value
of investment property of LKR729mn and impairment of
thermal assets of LKR576mn).

The gain in change of fair value of investment property


is attributable to the transfer of land to a joint venture to
commence construction of a hotel.

FY2014 FY2015E FY2016E FY2017E

ROE ( Equity holders)

ROCE

ROA

Source: HHL, NLE

Figure 27: EBIT


5,000

12%
10%

4,000

8%

3,000

6%
2,000

4%

1,000

2%

0%
FY2012 FY2013 FY2014 FY2015E FY2016E FY2017E

We expect EBIT to be at LKR3,256mn in FY2015E cf.

EBIT (LKRmn) (LHS)

LKR3,378mn in FY2014. The reduction is on the back of


change in FV gain of LKR729mn recorded in FY2014.

FY2013

EBIT Margin (RHS)

Source: HHL, NLE

The divestment of Hemas Power PLC will be beneficial

relating to its effect on profitability eliminating the losses

Figure 28: Net Profit

incurred by the power segment.

4,000

ROE and ROA increased to 18.2% and 8.0% in FY2014

3,500

respectively cf. 14.6% and 6.8% in FY2013 mainly attributable to increased profitability and increased efficiency of assets. With reduced profitability in FY2015E,
we expect ROE and ROA to decline to 14.8% and 6.5%
in FY2015E and improve thereafter.

12%
10%

3,000

8%

2,500
2,000

6%

1,500

4%

1,000

2%

500
0

0%
FY2012 FY2013 FY2014 FY2015E FY2016E FY2017E

Net Profits (LKRmn) (LHS)

NP Margin (RHS)

Source: HHL, NLE

Pg | 15

Financial Position
Figure 29: Debt Composition

Figure 30: Net Assets

120%

50.00

100%

40.00

80%

30.00

60%
20.00

40%

10.00

20%
0%
FY2012

FY2013

FY2014 FY2015E FY2016E FY2017E

Short term Debt %

0.00
FY2012

FY2013

FY2014 FY2015E FY2016E FY2017E

Net Asset Value per share (LKR)

Long term Debt %


Source: HHL, NLE

Source: HHL, NLE

Group Property, Plant and Equipment increased 20.2% yoy in FY2014 mainly attributable to the acquisition of JLM.

Net Assets of the group stood at LKR27.75 at the end of FY2014 and LKR28.05 at the end of Q1FY2015.

The gearing ratio stood at 22.9% (excluding overdraft) at the end of FY2014, cf. 16.7% in FY2013 with net additions
amounting to LKR2b during the year.

With the aim of restructuring the balance sheet the company issued 5 year LKR1b debentures at 11.3% (effective
rate). The proceeds will be utilized to pay off existing debt allowing the company to have both fixed and floating rate
borrowings.

The repayment of debt will result in reduced gearing which we expect to lower to 17.0% in FY2015E and improve further in the subsequent years.

Figure 31: Total Debt to Equity


30,000

Figure 32: Liquidity


25%
20%

20,000

2.00
1.50

15%

10%

10,000

0
FY2012 FY2013 FY2014 FY2015EFY2016EFY2017E

Total Equity (LKRmn) (LHS)

1.00

5%

0.50

0%

0.00
FY2012

Total Debt (LKRmn) (LHS)

FY2014 FY2015E FY2016E FY2017E

Current Ratio

Total Debt to Capital % (RHS)


Source: HHL, NLE

FY2013

Liquidity Ratio

Source: HHL, NLE

Pg | 16

Financial Snapshot
LKR 000

FY2012

FY2013

FY2014

FY2015E

FY2016E

FY2017E

21,532,503

26,098,362

32,833,249

29,550,370

34,311,545

38,340,415

Gross profits

6,574,778

8,023,271

10,219,439

9,160,615

10,636,579

11,885,529

EBIT

1,783,950

2,436,994

3,378,598

3,256,852

3,829,979

4,331,622

Profit Before Tax

1,521,080

2,409,541

3,047,239

2,891,511

3,607,391

4,174,626

Net Profit

1,261,308

1,935,843

2,560,905

2,430,031

3,180,686

3,689,708

Net Profit for equity holders

1,164,525

1,659,660

2,409,276

2,235,628

2,862,617

3,357,634

2.45

3.76

4.97

4.72

6.17

7.16

Total Non-Current Assets

11,853,344

13,059,937

17,630,397

15,483,049

16,925,885

18,521,129

Total Current Assets

10,802,342

12,947,721

16,748,492

17,210,444

19,021,108

21,189,612

Total Equity (with Minority Interest)

