Update - 06 Jun, 2014 - Colombo Stock Exchange

Sri Lanka | Beverage, Food and Tobacco
EQUITY RESEARCH
Earnings review note
6 June 2014
Distilleries Company of Sri Lanka PLC (DIST) –
FY14 results
Key highlights and outlook
Key statistics
CSE/Bloomberg tickers

Net revenue posts modest growth while PBT margin expands: DIST reported
net revenue of LKR29.2bn (up 1.6% YoY) in FY14, despite a 2.1% YoY
decline in gross revenue. The decline in gross revenue was mainly driven
by a 4.2% YoY decline in the beverages segment (84% of FY14 gross
revenue), while the telecommunications segment’s revenue declined by
13.0% YoY. However, solid revenue growth in the diversified segment, up
44.3% YoY, and the plantations segment, up 14.1% YoY, enabled the
group to post modest growth in net revenue.
DIST posted a PBT margin expansion of 450bps, to reach 32.6%, driven by a
4.1% YoY decline in cost of sales (primarily attributable to lower raw
material costs in the beverages segment), which offset an 8.7% YoY
increase in administration expenses related to the group’s restructuring
program (as discussed in our initiation report). Furthermore, margin
improvement also came on the back of lower net other operating
expenses, down 61.2% YoY (due to improved performance from its
investment portfolio), and financing costs, down 27.9% YoY, along with an
11.5% YoY increase in associate income (driven mainly by its investments in
Aitken Spence PLC). This resulted in net income of LKR6.2bn (up 20.7% YoY)
and an EPS of LKR20.68 (vs. LKR17.13 in FY13).


Slight revisions to our FY15E forecasts: After incorporating DIST’s FY14
results, our FY15E net revenue forecast now stands at LKR30.9bn, and we
expect DIST to post a PBT margin of 28.5%.
Valuation outlook: We have maintained our valuation range at LKR171217. Refer to page 2 for further details on our valuation outlook.
Share price (5 June 2014)
No. of issued shares (m)
Market cap (USDm)
Enterprise value (USDm)
Free float (%)
52-week range (H/L)
Avg. daily vol (shares,1yr)
Avg. daily turnover (USD
‘000)
DIST.N0000/DIST
SL
LKR206
300
474
553
42.97
LKR217/178
56,502
86
Source: CSE, Bloomberg
Note: USD/LKR=130.9 (avg. for the 1 year ended 5
June 2014)
Share price movement
110%
100%
90%
80%
Jun-13 Aug-13 Oct-13 Jan-14 Mar-14 Jun-14
DIST
ASPI
S&P SL 20
Source: CSE, Bloomberg
Share price performance
Segmental review and our forecasts
The beverages segment continues to be the main contributor to DIST’s revenue and
posted gross revenue of LKR54.1bn during FY14 (down 4.2% YoY). We believe this
decline was due mainly to a modest fall in volumes, which could not be compensated
by increasing average selling prices (ASPs), likely due to cost-conscious consumers
reverting to illicit products for a more effective ‘kick per buck’.
The segment’s PBT margin stood at 42.8% (compared with 32.6% in FY13); this was
driven by a decline in cost of sales, improvements in DIST’s investment portfolio and
lower finance costs (as mentioned earlier).
Despite a dip in gross revenue in FY14, we expect beverages to post modest gross
revenue growth in FY15E driven by the relatively inelastic nature of the product (due
to consumers’ dependency on alcohol), which will help to maintain stability in volumes
despite increases in ASPs. Our revenue forecast for FY15E now stands at
LKR57.6bn, while our FY15E PBT margin estimates remain unchanged at 33.3%.
The non-beverages segment (includes a variety of sub-businesses, ranging from
telecommunications to plantations, media and financial services operating under the
investment holding arm Melstacorp Ltd) generated revenue of LKR10.3bn in FY14 (up
10.7% YoY).
As mentioned earlier, non-beverage revenue was driven by strong performance in the
company’s diversified business and plantations operations, which offset the
3m
6m
12m
DIST
1%
9%
5%
S&P SL 20
7%
9%
-3%
All Share Price Index
5%
8%
-1%
Source: CSE, Bloomberg
Summary financials
LKRm (quarter
end 31 March)
Gross revenue
4QFY14
4QFY13
YoY
change
4.5%
16,965
16,240
Net revenue
7,394
7,264
1.8%
EBIT
1,544
779
98.3%
PBT
2,104
1,361
54.6%
Net profit
1,323
641
106.3%
Recurrent EPS
4.41
2.14
106.3%
ROE (%)
10.0
5.7
435bps
P/E (x)
10.9
19.0
-42.5%
Source: DIST
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Distilleries Company of Sri Lanka PLC
telecommunications segment’s lackluster top-line performance.
The PBT margin (excluding associate income) stood at negative 0.2% for FY14, largely due to a sharp decline in margins from the
telecommunications and diversified business operations.
For the non-beverage segment, we forecast gross revenue of LKR11.2bn and a PBT margin (excluding associate income) of 6.2% for
FY15E. We continue to maintain a conservative view for these operations, as we believe DIST still has to reorganize and restructure its
diversified businesses in order to achieve any meaningful margin contribution.
Free cash flow (FCF) and gearing – The company reported negative FCF of LKR1.6bn owing to the increase in capex, in our opinion.
Capex for FY14 came in at LKR4.7bn compared with LKR2.8bn for FY13. This is attributed to the ongoing factory modernization
program, as DIST funds its capex and investments using internal sources. We maintain our expectation that FCF will rebound to above
LKR2.5bn levels in FY15E, as mentioned in our initiation report.
DIST continues to maintain a low level of gearing (at 18% in FY14 compared with 17% in FY13), a trend we expect to continue over our
explicit forecast period. We remain confident in our view that the low level of gearing will continue to provide DIST with further avenues
for external debt funding if required.
Valuation outlook
After incorporating the company’s FY14 results, our 12-month valuation range for DIST, based on our DCF/SOTP and P/E analyses,
has been maintained at LKR171-217.

