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Initial Public Offering – Lucky Lanka Milk Processing Company Ltd
Medium to Long-term
prospects with evolving
focus on liquid milk
July - 2014
Lucky Lanka Milk Processing Ltd - IPO
Profile
 Lucky Lanka Milk Processing Ltd (LLMP) is a leading player in local dairy
industry, engaging in the process of collecting locally produced fresh milk
IPO at a Glance
Voting 38 Mn Shares
The Offer
Non Voting 24 Mn Shares
from rural farmers and manufactures yoghurt and other milk products and
island wide distribution under the brand name “LUCKY”.
 Product range consists with Vanila, Strawberry, Chocolate, Treacle, Fruit Jelly
Issue Price
Voting 6 /- , Non Voting 3/-
and Fresh Fruit Yoghurts which contribute nearly 65% to 70% of the total
Funds to be raised
LKR 300 Mn
revenue of the Company. Curd, Pasteurized Milk, Sterilized milk,UHT milk,
CSE Listing
Diri Savi Board
Flavoured milk, Fruit drinks bottles also contain in the product line.
Issue Type
Offer for Subscription
Issue Opening Date
07th July 2014
Managers & Registrars
to the Issue
Merchant Bank of Sri Lanka
PLC
 LLMP’s factory is located at Kamburupitiya, Southern province of Sri Lanka
with a daily production capacity of 20,000 liters of value added milk products
including yogurts which operates at full capacity.
 Lucky yoghurt is the first yoghurt manufacturer in Sri Lanka to obtain SLS
certification and currently the company is in compliance with ISO 22000 &
Minimum Subscription 1,000 Shares
Objectives of the Offer

HACCP international standards.
The Business Model
Settlement of Long term
liabilities LKR 200 Mn
Collecting Fresh Milk
( From around 5,000 farmers)
Objectives of Offering

Improvements of the existing
production plant LKR 75 Mn
-
Increasing the cold room
capacity , LKR 35 Mn
-
Expanding the UHT milk
processing building , LKR
Yoghurt & other related
products manufacturing
process with a daily capacity of
20,000 Liters
Fresh Milk- Direct Sales
30 Mn
-
New machinery, LKR 10
Mn

Implementation of new projects
– “Gederata Kiri” project, Milk
Distribution with 15,000
distributors coupled with 120
delivery vehicles across the
country
Bar Outlets and milk for School
Canteen
LLMP sources fresh milk mainly from Uva Province including Welimada,
Badulla, Monaragala at a price range of LKR 52/-to 60/- per liter depending on the
quality which is above to the government guaranteed price of LKR 50/- per liter.
Asha Phillip Securities Ltd – Equity Research Division
1
Initial Public Offering – Lucky Lanka Milk Processing Company Ltd
July - 2014
Currently, company’s daily production capacity has been limited to 20,000 liters
from its maximum capacity of 30,000 liters per day due to the bottleneck in cold
room capacity level. From the IPO proceeds, LKR 35 Mn will be allocated to
overcome this key bottleneck, enhancing the cold room capacity to support the full
storage capacity of 30,000 liters per day.
Direct sales of Fresh milk is the LLMP’s prime focus since the possible above
average growth potential of fresh milk sector backed by government policies on
slashing imports of powdered milk which represent the 80% of country’s milk
requirement.
Will Yoghurt & other value added product Industry support to the
Current per capita consumption
of yoghurt stands at 1.5 per
month which has a growth
potential to 2 per month within
next three years
LLMP’s capacity expansion?
Currently, the local yoghurt consumption stands at 30 Mn yoghurts per month
while growing at a CAGR of 7.7% for last three years. LLMP has positioned as
the 3rd largest player in the yoghurt market with monthly average production of 5
Mn yoghurts (Daily average of 200,000). Further, we expect a conservative 5%
growth in industry consumption for next two years against the 7.7% CAGR
reported in last three years.
We expect the company to utilize 50% of the incremental capacity during
Storage capacity to be
FY214/15 for value added products whilst 100% capacity to be occupied by
expanded by 10,000 liters per
FY2015/16 with the improved penetration of other product categaries including
day
Lucky drinking yoghurt. We believe, per day production will accelarate to
250,000 units during 2H2014/15 while reaching the maximum of 300,000 units
per day by FY2015/16. The anticipated growth in capacity would register an
improved market share of 18% from 17% by FY15/16.
Can GP Margin be sustained?