12,640,944

14,412,379

17,629,635

18,367,073

21,064,337

24,270,623

Total Non-Current Liabilities

1,938,996

2,803,970

4,327,089

3,410,370

2,994,859

2,704,001

Total Current Liabilities

8,075,746

8,791,309

12,422,165

10,916,050

11,887,798

12,736,117

20.67

23.58

27.75

31.59

36.35

42.06

1,507,983

1,863,616

2,895,800

3,872,027

3,511,183

4,246,482

(1,608,823)

(1,361,483)

(4,662,937)

(387,716)

(2,401,808)

(2,683,829)

Net Financing Cash Flow

(437,744)

131,349

1,140,803

(1,603,128)

(1,077,008)

(898,932)

Net Change in Cash

(538,584)

633,482

(626,334)

1,881,183

32,366

663,721

Revenue YoY

19.2%

21.2%

25.8%

(10.0%)

16.1%

11.7%

Gross profit YoY

12.6%

22.0%

27.4%

(10.4%)

16.1%

11.7%

2.5%

36.6%

38.6%

(3.6%)

17.6%

13.1%

Profit Before Tax YoY

(3.1%)

58.4%

26.5%

(5.1%)

24.8%

15.7%

Net profit YoY

(6.9%)

53.5%

32.3%

(5.1%)

30.9%

16.0%

-3.8%

42.5%

45.2%

(7.2%)

28.0%

17.3%

Gross profit

30.5%

30.7%

31.1%

31.0%

31.0%

31.0%

EBITDA

11.2%

12.0%

13.0%

13.9%

14.0%

14.1%

Operating profit

8.3%

9.3%

10.3%

11.0%

11.2%

11.3%

Profit before tax

7.1%

9.2%

9.3%

9.8%

10.5%

10.9%

Net profit

5.9%

7.4%

7.8%

8.2%

9.3%

9.6%

Inventory turnover

8.1x

8.2x

7.1x

5.8x

7.2x

7.0x

Receivable turnover

4.2x

4.0x

4.2x

3.6x

4.0x

3.9x

Payable turnover

3.2x

3.3x

3.3x

2.7x

3.1x

3.0x

11.9%

14.6%

18.2%

14.6%

16.4%

16.6%

5.6%

6.8%

8.0%

6.7%

8.3%

8.9%

ROCE

13.1%

15.3%

17.2%

14.9%

16.7%

17.0%

Dividend Payout

20.4%

14.6%

15.1%

12.7%

13.0%

11.2%

Gearing ( Total Debt to Capital)

15.5%

16.7%

22.9%

16.6%

12.7%

9.8%

Current ratio (x)

1.3x

1.5x

1.3x

1.6x

1.6x

1.7x

Liquidity ratio (x)

1.1x

1.2x

1.0x

1.3x

1.3x

1.4x

Statement of Comprehensive Income


Revenue

EPS - LKR
Statement of Financial Position

NAV Per share - LKR


Statement of Cash Flow
Net Operating Cash Flow
Net Investing Cash Flow

Growth ratios (%)

Operating profit YoY

Net profit- parent YoY


Margins (%)

Turnover ratios (x)

Other ratios (%)


ROE (to equity holders)
ROA

Pg | 17

Income Statement
LKR 000

FY2012

FY2013

FY2014

FY2015E

FY2016E

FY2017E

Revenue

21,532,503

26,098,362

32,833,249

29,550,370

34,311,545

38,340,415

(14,957,725)

