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Renuka Holdings PLC | Coco Lanka PLC | Renuka Agri Foods PLC
October2011
Background
Renuka Holdings (RHL) is the holding company of a diversified organization. RHL through its subsidiaries have diversified in to four area of business as follows. Agribusiness FMCG & Food Services Automotive Investment, Leisure & Property
RHL is listed on the Colombo Stock Exchange (CSE) under the Investment Trust sector, and is the ultimate parent of Coco Lanka PLC (COCO) and Renuka Agri Foods (RAL) which are listed on the CSE under the Beverage, Food & Tobacco sector. RHL marks its presence in the fast growing distribution & FMCG business through its recently acquired subsidiary Shaw Wallace Ceylon Limited which facilitates growth driven by synergies. Shaw Wallace Ceylon Limited inherits many well known own brands and is working towards transforming in to one of the largest FMCG manufactures in the country. RHL through its unlisted fully owned subsidiary owns prime real-estate in Colombo, having the intention to embark on property development with foreign collaboration. Further the company also intends to embark on niche tourism through boutique hotels, holding valuable properties in the Southern and Eastern coastal belts as well as in the Northern Province.
Highlights
Financial Performance 1QFY11/12 1Q FY12 (SLRs.Mn) 1Q FY11 (SLRs.Mn) 373.6 96.70 119.0 88.00 31.01 YoY Change 213% 228% -57% -151% 211%
Price SLRs. 90.00
RHL.N PriceVolume
Volume Mn. 4 3 3 2 2 1 1 0
Revenue EBIT Net Profit Mart to Market Valuation Gain/(Loss) Earnings Excluding Mark to Market Valuation
RHL is enriched with its valuable land bank, which includes 385 perches of prime freehold land in Colombo. RHL intends to embark on a mixed property development project with foreign collaboration, on an 85perch lakefront land belonging to the company at the Gallface Terrace Colombo. Shaw Wallace Ceylon Ltd to be transformed in to one of the largest FMCG manufactures in the country having a strong distribution network, with Renuka Products being a dedicated manufacturing facility for the Shaw Wallace Group. Agribusiness margins to improve with the new product line of Coconut Water in Tetra packs. Commercial production to begin during January 2012 targeting the export market. Fundamental Analysis Division Capital TRUST Research (Pvt) Ltd
ShareVolume
Price
RHL|COCO|RAL
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XNonv votingShare
* Th includes S his SLRs.286.4mn as change in fair value of investment property. This has n n f p s
be excluded i arriving at R een in Recurring Net Profit Attribu t utable to Equi Shareholde ity ers.
RHL|COCO|RA AL
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Group Structure
RHL|COCO|RAL
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Operational Overview
Agribusiness
RHLs fully owned subsidiary Renuka Agro Exports is the strategic apex of the Agribusiness. Renuka Agro Exports holds 50.6% of Coco Lanka PLC (COCO) that was restructured and transformed in to an Investment Trust, holding 50.09% of Renuka Agri Foods PLC (RAL). As part of the restructuring process Renuka Organics (Pvt) Ltd and Renuka Teas (Ceylon) (Pvt) Ltd that were earlier held by COCO was transferred to RAL as an expansion strategy at a consideration of SLRs.147m. Thus RAL is now the investment vehicle in Agribusiness.
Automotive
Presences in the automotive sector is through McShaw Automotive Ltd a joint venture between Shaw Wallace Ceylon Ltd and McLarens Holdings Ltd. Shaw Wallace having entered the automotive sector as the exclusive distributor of Delphi Lockheed brake oil in Sri Lanka, the joint venture has developed new lines of business in Lubricants, Radiator Coolant, Tyres & Tubes, Auto Part & Accessories, Batteries and Car Care Products. It has a strong distribution network of nominated and direct dealers, service stations, fuel stations, spare parts shops and franchise workshops.
