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Issue of 390,000,040 shares at a price of LKR18.00 to be listed on the Main Board
INITIAL PUBLIC OFFERING
Analyst: Minoli Mallawaarachchi: [email protected]
PEOPLE’S LEASING CO. LTD
1 | P a g e
PEOPLE’S LEASING CO. LTD
People’s Leasing Company limited (PLC) was incorporated in 1995 and
registered as a Specialized Leasing Company (SLC) under section 34 of the
Finance Leasing Act No.56 of 2000.
The principal business activity of the PLC is the provision of finance leasing,
operating leasing, HP facilities, asset financing, and term loans.
The company has registered a Compound annual growth rate (CAGR) of 28%
in overall interest income, over a period of 5 years, compared with a CAGR
growth of 38% in interest earning assets.
The interest expenses for a period of 5 years have grown at CAGR of 38%,
and according to the latest available data for 1QFY11/12 the YoY growth had
been 67%.
Net profits had accounts for a CAGR growth of 37% over a period of 5 years.
Simultaneously, as per the year ended FY11/10, the YoY growth in net profit
was an impressive 126%.
Taking into consideration of aforesaid conditions we forecast a net profit of
LKR3.9bn for FY11/12 achieving a growth of 50% YoY and yet a 4% decline in
FY12/13 (due to reversal of LKR1.6bn provisions being included in FY11/12
profits) delivering a net profit of LKR3.7 bn.
In terms of earnings to price multiple; the ordinary share is attractively
valued at 9.3x (based on normalized profits adjusted for the LKR1.6 bn
reversal of reserves) and 7.8x on FY11/12E and FY12/13E earnings
respectively (based on the issue price of LKR18.0)
2 | P a g e
The issue
The issuance of Three Hundred and Ninety Million and Forty (390,000,040)
new Ordinary Voting shares at the issue price of LKR18.00, to raise a total
capital of LKR7,020,000,720 (LKR7 bn). Subsequent to the issue, company will
be listed on the Main Board of the CSE.
The objectives of the issue
The primary objective of the issue is to obtain a
listing for the Ordinary Voting shares of the company
on the CSE to comply with the regulatory
requirements of the Monetary Board of CBSL as
communicated by the Department of supervision of Non- Bank Financial
institutions.
It is expected that the company will
meet the minimum public holdings
requirement of the CSE on the
completion of the issue.
The proceeds from the IPO, after meeting expenses to the issue, would be
utilized to grant more leasing, HP and loan facilities to the customers. Apart
from the above, the increase in stated capital of the company subsequent to
the issue would improve its debt to equity position and would enable the
company to leverage on its balance sheet and raise the requisite debt
financing in a comfortable manner.
Following is the allocation of shares to identified categories, and the issue
price of LKR18.00 is applicable to all categories.
Key milestones of PLCL
©
Incorporation-1995
IPO-2011
2008/2008- formed two subsidiaries; People's
Leasing Property Development Limited and People's
Leasing Fleet Management Limited
2009/10, the Company acquired 84.50%
stake of Seylan Merchant Leasing PLC
The People's Insurance Limited was incorporated
as a fully owned subsidiary of PLC
By 30th June 2011, the company
capitalized a sum of LKR4.1bn (28mn
shares)
Share split of 1:15
after the bonus issue
3 | P a g e
Company Overview
People’s Leasing Company limited (PLCL) was incorporated in 1995 and
registered as a Specialized Leasing Company (SLC) under section 34 of the
Finance Leasing Act No.56 of 2000.
Company was formed by Peoples Bank; a leading state owned Licensed
Commercial bank (LCB) in Sri Lanka. The majority of the share holding of the
parent- Peoples Bank (92.27%) is held by the state whilst a stake of 7.73% is
held by co- operative societies. The asset base of the Peoples Bank amounts
to approximately LKR619 bn as at end of June 2011, whilst the bank
continued to maintain its position as the second largest LCB in Sri Lanka.
The principal business activity of the PLCL is the provision of finance leasing,
operating leasing, HP facilities, asset financing, and term loans. The company
offers an array of leasing facilities and loans to cater to the needs of different
customer segments, including mortgage loans, vehicle loans, and short term
loans for working capital. PLCL also operates as a margin provider under a
license received from the SEC.