Our DCF/SOTP analysis yields a valuation range of LKR185-217 – using our base-case assumptions of a risk-free rate of 9.0%, a
market risk premium of 6.0%, and bull- and bear-case scenarios. Our bull-case scenario considers DIST’s intrinsic value without a
holding company discount.
We arrive at our bear-case equity valuation after assigning a 15% holding company discount. We have assigned the holding
company discount in order to account for DIST’s investments in some of its unprofitable subsidiaries under the company’s
diversified business operations (Melstacorp). We believe losses arising from some of these subsidiaries could result in the
Melstacorp restructuring program taking longer to contribute materially to the company’s valuation. Refer to the initiation note for
further details on our SOTP valuation approach.

On a P/E basis, DIST currently trades at a multiple of 11.0x FY15E (versus an average normalized two-year historical forward P/E
multiple of 9.6x). Our optimistic and pessimistic scenarios establish a valuation range of LKR171-189 by assigning a 5% premium
and discount to the two-year normalized historical average. This premium/discount is warranted by the positive and negative
factors that could impact our estimates, as discussed in our initiation note.
Figure 1:
Valuation range analysis provides a range of LKR171-217 per share (current share price: LKR206)
1
206
185
217
DCF/SOTP
171
189
P/E analysis
178
217
52-week range
0
150
160
170
180
190
200
210
220
Source: DIST, Bloomberg, Copal Amba estimates
2
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Distilleries Company of Sri Lanka PLC
Appendix 1: Results summary
Income statement (LKRm, except where stated
otherwise)
4QFY14
4QFY13
YoY change
(%)
FY14
FY13
YoY change
(%)
16,965
16,240
4.5%
64,410
65,790
-2.1%
7,394
7,264
1.8%
29,241
28,766
1.6%
(3,883)
3,511
(4,341)
2,923
-10.6%
(15,898)
12,869
-4.1%
20.1%
(15,240)
14,001
(523)
(472)
10.7%
(1,894)
(1,842)
2.8%
Administrative expenses
EBITDA
(1,062)
1,905
(905)
1,621
17.4%
17.5%
(3,735)
9,493
(3,436)
8,379
13.3%
EBIT (segment results)
1,544
779
98.3%
8,019
6,679
20.1%
Finance costs
Profit before tax
25
2,104
93
1,361
-73.6%
114
8,084
-33.7%
54.6%
75
9,534
Tax expense
(746)
(709)
5.2%
(3,212)
(2,826)
13.7%
Profit for the period
1,358
652
108.5%
6,322
5,258
20.2%
Net income attributable to equity holders of the parent
1,323
641
106.3%
6,205
5,140
20.7%
4.41
2.14
106.3%
20.68
17.13
20.7%
4QFY14
4QFY13
YoY change
(%)
FY14
FY15E
FY16E
14,293
13,981
2.2%
54,105
57,648
61,267
2.2%
3.2%
-4.2%
6.5%
6.3%
7,081
Gross revenue
Net revenue
Cost of goods sold
Gross profit
Distribution expenses
Diluted EPS (LKR)
8.8%
8.7%
17.9%
Financial summary of key segments
Beverages segment
Revenues
YoY growth
PBT
1,869
515
8,114
6,575
262.6%
-55.7%
27.8%
-19.0%
7.7%
39.6%
10.3%
42.8%
33.3%
33.5%
4QFY14
4QFY13
YoY change
(%)
FY14
FY15E
FY16E
Revenues
2,672
2,259
18.3%
10,306
