OSEA 1Q2014 Earnings Note - BUY - 29 Apr 2014

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Overseas Realty (Ceylon) PLC [OSEA.N0000]

1Q2014 EARNINGS NOTE – BUY

YEAR END DEC (LKR mn) 1Q2013 2013 1Q2014 2014E

Current Price (LKR)

Revenue 906 4,857 1,710 5,760 20.2

Net Profit 515 2,640 716 2,770 Target Price (LKR)

EPS (LKR) 0.61 2.89 0.85 3.28 25.4

EPS Growth (%) 11 (1) 39 13 Recommendation

EPS (Net of Fair Value Gain) 0.33 1.79 0.55 2.26 BUY

EPS Growth (Net FV Gain %) 590 67 67 26 Date

DPS - 1.45* - 0.37 29-APR-14

Dividend Yield (%) - 1.5 - 1.8

PER (x) - 11.2 - 8.9

NAV/Share (LKR) 28.6 28.7 29.5 32.0

Discount to NAV (%) (29) (30) (31) (37)

OSEA 1Q2014 EPS is up 39% YoY to LKR 0.85. CAL is maintaining 2014E EPS at LKR 3.28 (+13% YoY). Profit growth stems primarily from revenue recognized on the sale of apartments (percentage completion method), while rental income grew c.20% YoY due to avg. rental revision to LKR 260psf at the WTC towers. The WTC towers remain Colombo’s A-grade commercial space and enjoy c.90% occupancies. In 2014E, CAL expects revenue from sale of apartments to reach LKR 3.9bn (+22% YoY) and rental income to reach LKR 1.8bn (+12% YoY). Our target price of LKR 25.4 (+26%) is based solely on WTC-only reversionary rentals. BUY

1Q2014 EPS net-FV +64% YoY – EPS net-FV of LKR 0.55 was driven primarily by

apartment sales. GP margins on apartment sales improved to 12% from 9% in 1Q2013.

For 2014E, CAL expects GP margins to improve to c.40% from 37% in 2013 as GP

margins improve on apartment sales (to c.16% from 11% in 2013). CAL expects EPS

net-FV to grow by 26% to LKR 2.26.

207 units in Phase II sold and recognized by end 2014 – CAL expects a vacancy rate of

c.5% at the Phase II development of 218 units by end-2014E. We have not accounted

for any revenue from Phase III sales till 2015E and forecast 132 units sold by end-

2015E. CAL anticipates the commercial development to commence in 2016E, which

would uplift rental income once complete.

CAL’s LKR 25.4 target price is based on WTC reversionary rentals only – At current

prices, OSEA is trading at a 37% discount to 2014E NAV. CAL’s target price is LKR 25.4

(+26%), based on rental revisions at OSEA’s WTC towers only (a full reversion to NAV

may provide +58%). BUY

CAL Research

Level 5, “Millennium House”,

No.46/58, Nawam Mawatha,

Colombo 2

Tel: +94 11 231 7786

Email: [email protected]

Purasisi Jinadasa

REFER p.4 FOR DISCLAIMER

Market Capitalization (LKR):17bn

Market Capitalization (USD): 130mn

6mos avg. Daily T/O (USD): 21k

Free Float: 16.6%

6mos Price H/L (LKR): 21.7/17.6

* Includes a one-time dividend of LKR 1. For 2014E, CAL maintains a c.10% dividend p/o, in-line with management guidance

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LKR thsd 2011 2012 1Q2013 2013 1Q2014 2014E 2015E 2016ERental Income 850,425 1,339,257 343,616 1,589,573 423,855 1,787,828 1,797,797 1,820,113

Sale of Apartments 1,587,516 554,441 546,548 3,190,047 1,256,207 3,895,268 4,545,618 3,788,015

Other Services 56,627 60,421 15,575 77,404 30,825 79,745 157,488 159,443

Total Revenue 2,494,567 1,954,119 905,739 4,857,024 1,710,887 5,762,841 6,500,903 5,767,571

Direct Operating Expenses (337,755) (425,936) (105,923) (423,853) (106,224) (464,835) (467,427) (723,513)

Cost of Sales of Apartments (1,230,613) (396,546) (465,562) (2,635,185) (1,047,052) (2,998,755) (3,477,306) (2,864,192)

Gross Profit 926,200 1,131,636 334,254 1,797,986 557,611 2,299,251 2,556,170 2,179,866

Fair Value Gain on Investment Property 2,122,860 1,563,310 232,463 929,852 250,810 861,541 991,793 1,084,230