The company is renowned to be the market leader in the leasing and HP
industry of Sri Lanka having secured a market share of over 20%, measured in
terms of annual disbursements.
The company bears a long-term rating of ‘A (lka) stable ‘from Fitch Ratings
Lanka Limited, signifying its strong credit profile and excellent track record of
performance.
Company has an unprecedented presence throughout the country compared
with other peers engaged in similar business as of PLCL. This has been
achieved through 37 branches and 121 window offices which are located at
Peoples Bank branches throughout the country.
People’s Leasing Company Limited functioning as the holding company of the
PLC group, operates with six subsidiaries, maintaining its presence in the
spheres of leasing and HP financing, motor and general insurance, fleet
management, property development and Micro finance.
Subsidiary operations
Peoples Finance PLC (ticker; SMLL) - PLCL holds 88.51% of the company.
SMLL is a Registered finance company in Sri Lanka delivering core products
including, leasing, HP, loans. And also company has the capacity to accept
deposits from the public.
Peoples Insurance Limited- A company carrying on general insurance
business and registered with the IBSL, was incorporated on July 22, 2009 as a
public limited liability company, and is a fully owned subsidiary of PLCL.
4 | P a g e
Peoples Leasing Fleet Management Limited- A fully owned subsidiary of
PLCL and engages in the provision of operating leases and vehicle hire
facilities and operates a service station, “PLC auto care”. Also the company
commenced the vehicle valuation unit during FY10/11, which is expected to
make a significant contribution for the PLC group with the expansion of the
operating lease business and vehicle servicing.
Peoples leasing Property Development Limited- A fully owned subsidiary of
PLCL was incorporated on August 15, 2008 as a public limited company. The
company engages in facilitating the development of office buildings and
productivity stimulating workspace required for Peoples Bank and PLC group.
Peoples Leasing Havelock Properties Limited- A fully owned subsidiary of
PLCL, mainly involved in undertaking a BOI approved project which is to
construct an office complex at Havelock Road, to house subsidiaries of PLC.
Peoples Micro Finance Limited- A fully owned subsidiary of PLC, operating
with the primary objective of providing financial services to the low income
segment of the society and capacity building of the identified segment and
micro enterprises.
Sri Lanka’s gross domestic product expanded by 8% in 2010 (2009; 3.5%) ,
the highest annual growth rate recorded for the last 30 years. This has been
achieved on the shoulder of attractive macroeconomic fundamentals after
the cessation of war prevailed over three decades.
The current inflation (as measured by the Colombo Consumer Price Index)
and interest rates which peaked in 2008 have eased to relatively low levels.
As per end 2010, Specialized Leasing Companies have contributed a 2.30% to
the asset base of the domestic financial system. Particularly, the SLC
industry‘s lending increased by a circa 32% YoY to reach a LKR105.40 bn by
the end of December 2010. Further, Industry Net Interest Margins also has
improved from 5.4% to 8.52% YoY, primarily due to lowered borrowing cost.
Leasing was originally popularized by SLC’s and Registered Finance
Companies (RFC’s) in Sri Lanka, but it has now become an equally popular
product amongst Licensed Commercial Banks and Licensed Specialized Banks.
This has been mainly due to the higher interest margin available in leasing
industry.
Industry Overview
5 | P a g e
In terms of regulatory implications, SLC’s registered in Sri Lanka are not
permitted to mobilize deposits from the general public as a source of
funding; amendments made to the regulations in 2007 allow SLC’s to issue
debt securities to the public.
Financial performance
Interest income
The overall interest income of the PLC group is a combination of interest
earned by the company PLCL and its subsidiaries. However, more than 92%
(as at FY10/11) of the revenue is delivered by the PLCL (the company) itself.
Interest income of the PLC group is derived through varied sources such as
Leasing and Hire purchase (HP), loans and advances, interest earned from
deposits in banks and financial institutions and dealing in government
securities. Being resultant from the specialization in leasing industry, a
substantial portion of interest income is comprised of interest earned over
leasing and HP. This contribution was approximately 87% as per year ended
FY10/11.