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Future Outlook
Outlook for RHL remains positive with strong growth potential in Agribusiness, and FMCG & Food Services. Acquisition of Shaw Wallace Marketing has great synergies which would facilitate island wide distribution of own brands of RAL. Renuka Products will be the dedicated FMCG manufacturing facility for Shaw Wallace, thus revenue from distribution of FMCG will improve rapidly as more and more products are added to its portfolio. The leisure industry in Sri Lanka is prospering with unfilled demand. Thus diversifying in to this segment is a timely decision having freehold land in the Southern and Eastern coastal belts as well as in the Northern Province. In future this segment would also bring in a significant contribution in terms of profit. The wayward market condition in the Colombo Stock Exchange has resulted in a marked-to-market (MTM) valuation loss amounting to SLRs.25.4mn in the equity investment portfolio during the 1Q FY11/12. We expect the market to recover during the 2H of FY11/12 thus the MTM loss will get reversed. However we have not included such reversal in our profit forecast.
Sector Comparison
Sector PE (x) Sector PBV (x) Symbol NoofsharesMn FY10/11 NetProfit(SLRs.Mn) FY11/121Q FY10/11 EPS(SLRs.Mn) Annualized 2010/11 PER(x) Forward NAV PBV(x) MPS GUAR Ceylon Guardian Investment GREG Environmental Resources Investments 15.12 38.71 1.60 62.00 9.76 1.03 40.00 4.05 138.76 2.23 309.10 4.23 65.33 1.84 120.30 (302.48) 23.32 2.76 64.30 (158.21) 73.36 2.54 186.00 4.10 5.01 3.23 76.36 9.55 28.41 10.14 (0.21) 53.32 (1.18) 31.34 51.24 12.37 1567.35 32.36 699.66 11.87 (16.77) 1.21 (2.35) 5.93 = 22.9 = 3.3 RHL.N 43.75 618.47 RHL.X 6.25 GUAR 82.10 2657.02 CINV 98.51 1,169.28 GREG 315.48 380.42 ASCO 7.99 47.39
Valuation
During FY11/12 earnings are forecasted to grow by7% YoY on a recurrent basis to reach SLRs.355mn. The voting share is trading at a forward PE of 8.9x while the nonvoting is trading at 5.7x both of which are at a discount to the sector PE. These earning forecasts are based on conservative assumptions and can improve further especially in the case of a strong recovery in the Colombo Stock Exchange. Considering the low PE and PBV, and future prospects of the entity we give a medium to long term buy recommendation.
RHL|COCO|RAL
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Background
COCO which was formally engaged in manufacturing and marketing of agriculture products was transformed in to an investment trust by transferring its exposure in agribusiness to its subsidiary Renuka Agri Foods PLC (RAL). Accordingly Renuka Organics (Pvt) Ltd and Renuka Teas Ceylon (Pvt) Ltd was transferred to RAL during the year for a total consideration of SLRs.147mn. COCO is now engaged in managing a portfolio of listed equity and debt instruments, and is the holding company of RAL which is the investment vehicle to the agribusiness. Long Term Investments The company holds 221mn shares (50.09%) of RAL which is recognized at cost in the books of COCO. Note 1in this report illustrates the unrealized capital gain when RAL is valued at the current market price. Coco Hotels & Properties (Pvt) Ltd (formerly known as Island Capital (Pvt) Ltd) is a 100% owned subsidiary of RHL. COCO has paid a sum of SLRs.471mn as an advance payment to purchase shares of the said company. Once the issue is made Coco Hotels & Properties (CHP) will be 50% owned by and COCO. CHP owns a 85 perch prime land with lake frontage at the Galleface Terrace on which a mixed property development with foreign collaboration will take place in near future. Equity Share Portfolio During the 1Q of 2011 the company reported a loss of SLRs.16mn primarily due to the recognition of mark to market loss of this portfolio as a result of withered market conditions. Following a recovery in the equity market, these unrealized losses will hopefully get reversed. The following share portfolio is available as of 31st March 2011, and is adjusted for share splits, capitalization of reserves and scrip dividends which took place in the interim period. Company No.of Shares 150,000 250,000 92,600 300,150 51,000 5,000 10,000 10,000 MarketPrice (SLRs.) 393.00 174.00 130.00 199.90 218.20 327.00 136.00 99.00 MarketValue (SLRs.) 58,950,000 43,500,000 12,038,000 59,999,985 11,128,200 1,635,000 1,360,000 990,000 189,601,185 210,103,180 204,108,446 (20,501,995.0)
COCO.N PriceVolume
Volume '000 1,600 1,400 1,200 1,000 800 600 400 200 0
Oct10
Feb11
Dec10
Apr11
DistilleriesCompanyPLC DFCCBankPLC HattonNationalBankPLC SampathBankPLC LankemCeylonPLC RoyalceramicPLC LankaCeramicPLC Total BookValueasat31stMarch2011 TotalCostoftheSharePortfolio MarktoMarketValuationloss (Asat28thSeptember2011)
ShareVolume
Aug11
Oct11 Price
Jun11
CeylonTobaccoPLC
RHL|COCO|RAL
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Investment Property The company holds a 215 perch land with 30,000 sq.ft of building as an investment property which was last revalued during March 2009 at SLRs.92.7mn. Companys policy is to revalue such assets every three years, thus there will be possible revaluation gain recognized during FY11/12.