Administration Expenses (196,287) (200,256) (44,713) (207,562) (56,049) (374,585) (422,559) (374,892)

Marketing & Promotional Expenses (73,946) (60,413) (10,337) (59,994) (12,160) (90,480) (102,068) (90,555)

Finance Costs (171,907) (173,120) (28,346) (42,558) (23,035) (12,728) (20,339) (1,916)

Finance Income 159,456 257,754 70,028 223,177 87,617 293,554 354,063 346,843

Profit Before Tax 2,766,374 2,518,911 553,349 2,640,901 804,794 2,976,553 3,357,060 3,143,576

Income Tax Expense (25,257) (51,275) (10,257) 406 (11,316) (60,591) (68,337) (63,991)

Profit After Tax for the Year 2,741,117 2,467,636 543,092 2,641,307 793,478 2,915,961 3,288,723 3,079,585

Minority Interest (60,018) - (28,356) (204,399) (76,983) (145,798) (164,436) (153,979)

Profit 2,681,099 2,467,636 514,736 2,436,908 716,495 2,770,163 3,124,287 2,925,606

EPS 3.18 2.93 0.61 2.89 0.85 3.28 3.70 3.47

EPS (net-FV) 0.66 1.07 0.33 1.79 0.55 2.26 2.53 2.18

PER (x) 6.4 6.9 NA 7.0 NA 6.2 5.5 5.8

NAV/Share (LKR) 24 27 NA 29 NA 32 36 39

Discount to NAV -17% -26% NA -30% NA -37% -43% -48%

Source: Company Reports and CAL Estimates

Appendix 1 – Income Statement

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LKR thsd 2011 2012 2013 2014E 2015EASSETS

Non-Current Assets

Investment Property 17,884,033 19,459,463 20,389,315 21,191,094 22,182,887

PP&E 394,912 644,130 703,210 838,571 997,564

Intangible Assets 25,709 18,405 17,734 17,484 23,140

Investments in Subsidiaries - - - - -

Deferred Tax Assets - - 42,475 - -

Current Assets

Inventories 3,167,476 4,129,474 5,350,422 6,742,524 5,980,831

Trade and Other Receivables 1,517,096 1,839,280 1,449,718 1,072,662 689,969

Amounts due from Related Parties 24,999 13,602 25,521 24,999 24,999

Income Tax Recoverable - - - - -

Short term Investments 315,261 - 1,235,743 315,261 1,418,363

Cash Balances 1,881,603 1,810,826 1,673,964 3,352,309 4,106,564

TOTAL ASSETS 25,211,088 27,915,180 30,888,102 33,554,904 35,424,318

EQUITY AND LIABILITIES

Equity Holders

Stated Capital 10,186,085 10,186,085 10,186,085 10,186,085 10,186,085

Revaluation Reserve 164,664 216,071 238,875 238,875 238,875

Retained Earnings 9,266,061 11,564,200 13,752,284 15,299,265 18,110,981

Minority Interest 963,129 942,942 1,147,341 1,293,132 1,457,560

Non-Current Liabilities

Interest Bearing Loans and Borrowings 245,817 2,231,813 145,805 2,539,809 95,805

Non-interest Bearing Loans - - - - -

Post-employment Benefit Liability 23,128 26,559 17,666 11,041 7,176

Current Liabilities

Trade and Other Payables 615,262 493,227 1,588,434 1,642,735 1,828,377

Rental and Customer Deposits 1,088,412 2,082,488 1,888,488 2,209,316 2,347,361

Amounts due to Related Parties 9,442 19,652 12,041 12,041 12,041

Interest Bearing Loans and Borrowings 2,635,530 81,057 1,888,483 100,008 1,117,458

Non-interest Bearing Loans 844 49,353 - - -

Income Tax Payable 10,335 19,158 19,702 19,702 19,702

Dividends Payable 2,380 2,576 2,896 2,896 2,896

TOTAL EQUITY AND LIABILITIES 25,211,088 27,915,181 30,888,100 33,554,904 35,424,318

Appendix 2 – Balance Sheet

Source: Company Reports and CAL Estimates

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Contacts

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Tel No: +94 11 231 7777 (General)


Head of Research

Purasisi Jinadasa

Tel No: +94 11 231 7786


Udeeshan Jonas

Tel No: +94 11 231 7746


Thushani de Silva


Devin Karunaratne


Christeen Silva


Teresh Amaratunga


Documents

OSEA 1Q2014 Earnings Note - BUY - 29 Apr 2014