SRI LANKA EQUITY | ENERGY

COMPANY UPDATE | 28 MAY 2018

Chevron Lub. [LLUB]: HOLD [+11%] Naveed Majeed

naveed@asiasecurities.lk
+94 11 772 2043
New entrants & floods to impact valuations adversely
New players to enter already crowded market; we are negative Key statistics
According to local media reports, the Petroleum Resources Development BBG ticker LLUB SL
Ministry plans to present a cabinet paper in June ‘18 for further liberalisation CSE ticker LLUB.N0000
of Sri Lanka’s lubricant industry. Accordingly, the government may issue five to GICS subsector Oil & gas refining
six new import licenses, which in our view, would put added pressure on LLUB’s
Price at 25 May 18 (LKR) 88.50
volumes given an already crowded market. From our conversation with LLUB’s
52 week Hi/Lo (LKR) 169.90 /87.90
management, we understand that it is highly likely that the cabinet paper will
be passed. We note that LLUB’s market share has been depleting sharply over Market cap (LKR mn) 21,240
the past few years from ~55.0% in 2012 to ~45.0% in 2016, as aggressive sales Market cap (USD mn) 137
strategies from competitors has caused LLUB to lose sales volumes. In our view, No. of shares (mn) 240
the entrance of new players could result in further dilution of market share. ADT (LKR mn) - 3M 8.8
The Sri Lankan lubricants industry currently has 13 players while ~70.0% of the ADT (USD k) - 3M 56.6
lubricant market is served by 10 licensed holders. We revise our volume ADT (shares k) – 3M 92.8
estimates in the forecast period. Free float (%) 42.7
Public float (%) 49.0
Floods to impact volumes in 2Q CY18E; we expect similar levels to 2Q CY17
Company website | CSE website
Upon discussions with management, we learn that the ongoing floods in Sri
Lanka as of May ’18 will impact sales volumes in 2Q CY18E. In 2Q CY17, the Source: CSE, Bloomberg, Company data
volume hit driven by the impact of the May ‘17 floods led to a loss of up to Note: LKR converted at 155 LKR per USD
~1mn liters during the quarter, which we estimate to be ~14.0% of sales
Valuation summary
volume. While the company claims that it is too early to quantify the impact of
the floods, we expect 2Q CY18E results to come in at similar levels to the same Price at 25 May 18 (LKR) 88.50
period last year. While we previously expected LLUB to see some earnings Target price (LKR) 89.00
upside in 2Q CY18E, we believe this will not be the case now. As such, we cut Upside (%) +0.6
our volumes estimates and expect it to grow at a slower pace of 1.5% in CY18E CY18E DPS (LKR) 9.00
(+4.0% previously). This lowers our full year revenue estimates to grow 6.6% Total return (%) +10.7
YoY (+9.2% previously), which is also partly driven by a lower base in CY17. We Source: Asia Securities
note that we forecast a price increase of 5.0% in CY18E.
Share price movement (indexed to LLUB)
We lower valuations with the market set to be further crowded
LKR
LLUB currently trades at 8.5x P/E CY18E. LLUB has traded at an average P/E of 180
12.4x over the last five years however, has traded at lower P/E of 8.7x over
the last 12 months. Apart from previously mentioned factors such as rising base 160
oil prices, a highly competitive market and difficulty in passing on costs leading 140
to lower profitability, we believe the entry of an additional five to six new
players changes the competitive landscape and will further dilute LLUB’s 120
market share. As such, we believe LLUB should trade at a lower multiple going 100
forward than it historically has. Despite the share falling ~48.0% YoY in the last
12-months, we believe its current trading multiple is justified and value the 80
share at 8.5x P/E CY18E. This yields us a TP of LKR 89.00/share (-20.9% to old May-17 Sep-17 Jan-18 May-18
TP; +0.6% upside; +10.7% TSR); downgrade to HOLD. LLUB ASPI S&P SL20