11,215
12,116
YoY growth
0.0%
0.0%
10.7%
8.8%
8.0%
YoY growth
PBT
Non-beverage segments
PBT
YoY growth
PBT
262.6%
(300)
303
(20)
690
885
-198.9%
-66.4%
-198.9%
-104.4%
NM
10.0%
-11.2%
13.4%
-0.2%
6.2%
7.3%
Source: DIST, Copal Amba estimates
Note: Full-year figures are for the year ended 31 March
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Appendix 2: Key financial data
Summary group financials (LKRm)
INCOME STATEMENT
2012
2013
2014
2015E
2016E
Gross revenue
63,125
65,790
64,410
68,864
73,383
Net revenue
26,975
28,766
29,241
30,931
33,253
Associate income
1,365
1,292
1,440
1,544
1,578
EBIT
6,633
6,679
8,019
7,290
8,176
PBT
8,977
8,084
9,534
8,809
9,544
Net profit
5,536
5,140
6,205
5,617
5,989
BALANCE SHEET
2012
2013
2014
2015E
2016E
Cash and cash equivalents
4,955
4,843
3,756
4,700
5,608
Short-term investments
1,316
1,768
2,665
2,665
2,665
Accounts receivable
8,210
8,190
11,532
10,565
11,661
(For the year ended 31 March)
(As at 31 March)
Current assets
Inventories
Total current assets
5,785
6,140
4,423
6,219
6,463
20,744
21,691
23,053
24,825
27,073
20,638
Non-current assets
Property, plant and equipment
14,462
15,438
16,366
18,550
Goodwill
1,378
601
601
601
601
Intangible assets
4,812
5,024
5,486
5,486
5,486
Investments in JV/associates
19,656
20,915
23,000
25,044
27,122
Total non-current assets
52,612
56,554
61,057
65,786
70,151
Total assets
73,355
78,245
84,111
90,612
97,224
Short-term debt
11,048
10,553
12,060
12,060
12,060
Accounts payable
11,414
11,467
9,466
11,055
12,429
1,288
727
1,139
1,139
1,139
23,977
22,989
24,147
25,737
27,110
Current liabilities
Income tax payable
Total current liabilities
Non-current liabilities
Long-term debt
1,320
602
681
681
681
Post-retirement benefit obligation
1,103
1,148
809
809
809
Total non-current liabilities
3,232
2,543
1,961
1,961
1,961
Equity
Common share capital
300
300
300
300
300
Retained profit
23,024
27,234
32,734
37,536
42,656
Total equity
Total liabilities and equity
46,146
73,355
52,713
78,245
58,002
84,111
62,913
90,612
68,153
97,224
2015E
2016E
CASH FLOW STATEMENT
2012
2013
2014
(For the year ended 31 March)
Net cash flow from operating activities
4,153
4,120
3,100
6,685
6,463
Net cash flow from investing activities
(15,633)
(2,128)
(4,443)
(4,902)
(4,477)
541
(1,578)
(1,394)
(839)
(1,078)
(10,940)
414
(2,738)
943
908
Net cash flow from financing activities
Net increase/(decrease) in cash and cash equivalents
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KEY RATIOS
2012
2013
2014
2015E
2016E
EBIT margin (%)
24.6
23.2
27.4
23.6
24.6
PBT margin (%)
33.3
28.1
32.6
28.5
28.7
ROE (%)
15.1
11.5
12.2
9.9
10.0
Debt/capital (%)
21.1
17.5
18.0
16.8
15.7
Free cash flow (FCF) yield (%)
3.9
2.6
(2.8)
4.5
4.3
P/E (x)
8.8
9.7
9.3
11.0
10.3
Source: DIST, Copal Amba estimates
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Distilleries Company of Sri Lanka PLC
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