The company has registered a Compound annual growth rate (CAGR) of 28%
in overall interest income, over a period of 5 years, compared with a CAGR
growth of 38% in interest earning assets. With reference to the latest
1QFY11/12, the individual growth in overall interest income was a significant
57% YoY (2QFY09/10-2QFY10/11). Whereas the growth had been supported
by a combination of escalated credit demand posed through declining
lending rates in the economy and increase in demand for leasing facilities
resulted from the reduction in import tax rates on vehicles.
6 | P a g e
Interest expenses
The interest expenses of the PLC group are
comprised of interest paid on borrowings and
deposits. Borrowings include funds obtained
through promissory notes, Securitizations and
other long-term loans. Similarly, PLC group as a
whole has access to public deposits through its
subsidiary Peoples Finance PLC. The interest
expenses for a period of 5 years have grown at
CAGR of 38%, and according to the latest
available data for 1QFY11/12, the YoY growth
had been 67%. This can be explained through a
CAGR growth rate of 41% in interest bearing
liabilities over a period of 5 years.
Net interest income
The net interest margin of PLC currently stands at 11.43%, significantly above
the SLC sector average of 5.83%. When compared with the overall banking
sector, leasing establishments are earning higher margins. Company’s
interest income/ average earnings assets was 20% as at end FY10/11, down
from 25% in FY09/10, but was par with sector
ratios. The decline in the ratio was due to
lower interest rates prevailing in the
economy compared with very high rates
especially in year 2008-2009. However going
forward the margins are expected to narrow
somewhat in the future due to intense
competition from Licensed commercial banks
and other Registered finance companies.
Net interest spread
As per the year ended FY11/1 the Company
has realized a net interest spread of 9%, as oppose to a rate of 8% recorded
year before. A higher spread has been achieved due to the nature of the
assets and liabilities of PLCL. Where the borrowings are more short term with
maturities extended from 0-12 months. Therefore ,in the prevailing low
interest rate economy, the borrowings get adjusted more frequently and
faster than more longer term assets (loans) operating with fixed interest
rates getting adjusted, ultimately leading to higher spreads.
7 | P a g e
Operating income
Net interest income gives a contribution of circa 82% to the operating
income whilst the rest being income generated through sale of vehicles
(gains on imported Ashok Leyland and TATA busses), fee and commission
income, net income from Islamic finance and other operating income which
includes dividends, bad debt recoveries, income on operating leases etc...
Historically the Non interest income as a percentage of operating income has
stood at 20% on average.
Operating expenses
Operating expenses (excluding provisions for loan losses)
have taken a CAGR growth of 29% over a period of 5
years, falling in line with the growth in the overall
business volume. Also the company has maintained a
relatively low level of cost to income ratios over the
years, where currently it hovers around 29% as per year
ended FY10/11, significantly below the SLC industry.
However, With reference to the latest available data as at end of 1QFY11/12,
the operating expenses have increased by a 48% YoY, resulting in a cost to
income ratio of 32%, mainly on the account of accelerated expenditure on
employee benefits.
Provision for credit losses
Company is maintaining adequate levels of provisions in order to cover
unanticipated losses which can arise from the lending portfolio. Provision for
credit losses charged from the P&L during FY10/11 decreased by above LKR
400 mn (compared with a previous allocation of LKR539 mn) to LKR52 mn
reflecting improving delinquencies and collections and fewer bankruptcies as
a result of improving economic conditions and lower average loans. Further,
during 1QFY11/12, the company has reversed a portion of LKR1.6 bn from its
general provisioning in the light of improving quality of its lending portfolio.
This reversal has also resulted in boosting the profitability of the company.
Effective tax rate
The effective tax rate has come down to 38% as per year ended FY10/11
from a previous rate of 51%. Similarly, it has further come down to 35%
based on the latest 1QFY11/12 performance. The lower rate was due to the
reduction in tax rates. Particularly, VAT on financial services came down
from 20% to 12% and income tax rate from 35% to 28%.