XNonvotingShare
*Note1NAVAdjustmentforUnrealizedCapitalGains
Value Unrealized Capital Gain/Loss 200 1,459 210 190 (21) 1,238 1Q2012 2012F 107.35 0.61 0.51 1,259
102.03 0.69 0.54 Fundamental Analysis Division Capital TRUST Research (Pvt) Ltd
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Background
RAL is a BOI approved company and commenced operations in July 2003. The company is entitled for a 12 year tax holiday from the date of commencement followed by a concessionary rate of 15% for a further period of 12 years. RALs principal activity is manufacturing and marketing of coconut based food and beverages which includes, ultra heat treated coconut milk in aseptic packages, coconut milk powder, coconut milk and coconut beverages. Today the company is fully equipped with state-of-the-art food processing technologies and has become countrys most diversified coconut factory. Its longstanding business partner Grace Foods (UK) Plc and its parent company GraceKennedy Ltd are one of RALs strategic shareholders, and together they own 8.66% of the issued capital. Nearly 95% of the sales of RAL were generated overseas while local distribution was limited to supermarkets until recent times. With the acquisition of Shaw Wallace Ceylon by RHL, the local distribution of RAL products is now happening in wide scale with an eminent growth in revenue and profitability.
RAL PriceVolume
7.00 6.00
100% RenukaOrganics(Pvt)Ltd
100%
5.00
Volume Mn. 45 40 35 30 25 20 15 10 5
RenukaTeas(Ceylon) (Pvt)Ltd
Exportcoconutandspiceproducts Holds the organic certification and provide organic coconut raw
ExportvalueaddedCeylonTea. Raw tea will be provided for the expected beverage expansion 100%
100%
ShareVolume
Price
50%
Kandy PlantationsLtd
60%
CeylonBotanical (Pvt)Ltd
100%
RHL|COCO|RAL
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Operational Overview
PrincipalProducts CeylonTea
Coconut and Organic Products Renuka Agri Foods Plc itself is one of the largest and most diversified coconut based food and beverage companies which facilitate a highly integrated network of growing, manufacturing and distribution in to global markets. The Groups own plantations and the network of out-growers are managed under Kandy Plantations Ltd which supplies about 16% of the raw nuts requirement where as the balance requirement for production is purchased from the outside market. Renuka Organics (Pvt) Ltd is the administrator for Organic certified products and it is engaged in export of its own organic certified products. Renuka Organics together with its subsidiary Kandy Plantations, supply the organic coconut raw material to RAL for the production of organic coconut products.
CoconutandOrganic Products
Forestry
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Ceylon Tea Tea is obtained through the Colombo Tea auction and graded in house before sent for further processing. The Renuka Teas Ceylon (Pvt) Ltd undertakes the production and export of value added tea mainly in categories of black tea, green tea and flavoured & herbal tea. The production is carried out in terms of bulk tea packing, production of tea bags (single and double chamber) and loose tea packing. Key export markets of Renuka Teas are Europe, US, Caribbean Islands and Africa. About 80% of the export revenue generated from tea is from the companys own brands. Forestry The group made its primary entry to forestry through its sub subsidiary Ceylon Forestry (Pvt) Ltd. considering the growing demand for forestry products within the country. Currently the group owns a site in Matale which consists of Teak, Broadleaf Mahogany and Khaya planted and this site will remain as a long term investment of the group until the biological asset valuations standards are properly adopted within the country.