The production cost of LLMP’s value added segement mainly consist with fresh
Value added product segment
milk which accounts nearly 40% of the production cost. Fresh milk collecting
will maintain a GP margin of
price would depend on the government guaranteed price of LKR 50/- per liter and
41%
we expect this price to revise slightly upward in order to encourage the milk
farmers enabling them to increase the supply. Packaging material cost would also
mark around 25% of the production cost which is expected to be relatively stable
based on the global prices of
HIPS, GPPS etc. Further, we believe yoghut
manufactuers will also take steps to maintain their respective margins with price
hikes inline with the increase in milk purchasing prices which will not dampen the
Asha Phillip Securities Ltd – Equity Research Division
2
Initial Public Offering – Lucky Lanka Milk Processing Company Ltd
July - 2014
demand in a growing market. Therefore, LLMP will be able to maintain the GP
margin of 41% on value added product catagaries.
Fresh Milk Sector – Lucky’s future
Fresh milk retailing business contributes nearly 20% of the total revenue while
yeilding realtively high GP margin of nearly 45%. LLMP is currently generating
Additional fresh milk capacity of
revenue from this businss line with a daily capacity of 5,000 liters,carrying a
9,000 liters to be added to
utilization of average 95%
Colombo & Kandy Districts
Colombo market by August 2014 onwards adding 5,000 liters of daily capacity
in Matara district. Company will penetrate the
through introducing milk bar outlets. The similar model is expeceted be replicated
in Kandy District too with 4,000 liters of daily capacity. The company’s plan on
selling one liter of fresh milk at a price of LKR 100/- would be considered as a
cheap price for consumers compared to one liter cost of milk powder and one liter
fresh milk packs avaialable in the market. Therefore, we expect the probability of
full utilization of additional 9,000 liters is nearly 100% which will stem from the
cost advantage coupled with the improved consumer accessibility to fresh milk via
milk outlets.Further, the refrigirating problems attaching to the fresh milk will not
be affected in Colombo and Kandy since this will target the daily milk
requirement of nearly 2% of population of each district. Hence, we forecast a
conservative utilization ratio of 85% in FY14/15, followed by a 100% utilization
in FY15/16. The improved penetration in liquid milk sales will register a revennue
contribution of nearly 37% to the total revenue by FY15/16, yeilding a relatively
high GP margin of 45%
against 41% GP margin of value added products.
Therefore, we expect the overall revenue to be accelerated at a 15.37% in
FY14/15E and 25.23% in FY15/16E.
Interest Cost saving would relax the bottom line
Finance cost to be saved by 81%
LKR 200 Mn worth of debt retirement through IPO proceeds would slash the
interest cost burden by sizeable 81% for FY14/15E, leading the overdraft
utilization also to be relaxed by virtually 30% amidst improved cash generation
supported by the interest cost saving.
Tax at concessionary 10%
LLMP will be taxed at a concessionary rate
Company will pay corporate taxes at a concessionary 10% rate from FY14/15
onwards.
Asha Phillip Securities Ltd – Equity Research Division
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Initial Public Offering – Lucky Lanka Milk Processing Company Ltd
July - 2014
Recurring Earnings to grow at an exponential 232%
FY14/15E earnings to stand at LKR 66.6 Mn with an exponential growth of 232%
amidst the bulky interst cost savings coupled with an accelerated revenue growth
of nearly 15%. Further, the after tax profit is expected to be boosted by almost
24% for FY15/16E, driven through a strong revenue growth of 25%. Further,
overall GP margin would also be expected to range between 42% to 43% for next
two years.
Dividend pay out will maintain at 10%
We expect the management will maintain a low profile pay out ratio amidst the
reinvestment requirement in growing fresh milk sector.