Movement (%) YTD 3M 12M

LLUB (26) (22) (48)
ASPI 2 (2) (4)
S&P SL20 (1) (3) (6)
Source: CSE, Bloomberg

Financial summary
In LKR mn CY2015 CY2016 CY2017 CY2018E CY2019E CY2020E
Revenue 11,564 12,089 11,052 11,779 12,194 12,563
EBITDA 4,310 4,689 3,586 3,676 3,750 3,909
Recurring net profit 3,092 3,481 2,554 2,510 2,586 2,702
Diluted recurring EPS (LKR) 12.88 14.51 10.64 10.46 10.77 11.26
ROE (%) 62.5 81.5 65.0 60.2 58.3 57.7
P/E (x) 6.9 6.1 8.3 8.5 8.2 7.9
EV/EBITDA (x) 4.4 4.1 6.0 5.8 5.7 5.4
P/B (x) 4.5 5.5 5.3 4.9 4.7 4.4
Source: Company data, Asia Securities | Note: Historical interim ROE, P/E, EV/EBITDA on a TTM basis
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 Estimate revisions
In LKR mn CY18E - O CY18 – N %Δ CY19E - O CY19E – N %Δ CY20E - O CY20E – N %Δ
Revenue 12,069 11,779 -2.4 12,557 12,194 -2.9 12,936 12,563 -2.9
EBITDA 3,762 3,676 -2.3 3,856 3,750 -2.8 4,020 3,909 -2.7
Recurring net profit 2,572 2,510 -2.4 2,653 2,586 -2.5 2,774 2,702 -2.6
Diluted recurring EPS (LKR) 10.72 10.46 -2.4 11.05 10.77 -2.5 11.56 11.26 -2.6
DPS (LKR) 10.00 9.00 -10.0 10.00 10.00 - 10.00 10.00 -
ROE (%) 63.0 60.2 -2.8pp 61.8 58.3 -3.5pp 60.2 57.7 -2.5pp
P/E (x) 8.4 8.5 8.1 8.2 7.8 7.9
EV/EBITDA (x) 5.7 5.8 5.6 5.7 5.4 5.4
P/B (x) 5.2 4.9 4.9 4.7 4.5 4.4
Source: Company data, Asia Securities | Note: E- Estimate, A – Actual, O – Old estimate, N – New estimate

Key ratios
CY2015 CY2016 CY2017 CY2018E CY2019E CY2020E
Revenue growth (%) 0.4 4.5 (8.6) 6.6 3.5 3.0
EBITDA growth (%) 18.2 8.8 (23.5) 2.5 2.0 4.3
Recurring net profit growth (%) 12.6 12.6 (26.7) (1.7) 3.0 4.5
Recurring diluted EPS growth (%) 12.6 12.6 (26.7) (1.7) 3.0 4.5

EBITDA margin (%) 37.3 38.8 32.4 31.2 30.7 31.1

Net margin (%) 26.7 28.8 23.1 21.3 21.2 21.5

Recurring diluted EPS (LKR) 12.88 14.51 10.64 10.46 10.77 11.26
DPS (LKR) 11.50 18.00 12.25 9.00 10.00 10.00
Tan. BVPS (LKR) 19.53 16.09 16.65 18.10 18.88 20.13

OCF (LKR mn) 3,029 3,713 1,392 3,044 2,654 2,795

Unlevered FCF (LKR mn) 2,934 3,622 1,300 2,939 2,546 2,683
Levered FCF (LKR mn) 2,934 3,622 1,295 2,934 2,540 2,678

OCF/EBITDA (%) 70.3 79.2 38.8 82.8 70.8 71.5

Unlevered FCF/EBIT (%) 70.8 80.2 38.2 84.2 71.6 72.3
Levered FCF/Recurring net profit (%) 94.9 104.0 50.7 116.9 98.3 99.1

Net debt/equity (x) (0.5) (0.5) (0.0) (0.2) (0.2) (0.3)

Net debt/EBITDA (x) (0.5) (0.4) (0.0) (0.2) (0.3) (0.3)
EBITDA/interest (x) nm nm nm nm nm nm

ROA (%) 45.7 49.4 41.3 45.9 45.3 45.3

ROE (%) 62.5 81.5 65.0 60.2 58.3 57.7
P/E (x) 6.9 6.1 8.3 8.5 8.2 7.9
EV/EBITDA (x) 4.4 4.1 6.0 5.8 5.7 5.4
P/B (x) 4.5 5.5 5.3 4.9 4.7 4.4
Dividend yield (%) 13.0 20.3 13.8 10.2 11.3 11.3
Dividend payout (%) 89.3 124.1 94.0 90.0 90.0 90.0
Source: Company data, Asia Securities

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 Income statement
In LKR mn CY2015 CY2016 CY2017 CY2018E CY2019E CY2020E
Revenue 11,564 12,089 11,052 11,779 12,194 12,563
Operating expenses (7,254) (7,401) (7,467) (8,103) (8,445) (8,653)
EBITDA 4,310 4,689 3,586 3,676 3,750 3,909
Depreciation and amortization (167) (173) (180) (186) (192) (199)
EBIT 4,143 4,515 3,406 3,490 3,557 3,711
Interest income 160 187 95 1 39 47
Interest expense (0) (0) (5) (5) (5) (5)
Associate/JV income - - - - - -
FX gain/loss 15 - - - - -
Other non-operating income/expenses - - - - - -
Profit before tax 4,319 4,703 3,496 3,486 3,591 3,752
Income tax expenses (1,227) (1,221) (942) (976) (1,005) (1,051)
Profit for the year 3,092 3,481 2,554 2,510 2,586 2,702
Minority interest - - - - - -
Preferred dividends - - - - - -
Recurring net profit 3,092 3,481 2,554 2,510 2,586 2,702
Source: Company data, Asia Securities