(18,075,091)

(22,613,810)

(20,389,756)

(23,674,966)

(26,454,887)

Gross Profit

6,574,778

8,023,271

10,219,439

9,160,615

10,636,579

11,885,529

EBITDA

2,413,372

3,144,587

4,284,570

4,099,830

4,788,951

5,420,207

629,422

707,593

905,972

842,979

958,972

1,088,585

Operating Profit

1,783,950

2,436,994

3,378,598

3,256,852

3,829,979

4,331,622

Finance Cost

(465,269)

(370,103)

(657,076)

(691,058)

(548,304)

(482,713)

Finance Income

202,399

342,650

325,717

325,717

325,717

325,717

Profit Before Tax

1,521,080

2,409,541

3,047,239

2,891,511

3,607,391

4,174,626

Cost of Sales

Depreciation

Income Tax Expenses

(259,772)

(473,698)

(486,334)

(461,480)

(426,706)

(484,918)

Profit for the Year

1,261,308

1,935,843

2,560,905

2,430,031

3,180,686

3,689,708

Equity Holders of the Parent

1,164,525

1,659,660

2,409,276

2,235,628

2,862,617

3,357,634

96,783

276,183

151,629

194,402

318,069

332,074

FY2012

FY2013

FY2014

FY2015E

FY2016E

FY2017E

Profit Before Taxation

1,521,080

2,409,541

3,047,239

2,891,511

3,607,391

4,174,626

Net Cash flows from Operations

1,507,983

1,863,616

2,895,800

3,872,027

3,511,183

4,246,482

Net Cash flow from Investments

(1,608,823)

(1,361,483)

(4,662,937)

(387,716)

(2,401,808)

(2,683,829)

Net Cash flows from Financing

(437,744)

131,349

1,140,803

(1,603,128)

(1,077,008)

(898,932)

Net Increase/(Decrease)

(538,584)

633,482

(626,334)