Historical Financials & Projections with Valuation Multiples
March 31st (LKR Mn)
Revenue
Cost of Sales
Gross Profit
Other income
Administarion expenses
Selling & distribution
Operating profit
Finance Cost
Profit before tax
Income Tax
After tax profit
Source:
Company, Asha
Phillip Research
FY11-12
681.6
(405.8)
275.8
0.4
(38.0)
(182.0)
56.2
(51.1)
5.1
5.1
FY12-13
841.8
(505.8)
336.0
3.0
(55.1)
(214.2)
69.7
(51.6)
18.1
18.1
FY13-14
896.5
(527.1)
369.4
0.8
(75.4)
(208.1)
86.8
(66.4)
20.3
20.3
FY14-15E
1,034.3
(597.6)
436.7
FY15-16E
1,295.2
(745.2)
550.0
(86.9)
(263.2)
86.6
(12.6)
74.0
(7.4)
66.6
(108.9)
(336.8)
104.4
(12.6)
91.8
(9.2)
82.7
Total Equity
Net Cash from operations
Cash & cash eqevelents - Closing
292.2
78.8
(35.9)
310.6
42.9
(16.0)
360.8
(33.8)
(55.6)
727.5
84.8
25.1
810.1
35.7
44.7
EPS
Expected Dividend pay out ratio
Dividends
Total dividends
Dividend Yeild - Voting
Dividend Yeild - Non Voting
0.04
-
0.13
-
0.15
-
0.33
10%
0.03
6.66
0.56%
1.11%
0.41
10%
0.04
8.26
0.69%
1.38%
Ratios
Revenue growth
24.79%
23.50%
6.50%
15.37%
25.23%
GP Margin
Operating profit margin
Net profit margin
ROE
40.46%
8.25%
0.75%
1.75%
39.91%
8.28%
2.15%
5.82%
41.21%
9.68%
2.27%
5.64%
42.22%
8.37%
6.44%
9.16%
42.47%
8.06%
6.38%
10.20%
0.33
3.64
18.02
1.65
0.41
4.05
14.52
1.48
EPS
NAV
PER
PBV
Asha Phillip Securities Ltd – Equity Research Division
0.04
2.12
0.13
2.25
0.15
2.61
4
Initial Public Offering – Lucky Lanka Milk Processing Company Ltd
July - 2014
Peer Group Trading Multiples
LANKA MILK
FOODS (CWE) PLC
Price to Earnings (PER)
Price to Book Value (PBV)
Price to Sales
ROE (%)
KOTMALE
HOLDINGS PLC
RENUKA
AGRI
FOODS PLC
18.90
1.88
1.16
9.96%
15.87
0.95
0.54
6.00%
187.37
0.45
0.98
0.24%
RENUKA
SHAW
WALLACE
PLC
6.40
0.64
0.28
10.07%
Proxy Group
Average
20.36
0.63
0.63
3.09%
LUCKY
18.02
1.65
1.16
9.16%
Source: Company, Asha Phillip Research
Non Voting Share has been priced at an attractive 50% discount to the voting
price which is beyond the 2 year average voting to non voting discount band of
15% - 35% of the market.
Non Voting Discount of selected stocks - Last 2 Year trading band
5.00%
0.00%
-5.00%
-10.00%
-15.00%
-20.00%
-25.00%
-30.00%
-35.00%
-40.00%
-45.00%
TKYO. Discount
COCO. Discount
CIC. Discount
LGL. Discount
COMB. Discount
HNB. Discount
RHL. Discount
Source: CSE, Asha Phillip Research
“Non Voting discounts have not been reached beyond 35% on average for last 2 years”
Asha Phillip Securities Ltd – Equity Research Division
5
Initial Public Offering – Lucky Lanka Milk Processing Company Ltd
July - 2014
Voting share is priced at 18x PER on one year forward earnings which is in line
with the proxy group average PER of 20x with a slight upside potential in short
term. But, this could be considered as a prospective share with a medium to long
term outlook ( Priced at 14.5x PER on FY15/16E earnings) mainly from capital
appreciation along with the dairy sector transformation which is presumed to be
materialized in the country soon. Further, the non voting share is considered to be
attractive with an above average discount of 50% against the voting share.
Pasindu Perera
Manager – Research
[email protected]
TP: +94112429109
Lasantha Senanayake
Research Analyst
[email protected]
Nishantha Warnakulasuriya
Trainee Research Analyst
[email protected]
DISCLAIMER: This document has been prepared and issued by Asha Phillip Securities Ltd, on the basis of publicly available information, internally
developed data and other sources, believed to be reliable. Whilst all responsible care has been taken to ensure that the facts stated are accurate and the
opinions given are fair and reasonable. Neither Asha Phillip Securities Ltd, nor any Director, Officer or employee, shall in any way be responsible for the
contents. Asha Phillip Securities Ltd may act as a Broker in the investments which are the subject of this document or related investments and may have
acted upon or used the information contained in this document, or the research or analysis on which it is based, before its publication. Asha Phillip
Securities Ltd., Its Directors, Officers or Employees may also have a position or be otherwise interested in the investments referred to in this document.
This is not an offer to sell or buy the investments referred to in this document.
Asha Phillip Securities Ltd – Equity Research Division
6

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