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 Balance sheet
In LKR mn CY2015 CY2016 CY2017 CY2018E CY2019E CY2020E
Assets
Non-current assets
Property, plant and equipment 2,196 2,133 2,067 2,004 1,939 1,870
Intangible assets - - - - - -
Goodwill - - - - - -
Equity method investments - - - - - -
Interest earnings investments - - - - - -
Other investments - - - - - -
Other non-current assets 90 75 77 77 77 77
Total non-current assets 2,286 2,208 2,144 2,081 2,016 1,947

Current assets
Accounts receivable 1,072 1,072 1,130 968 1,002 1,033
Inventories 1,309 1,790 2,046 1,776 1,851 1,897
Prepaid expenses 1 15 - 7 7 7
Other WCA 39 52 - - - -
Cash and cash equivalent 2,339 1,910 25 781 942 1,248
Restricted cash - - - - - -
Short term interest earning investments - - - - - -
Other short term investments - - - - - -
Other current assets - - - - - -
Total current assets 4,759 4,839 3,201 3,532 3,802 4,184

Total assets 7,045 7,047 5,344 5,614 5,818 6,131

Liabilities
Non-current liabilities
Long term borrowings - - - - - -
Employee benefits 126 120 162 162 162 162
Other non-current liabilities 174 246 246 246 246 246
Total non-current liabilities 299 366 408 408 408 408

Current liabilities
Accounts payable 187 251 525 222 231 237
Accrued expenses 200 265 - 222 231 237
Other WCL 961 1,623 - - - -
Short term borrowings - - - - - -
Other current liabilities 712 681 417 417 417 417
Total current liabilities 2,059 2,820 941 861 879 891

Total liabilities 2,358 3,186 1,349 1,269 1,287 1,299

Equity
Common equity 600 600 600 600 600 600
Preferred equity - - - - - -
Retained earnings 4,087 3,261 3,395 3,745 3,931 4,232
Other reserves - - - - - -
Minority interest - - - - - -
Total equity 4,687 3,861 3,995 4,345 4,531 4,832

Total equity and liabilities 7,045 7,047 5,344 5,614 5,818 6,131
Source: Company data, Asia Securities

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 Cash flow statement
In LKR mn CY2015 CY2016 CY2017 CY2018E CY2019E CY2020E
Cash flows from operating activities
EBITDA 4,310 4,689 3,586 3,676 3,750 3,909
Other non-cash items - - -
Change in working capital 394 153 (1,049) 344 (90) (64)
Tax paid (1,695) (1,185) (1,200) (976) (1,005) (1,051)
Other 20 57 54 - - -
Cash generated from operating activities 3,029 3,713 1,392 3,044 2,654 2,795

Cash flows from investing activities

Capex on PPE & intangibles (95) (91) (95) (101) (105) (108)
Proceeds from disposals 0 0 3 (3) (3) (3)
Net (acquisition)/disposal of subsidiaries - - -
Net (acquisition)/disposal of EMIs - - - - - -
Dividends received - - - - - -
Interest received 155 150 59 1 39 47
Other - - - (19) (19) (19)
Cash used in investing activities 59 59 (32) (122) (88) (83)

Cash flows from financing activities

Issuance/(repurchase) of common shares - - - - - -
Issuance/(redemption) of preference shares - - - - - -
Drawdown/(repayment) of debt - - - - - -
Dividends paid to common shareholders (2,040) (4,200) (3,240) (2,160) (2,400) (2,400)
Dividends paid to preferred shareholders - - - - - -
Interest paid (0) (0) (5) (5) (5) (5)
Dividends paid to minority interest - - - - - -
Other - - - - - -
Cash from financing activities (2,040) (4,200) (3,245) (2,165) (2,405) (2,405)

Net increase/(decrease) in cash 1,049 (429) (1,886) 757 161 306

Cash and cash equivalent at BOP 1,291 2,339 1,910 25 781 942
Effect of exchange movements - - -
Cash and cash equivalent at EOP 2,339 1,910 25 781 942 1,248
Source: Company data, Asia Securities | EMI stands for equity method investments