1,881,183

32,366

663,721

Beginning Cash/ Cash Equivalents

1,101,008

561,533

1,194,936

570,587

2,451,770

2,484,136

561,533

1,194,936

570,587

2,451,770

2,484,136

3,147,857

Non-Controlling Interests

Cash Flow Highlights


LKR 000

Ending Cash/ Cash Equivalents

Pg | 18

Balance Sheet
LKR 000

FY2012

FY2013

FY2014

FY2015E

FY2016E

FY2017E

10,283,616

11,293,957

13,571,854

11,424,506

12,867,342

14,462,586

474,685

578,453

1,683,130

1,683,130

1,683,130

1,683,130

Leasehold Right

94,455

90,592

145,847

145,847

145,847

145,847

Intangible Assets

461,499

436,701

1,333,247

1,333,247

1,333,247

1,333,247

Investment in Associates

179,399

221,325

380,303

380,303

380,303

380,303

Other Non Current Financial Assets

324,069

399,147

457,435

457,435

457,435

457,435

35,621

39,762

58,581

58,581

58,581

58,581

11,853,344

13,059,937

17,630,397

15,483,049

16,925,885

18,521,129

Inventories

2,004,989

2,425,137

3,932,906

3,058,463

3,551,245

3,968,233

Trade and Other Receivables

5,854,420

7,047,695

8,523,389

7,978,600

9,264,117

10,351,912

134,306

78,590

126,716

126,716

126,716

126,716

ASSETS
Non Current Assets
Property, Plant and Equipment
Investment Properties

Deferred Tax Assets


Current Assets

Tax Recoverable
Other Current Financial Assets

361,515

172,919

1,032,714

1,032,714

1,032,714

1,032,714

Cash and Short Term Deposits

2,447,112

3,223,380

3,132,767

5,013,950

5,046,316

5,710,037

10,802,342

12,947,721

16,748,492

17,210,444

19,021,108

21,189,612

22,655,686

26,007,658

34,378,889

32,693,493

35,946,994

39,710,742

1,600,603

1,600,603

1,600,603

1,600,603

1,600,603

1,600,603

440,601

409,751

400,289

400,289

400,289

400,289

Other Components of Equity

1,161,253

1,314,477

922,551

922,551

922,551

922,551

Retained Earnings

7,447,822

8,828,511

11,377,081

13,354,824

15,805,209

18,750,611

10,650,279

12,153,342

14,300,524

16,278,267

18,728,652

21,674,054

1,990,665

2,259,037

3,329,111

2,088,805

2,335,685

2,596,570

12,640,944

14,412,379

17,629,635

18,367,073

21,064,337

24,270,623

1,384,827

2,182,887

3,468,422

2,551,703

2,136,192

1,845,334

Other Non Current Financial Liability

144,518

140,343

158,010

158,010

158,010

158,010

Deferred Tax Liabilities

161,309

193,313

273,418

273,418

273,418

273,418

Employee Benefit Liability

248,342

287,427

427,239

427,239

427,239

427,239

1,938,996

2,803,970

4,327,089

3,410,370

2,994,859

2,704,001

5,189,966

5,906,044

7,956,628

7,136,414

8,286,238

9,259,210

63,743

141,591

123,869

123,869

123,869

123,869

936,458

715,230

1,779,488

1,093,587

915,511

790,858

1,885,579

2,028,444

2,562,180

2,562,180

2,562,180

2,562,180

8,075,746

8,791,309

12,422,165

10,916,050

11,887,798

12,736,117

TOTAL LIABILITIES

10,014,742

11,595,279

16,749,254

14,326,420

14,882,657

15,440,118

TOTAL EQUITY AND LIABILITIES

22,655,686

26,007,658

34,378,889

32,693,493

35,946,994

39,710,742

TOTAL ASSETS
EQUITY AND LIABILITIES
Equity
Stated Capital
Other Capital Reserves

Equity Attributable to Equity Holders


Non-Controlling Interests
Total Equity
Non Current Liabilities
Interest Bearing Loans and Borrow.

Current Liabilities
Trade and Other Payables
Income Tax Payable
Interest Bearing Loans and Borrow.
Bank Overdrafts

Pg | 19

Du Pont Analysis
FY2012

FY2013

FY2014

9.5%

12.4%

15.5%

11.9%

14.6%

18.2%

Financial Leverage

2.14x

2.13x

2.28x

ROA

5.6%

6.8%

8.0%

1.03x

1.07x

1.09x

Sustainable Growth Rate


ROE

Asset Turnover
Profit Margin

5.4%

6.4%

7.3%

Interest Burden

0.85x

0.99x

0.90x

Tax Burden

0.83x

0.80x

0.84x

Minority

0.92x

0.86x

0.94x

Net profit margin increased to 7.3% in FY2014 from 6.4% in FY2013 as a result of EBIT margin increasing from 9.3% to
10.3%, effective taxation decreasing from 19.7% to 16.0% and the share attributable to minority declining from 14.3% to
5.9% over the same period which counteracted the effect of increasing finance expenses.
Efficiency of assets increased from 1.07x to 1.09x resulting in an increased ROA of 8.0% in FY2014 cf. 6.8% in FY2013. With
increased debt utilized to finance the purchase of assets financial leverage increased from 2.13 to 2.28 resulting in a higher
ROE of 18.2% in FY2014 cf. 14.6% in FY2013.

Pg | 20

Valuation
Primary Valuation
We have used the SOTP method as the primary valuation to arrive at a per share price of LKR78. FMCG, healthcare, leisure and transportation segments have been valued using the P/E multiples applicable to each segment. FMCG sector is
valued using a multiple of 21.1x (discounted average multiple of CARG and NEST), healthcare sector valued at 9.7x
(discounted sector P/E), leisure sector valued using a multiple of 12.4x (average of CONN, STAF and PEG), transportation
sector valued at 15.7x (discounted P/E multiple of DOCK) and the other segment is valued at the fair value of net assets to
arrive at a total equity value of LKR40b.
Sector

Valuation method

Multiple (x)