PrincipalMarkets&Distribution
Renuka Agri Foods Plc has a strong worldwide market base of 62 countries and it is continuously growing. The groups export markets include Africa, Middle East, East Asia, and Europe being its largest overseas market. Thailand, Indonesia, Malaysia and Philippines are the key rivals in export trade. The company commenced its local operations by selling coconut products to local food service channels in 2006. Since then RAL products were made available to consumers mainly through Supermarkets. Today through Shaw Wallace Renuka Products are made available not only in supermarkets but also in thousands of retail & grocery shops across the length and breadth of the country.
Future Outlook
Renuka Agri Foods Plc is currently on a major expansion drive toward building up its own value based on the groups synergy. Beverage Expansion Project RAL entered in to an agreement with GraceKennedy Ltd to manufacture coconut water based and other beverages packed in aseptic retail packaging, of which commercial operations will begin early next year. Accordingly RAL invested in a new manufacturing plant that has the capability of producing a range of related beverages using fruit, milk and tea as raw materials. Coconut water packaging will be done at the initial stage and the project will eventually be expanded in to manufacturing of fruit juices, ice tea and isotonic beverages. GraceKennedy is expected to buy 20% out of the total production while the balance will be sold in local end export markets under the Renuka brand. Greenfield Plantation Project - The project is expected to be initiated upon the commencement of the beverage expansion project in January 2012. Accordingly 5000 acres of state land from East or Northern Western parts of the island will be considered. This will basically to provide raw materials to the production of value added coconut products.
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Distribution Infrastructure Local - Shaw Wallace Ceylon Ltd being a higher value added distribution company which generates 70% of sales from its own brands, will pave the way to realize its synergetic advantage by establishing a strong distribution channel within the country. Accordingly, RAL entered into an agreement with Shaw Wallace Food Services Ltd for distribution of Renuka coconut milk powder and Tanagana Tea to catering channel. Renuka Product Pvt Ltd a sub-subsidiary of RAL, will become the dedicated FMCG manufacturing arm to Shaw Wallace Ceylon Ltd which will add variety and value to their product portfolio. Overseas - The group has drawn its plans to set up a subsidiary in UK, one of its key export buyers to oversee the marketing operations of RAL and its subsidiaries. This will allow the company to set up an intermediary stock of its own branded products for a better promotion. Going forward the company is expected to post strong earnings and improve margins through strong distribution, new product development and strong synergies developed within the group.
Sector Comparison
Sector PE (x) Sector PBV (x) = 15.3 = 4.2 Symbol NoofsharesMn FY10/11 NetProfit(SLRs.Mn) FY11/121Q FY10/11 EPS(SLRs.Mn) 1QAnnualized 2010/11 PER(x) Forward NAV PBV(x) MPS LAMBKotmaleHoldings SOYConvenienceFoods 10.8 2.38 3.1 7.30 17.3 18.11 2.7 48.80 (64.5) 20.84 3.8 78.90 21.0 48.52 2.5 120.80 24.6 82.46 5.1 420.00 15.0 19.55 5.4 104.80 17.4 78.19 3.1 240.20 0.67 20.3 2.81 20.4 (1.22) 19.6 5.74 111.4 17.06 22.1 7.01 10.8 13.80 7.9 67.5 0.36 22.1 2.40 (9.2) 4.02 57.4 1.08 11.7 18.98 41.3 9.73 55.2 30.37 RAL 401.3 144.0 LAMB 31.4 75.3 TSML 30.0 120.7 LMF 40.0 43.4 SOY 2.8 52.2 TAFL 23.5 229.1 BFL 16.0 485.9
TSMLTeaSmallholderFactories TAFLThreeAcreFarms
LMFLankaMilkFoods BFLBairahaFarmsPlc
Valuation
During FY11/12 earnings are forecasted to grow by 110% to reach SLRs.302mn. Based on the forecasted earnings and the sector PE of 15.3x the share is undervalued and has the potential to reach SLRs.11.48. We give a buy recommendation for RAL considering its future growth prospects and the steep discount in the share price when compared to the sector.