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 Top 10 shareholders – Voting (% held)
Shareholder Mar-17 Dec-17 Mar-18 Δ YoY (pp) Δ QoQ (pp)

Chevron Ceylon Limited 51.00 51.00 51.00 - -

Renuka Hotels Limited 1.17 2.17 2.17 +1.00 -

RBC Investor Services Bank- COELI SICAV I- FRONTIER MARKETS

1.65 1.74 1.85 +0.20 +0.11
FUND

BNYM SA/NV- Blackrock Frontiers Investment Trust PLC 1.85 1.85 1.85 - -

BNYM SA/NV-NEON LIBERTY EMERGING MARKETS FUND LP 1.74 1.74 1.74 - -

Northern Trust Global Services London S/A VERDIPAPIRONDET ODIN

1.39 1.44 1.44 +0.05 -
EMERGING MARKETS

Cargo Boat Development Company Limited 1.17 1.42 1.42 +0.25 -

Sri Lanka Insurance Corporation LTD- LIFE FUND - 1.21 1.21 +1.21 -

HINL-SSBT-Change Global Frontier Markets, LP - - 1.15 +1.15 +1.15

BNYM SA/NV- FRONTAURA GLOBAL FRONTIER FUND LLC 1.15 1.15 1.15 - -

Source: Company data

6
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 Analyst Certification
I, Naveed Majeed, certify that the views expressed in this report accurately reflect my
personal views about the company. I also certify that no part of my compensation was, is, or
will be, indirectly or directly, related to the specific view or recommendation expressed in this
report.

Company Certification
Asia Securities (Private) Limited has no direct affiliation with the company/companies covered
in this report and does not receive any material benefit from the company for publishing this
report.

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Research
Kanishka Perera – Head of Research Mangalee Goonetilleke Naveed Majeed
Strategy | Banks | Insurance | Conglomerates | Consumer | Manufacturing | Textiles |
Telecommunications Healthcare Energy | Construction
kanishka@asiasecurities.lk mangalee@asiasecurities.lk naveed@asiasecurities.lk
+94 11 772 2044 +94 11 772 2042 +94 11 772 2043

Lakshini Fernando Isuri Munasinghe

Economics | Finance isuri@asiasecurities.lk
lakshini@asiasecurities.lk +94 11 772 2036
+94 11 772 2045

Osadi Hettiarachchi Thilini Amarasiri

osadi@asiasecurities.lk thilini@asiasecurities.lk
+94 11 772 2048 +94 11 772 2047

Institutional Sales
Sabri Marikar Shiyam Subaulla Niroshan Wijekoon
CEO Head of Institutional Sales niroshan@asiasecurities.lk
sabri@asiasecurities.lk shiyam@asiasecurities.lk +94 11 772 2007
+94 11 772 2022 +94 11 772 2011 +94 77 771 3645
+94 77 357 6868 +94 77 350 2016

Anushan Kandasamy Ruwan Hettiarachchi Gagani Jayawardhana

anushan@asiasecurities.lk ruwan@asiasecurities.lk gagani@asiasecurities.lk
+94 11 772 2019 +94 11 772 2020 +94 11 772 2014
+94 77 722 2519 +94 77 741 0164 +94 71 408 4953

Niroshan Ratnam Miflal Farook Charith Perera

ratnam@asiasecurities.lk miflal@asiasecurities.lk charith@asiasecurities.lk
+94 11 772 2006 +94 11 772 2010 +94 11 772 2015
+94 77 371 7515 +94 77 225 3730 +94 77 359 8937

Foreign Sales
Dinusha Gomes
Head of Foreign Sales
dinusha@asiasecurities.lk
+94 11 772 2080
+94 77 300 2274

Retail Sales
Subeeth Perera Priyantha Hingurage Romesh Priyadarshana
Head of Retail Sales priyantha@asiasecurities.lk romesh@asiasecurities.lk
subeeth@asiasecurities.lk +94 11 772 2033 +94 11 772 2032
+94 11 772 2035 +94 77 350 2015 +94 77 254 8795
+94 71 404 2683

Kalana Hewawasam Nuwan Eranga Perera Uthpala Karunathilaka

kalanag@asiasecurities.lk eranga@asiasecurities.lk uthpala@asiasecurities.lk
+94 11 772 2028 +94 11 772 2026 +94 31 567 6881
+94 77 395 9438 +94 77 736 8012 +94 77 369 1685

Bhanu Ganegama Ashan Silva

bhanu@asiasecurities.lk ashan@asiasecurities.lk
+94 11 772 2031 +94 117722005
+94 77 184 8789 +94 77 0458028

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