Equity value (LKRmn)

Per share (LKR)

FMCG

P/E

21.7

16,921

33

Healthcare

P/E

9.7

6,255

12

Leisure

P/E

12.0

778

Transportation

P/E

15.7

6,316

12

Other

Net Assets

10,013

19

40,283

78

Secondary Valuation
The derived target price of LKR78 is further justified by our EV/EBITDA valu- LKRmn
ation which gives a per share price of LKR80 based on a EV/EBITDA multiEnterprise Value (current)
ple of 10.1x. HHL will trade at a EV/EBITDA multiple of 8.5x in FY2015E cf.
EBITDA 2015E
the peer average of 11.0x which we believe is not warranted given the
EV/EBITDA (x) 2015E
growth prospects of the company.
Target multiple (x)

34,708
4,100
8.5
10.1

HHL revenue is expected to grow at a CAGR of 13.9% from FY2015E-17E Target EV

34,708

fuelled by the expected growth in the healthcare segment. The strength- Market cap. Intrinsic value

41,266

ened distribution channel and variety of products offered with the acquisi- No of shares (mn)
tion of JLM should boost company revenue and profitability. The leisure Value per share (LKR)
segment should also contribute to growth of the company with the new

515
80

luxury hotel to commence operations in FY2016E. The divestment of Hemas Power PLC, even though there will be an impact to the top line, with
the elimination of losses in the power segment we expect EBIT margin to
improve to 11.0% in FY2015E and net profit margin to improve to 8.2% from
10.3% and 7.8% respectively.
HHL has been able to generate superior returns well above its peers with
ROE and ROA standing at 18.2% and 8.0% in FY2014 cf. the peer averages
of 10.3% and 5.0% respectively. Hence, we believe HHL should be assigned
with a higher multiple of 10.1x to be trading at a price target of LKR80.