TheinformationandtheopinionscontainedhereinwerecompiledbyCapitalTRUSTResearch(Pvt)Ltd,andarebasedoninformationobtainedfromreliable sourcesingoodfaith.However,suchinformationhasnotbeenindependentlyverifiedandnoguarantee,representationorwarrantyexpressedorimpliedis madebyCapitalTRUSTResearch(Pvt)Ltdanditsrelatedcompaniesastoitsaccuracyorcompleteness.Thisreportisnotandshouldnotbeconstruedasan offertosellorasolicitationofanoffertobuyanysecurity.NeitherCapitalTRUSTResearch(Pvt)Ltdnoritsrelatedcompanies,directorsandemployeescanbe heldliablewhatsoeverforanydirectorconsequentiallossarisingfromanyuseofthisreportortheinformationcontainedherein.
RHL|COCO|RAL
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FAX : (011)-5365725
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BOARD OF DIRECTORS
Moksevi Prelis Tushan Wickramasinghe Sarath Rajapakse (Chairman) (Managing Director/CEO) (Director)
TRADING DIVISION
Tushan Wickramasinghe Dakshana Gooneratne Lawrence David M J M Husni Sandesh Jayakody Nilantha Perera Minoli Wickramasinghe Kavin Kodytuakku Saliya Gamagedera Asanka Perera Rohitha Wickramasinghe Radheeka Pillai Suneth Fernando Sajee Perera Gayan Vithanage Shanmugassharma Rakesh Rasika Vithanage Rukshan Perera Chamila Fernando Laxman Ratnayake (011)-5378201/2 (011)-5378206 (011)-5378208 (011)-5378209 (011)-5378118 (011)-5378207 (011)-5367672 (011)-5378119 (011)-5378120 (011)-5378213 (011)-5378216 (011)-5340672 (011)-5378212 (011)-5378214 (011)-5378210 (011)-5335225 (011)-5335225 (011)-5335225 (011)-5335225 (011)-5335225 0777-313456 0777-360492 0777-289331 0773-219503 0773-733273 0777-715970 0777-287937 0777-536870 0773-219506 0773-291847 0777-536880 0777-287936 0773-633533 0777-287941 0777-287933 0777-536877 0777-536898 0777-536883 0777-536887 0777-287948
KANDY BRANCH
Arjuna Wilbawa Thilina Yahampatharachchi Suranga Guruge Dasantha Herath Mohomed Faizan Ananda Wijenayake FAX 081-5628072 081 5626839 081-5626839 081-5675423 081-5628073 081-5628430 081-5633642 081-5741741 037-5671403 037-5675853 037-5677939 037-5264264 0773-291846 0773 219502 0773-219502 0773-291845 0773-865305 0777-840256 0777-840254
KURUNEGALA BRANCH
Bogala Samaranayake Dammika Senarathne Sonal Silva FAX 0773-688604 0777-560699 0773-833994
JAFFNA BRANCH
Jayaroshman Ketheesh 021-5677 002 0777-270922
RESEARCH DIVISION
Charitha Gunasekere Asanka Kumarage Madusha Perera Shashitha Jayakody (011)-5335225 (011)-5335225 (011)-5335225 (011)-5335225 0773-865301 0777-536875 0777-361394
NEGOMBO BRANCH
Sanjeewa Perera Sujith Kumara Narada Abeysinghe Srikanth Anton FAX 031-5675291 031-5675292 031-5675293 031-5675294 031-2227894 0773-291848 0773-291849 0773-833997 0773-219505
ACCOUNTS DIVISION
Methmal Senivirathne Ranjini Jayawardena Subani Wimalarathne Kumari De Alwis Dilini Gamage (011)-5379102 (011)-5378215 (011)-5335225 (011)-5335225 (011)-5335225 0777-766727 0773-596336 0772-015882 0772-015886 0777-722257
MATARA BRANCH
Venura Gamage Thusitha Karunaratne Prasad Jagoda Nuwan Wellage Prabath Rathnayaka Anurada Dahanayaka FAX 041-5623200 041-5623201 041-5670577 041-5679881 041-5679592 041-5670570 041-5410044 0773-936222 0773-865302 0773 596338 0773-865303 0773-785157 0773-596339
KIRIBATHGODA BRANCH
Asiri Perera Anuradha Weerakkody Nuwan Wellage 115238452 115238454 115238453 0773-692812 0777-354760 0773-865303
DOCUMENTATION DIVISION
N.M.A Navaratne (011)-5335225 0777-287931