EV/EBITDA ROE FY2014 ROA FY2014


HHL

8.47x

18.2%

8.0%

JKH

17.62x

11.0%

6.5%

SPEN

7.43x

12.2%

6.3%

CTHR

10.45x

7.5%

2.3%

Average

11.83x

10.2%

5.0%

Pg | 21

Appendix 1: HHL Share Price Movement Vs. ASPI


LKR
300

250
200
150
100
50
0
1/4/2010

1/4/2011

1/4/2012

ASPI

1/4/2013

1/4/2014

HHL

Source: Bloomberg, NLE

Appendix 2: P/E Band Chart


LKR

80.00
70.00

14.2x

60.00

12.4x

50.00

10.5x

40.00

8.7x

30.00

6.9x

20.00

5.0x

10.00
-

Apr-12

Oct-12

Apr-13

Oct-13

Apr-14

Oct-14

Source: Bloomberg, NLE

Pg | 22

Appendix 3: Subsidiaries, Associates and Joint-Ventures


FMCG

Eff. holding

Voting

Hemas Manufacturing (Pvt) Ltd

100%

100%

Manufacture of FMCG Products

Hemas Marketing (Pvt) Ltd

100%

100%

Trading & Distribution of FMCG Products

Hemas Trading (Pvt) Ltd

100%

100%

Import and sale of Food Products

Hemas Consumer Brands (Pvt) Ltd

100%

100%

Trading of FMCG Products

Unicorn Investment (Pvt) Ltd

100%

100%

Reserch and Development Services

J L Morison Son & Jones (Ceylon) PLC

89%

89%

Importing and distribution of consumer products

Eff. holding

Voting

Hemas Pharmaceuticals (Pvt) Ltd

100%

100%

Distribution of Pharmaceutical Products

Hemas Surgical & Diagnostics (Pvt) Ltd

100%

100%

Distribution of Healthcare Products

Hemas Hospitals (Pvt) Ltd

83%

83%

Hospital Services

Hemas Southern Hospitals (Pvt) Ltd

83%

83%

Hospital Services

Hemas Capital Hospital (Pvt) Ltd

83%

83%

Hospital Services

Hemas South Colombo Hosipitals (Pvt) Ltd

83%

83%

Hospital Services

Hemas Clinical Research Services (Pvt) Ltd

100%

100%

Support Services of Clinical Trials

J L Morison Son & Jones (Ceylon) PLC

89%

89%

Importing and distribution of Pharmaceuticals and medical aid

M. S. J. Industries (Ceylon) (Pvt) Ltd

89%

89%

Manufacturing and Trading Pharmaceuticals

Eff. holding

Voting

Leisure Asia Investments Ltd

100%

100%

Investment Holding Company

Serendib Hotels PLC

51%

51%

Operating a Tourist Hotel and Investment 'Holding Company

Hotel Sigiriya PLC

32%

51%

Operating a Tourist Hotel

Dolphin Hotels PLC

39%

51%

Operating a Tourist Hotel

Miami Beach Hotel Ltd

33%

51%

Operating a Tourist Hotel

Serendib Leisure Management Ltd

51%

51%

Operating a Tourist Hotel

Jada Resorts & Spa (Pvt) Ltd

20%

20%

Operating a Tourist Hotel

Diethelm Travel Lanka (Pvt) Ltd

60%

60%

Destination Management Services

Diethelm Travel The Maldives (Pvt) Ltd

49%

49%

Destination Management Services

Hemtours (Pvt) Ltd

100%

100%

Destination Management Services

Conventions Asia (Pvt) Ltd

100%

100%

Event Management

Mowbray Hotels Ltd

89%

89%

Hotel Property

PH Resort & Spa (Pvt) Ltd

50%

50%

Hotel Property

Healthcare

Leisure

Principal activities

Principal activities

Principal activities

Pg | 23

Appendix 3: Subsidiaries, Associates and Joint-Ventures


Transportation

Eff. holding

Voting

Principal activities

Forbes Air Services (Pvt) Ltd

100%

100%

GSA Emirates Airline

Hemas Air Services (Pvt) Ltd

100%

100%

GSA Malaysian Airline

Hemas Travels (Pvt) Ltd

100%

100%

Travel Agent

Hemas Aviation (Pvt) Ltd

100%

100%

Airline Representation

Exchange & Finance Investment (Pvt) Ltd

100%

100%

Airline Representation

Discover the World Marketing (Pvt) Ltd

100%

100%

Airline Representation

Far Shipping Lanka (Pvt) Ltd

100%

100%

Shipping Agents

Hemas Transportation (Pvt) Ltd

100%

100%

Shipping Agents

HIF Logistics (Pvt) Ltd

49%

49%

Freight Forwarders

ACX International (Pvt) Ltd

49%

49%

Courier Services

H & M Shipping (Pvt) Ltd

50%

50%

Crew Boat Servicing

Hemas Maritime (Pvt) Ltd

100%

100%

Break Bulk Casual Callers & Cargo Handling

Hemas Logistics (Pvt) Ltd

57%

57%

General Carries & Warehousing

Hemas Integrated Logistics (Pvt) Ltd

57%

57%

General Carries & Warehousing

Eff. holding

Voting

Hemas Corporate Services (Pvt) Ltd

100%

100%

Corporate Secretaries

Hemas Developments (Pvt) Ltd

100%

100%

Property Development

Vishwa BPO (Pvt) Ltd

100%

100%

Financial & Accounting BPO

Peace Haven Resorts Ltd

100%

100%

Hotel Property

N-able (Pvt) Ltd

100%

100%

Enabling Information & Technology Solutions

J L Morison Son & Jones (Ceylon) PLC

89%

89%

Importing and distribution of Agro Chemicals

M. S. J. Promotional Services

89%

89%

Promotional Activities

M. S. J. Cargos (Ceylon) (Pvt) Ltd

89%

89%

Wharf Clearing Activities

M. S. J. Hotels (Ceylon) (Pvt) Ltd

89%

89%

Hotel Industry

M. S. J. Foods (Ceylon) (Pvt) Ltd

89%

89%

Food and Beverage

M. S. J. Tours (Ceylon) (Pvt) Ltd

89%

89%

Transport Services

Other

Principal activities

Pg | 24

Appendix 4: Board of Directors


Board Member
Mr. H N Esufally

Non-Executive Chairman

He assumed responsibility as CEO in January 2001, and


was appointed Chairman in November 2013.

Mr. Steven Enderby

Executive Director / CEO

He joined Hemas to head up the group efforts in mergers


and acquisitions and strategy. He was appointed to the
board of management of Hemas Holdings PLC in May
2013. Steven took up the office of Deputy CEO and Director
of Hemas Holdings PLC in November 2013 and was elevated to the status of Group CEO on 1st April 2014.

Mr. A N Esufally

Non-Executive Director

He serves as Chairman of Serendib Hotels PLC and Dolphin Hotels PLC.

Mr. I A H Esufally

Non-Executive Director

He is the Chairman of the transportation sector and on the


board of Mercantile Shipping PLC. He was elected as
Chairman of Hemas Power PLC in April 2012 and also
serves as a member of the audit committee.

Mr. M E Wickremesinghe

Chairman - Audit Committee

Mr. M A H Esufally

Executive Director

Chairman of Hemas Hospitals (Pvt) Ltd and Hemas Pharmaceuticals (Pvt) Ltd.

Mr. P K Mohapatra

Chairman Remuneration Commit- He sits on the Board of 15 publicly quoted as well as pritee

vate companies in India, South Asia, USA and Europe.

Chairman Nominations and Gov-

He currently serves as Director of Tata Sons Ltd and also

ernance Committee

serves as the Chairman of four Tata companies.

Mr. Dinesh Weerakkody

Independent Director

He currently serves as Chairman of Commercial Bank of

Dr Anura Ekanayake

Independent Directo

Mr. R Gopalakrishnan

Ceylon.
Mr. Malinga Arsakularatne Executive Director/ Chief Financial
Officer

Pg | 25

Appendix 5: Shareholder Information


Top 20 Shareholders

Holding

A Z Holdings (Private) Limited

17.61%

Saraz Investments (Private) Limited

16.77%

Blueberry Investments (Private) Limited

16.65%

Amagroup (Private) Limited

16.65%

Employees Provident Fund

5.29%

Hsbc Inttl Nom Ltd-Ssbt-National Westminster Bank PLC

1.89%

Hsbc Inttl Nom Ltd-Ssbt-National Westminster Bank PLC

1.22%

Murtazaali Abidhussen Hassanaly Esufally

1.15%

Husein Nuruddin Esufally

1.13%

Jacey Trust Services (Private) Limited-Account No-2

1.12%

Hsbc Inttl Nominees Ltd-Jpmcb-Scottish ORL SML TR GTI 6018

1.00%

Lexinton Holdings (Private) Limited

0.96%

Sri Lanka Insurance Corporation Ltd-Life Fund

0.92%

Jacey Trust Services (Private) Limited

0.89%

Employees Trust Fund Board

0.86%

Imtiaz Abidhusein Hassanally Esufally

0.86%

Anverally And Sons (Private) Ltd - A/C No.1

0.82%

Hsbc Inttl Nom Ltd-Jpmcb-Pacific Assets Trust PLC

0.59%

Cocoshell Activated Carbon Company Limited

0.58%

J B Cocoshell (Pvt) Ltd

0.58%

Figure 35: Shareholding

Figure 36: Shareholding

3.6%

7%

Resident
Non Resident

28.2%

93%

67.7%

9%

Institutional
Individual

Controlling Interest

Public Holding

Directors Shareholding

Close Family Members

91%

Source: HHL

Pg | 26

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The information and opinions contained in this report is arrived at based upon information obtained from sources which are believed to be reliable and in good faith. Such information has not been independently verified for its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only,
descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments. Nation Lanka Equities (Pvt) Ltd may, to the extent permissible by applicable law or regulation, use the above material, research or analysis in which they are based before the materialized disseminated to their customers. Not all customers will receive
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Pg | 27