Net profit (Profit attributable to equity holders)
Net profits had taken a CAGR growth of 37% over a period of 5 years.
Simultaneously, as per the year ended FY11/10, the YoY growth in net profit
was an impressive 126%. This has been achieved through a significant growth
8 | P a g e
of 45% in net interest income, 48% growth in operating income and a lower
growth of 4% in total operating expenses.
And the other positives are the decline in tax rates. Based on the latest
available quarterly results, the net profit growth is 494% YoY, where the
growth includes a one-off reversal of LKR1.6 bn in general provisioning
during the quarter.
However, based on a normalized net profit of LKR670.7 mn for 1QFY11/12 as
opposed to a net profit of LKR291.0 mn in 1QFY10/11, the growth in net
profit is a substantial 130%, a growth stemmed through a growth of above
57% in interest income, 30% growth in other income, while expenses side
growing by relatively slow pace.
Asset quality
The asset base of the company is largely
dominated by loan and lease rental receivable. As
per the year ended FY10/11 the contribution of
loans and lease rentals to the overall asset base
was 87% whilst cash and deposits accounting for
a 5%. However, during 1QFY11/12, it has shown a
tilt towards more liquidity, by increasing the cash
and short term funds by 205% within a period of
3 months, particularly; the increase was led by
cash at bank and reverse repos.
Therefore, due to the higher weight of loans and
lease rentals over the asset base of the company,
addressing the asset quality of the loan portfolio
are vital.
The quality of the loan portfolio of the company
is deemed healthy due to the company’s
stringent credit standards which has resulted in a
lower than industry NPL ratios. As per the
FY10/11 the gross NPL ratio has stood at 1.20%,
which is relatively below the SLC sector average
of 5.8%. The non performing loans of the company has reached to an
LKR852.8 mn by the end of 1QFY11/12 whilst the overall loan book achieving
a LKR65.4 bn. Total available provisions in order to guard any losses have
come down during 1QFY11/12 to a total of LKR889.8 mn from a previous
level of LKR2, 277.7mn as at end of financial year FY10/11, inclusive of both
specific and general provisions. This was majorly due to the reversal took
9 | P a g e
place in 1QFY12/11 from the general provision by LKR1.6bn. However,
bringing down the provisions have resulted in depleting the provisioning
cover to 1.04 for 1QFY11/12 from a previously high of 3.35, but still the
provisioning is adequate to cover the total outstanding non performing
loans.
PLC’s loan portfolio grew by a massive 95% during financial year ended
FY10/11 in comparison to the previous year FY09/10. And also with respect
to the latest available data for 1QFY11/12, the loan book has grown by an
18% within a time span of 3 months reaching a total loan book value of
LKR65.4bn (including loans and advances and lease rentals receivable). The
growth had been immensely supported by the loan facilities granted under
leasing and HP and this can be explained through the sudden boom in
importation of vehicles consequent to the removal of VAT on leased vehicles
and drop in import taxes.
Apart from the above, one of the convincing factor in the PLC loan portfolio
is that the 75% of leasing advances and 73% of HP advances as at 31st March
2011 have been extended to income generating vehicles, including lorries,
busses, dual purpose vehicles. This is an indication that the risk of default in
these loans is very much less compared with leasing granted for consumption
purposes.
Funding and liquidity
The funding base of the company is dominated
by borrowings which are followed by share
holder’s funds. The composition had been
somewhat constant prior to 2010 where
borrowings contribute by 50%- 60% whilst rest is
being funded through shareholders equity
(including both ordinary and preference shares). However, with the
acquisition of People’s Leasing Finance PLC formerly known as Seylan
Merchant Leasing Ltd (SMLL), the PLC group was
placed with deposits as a source of funding to
fuel the overall growth in the group lending
portfolio. This has led to the funding base of the
group to deviate from its historical trend.
Particularly, the current overall funding base of
the group is comprised of 55% borrowings, 29%
equity and 16% by deposits.
10 | P a g e
The borrowings of the company are mainly through issuance of promissory
notes, long term loans, and securitizations contributing 39%, 37% and 18%
respectively, to total borrowings as per 31st March 2011. Consequently, this
funding diversity is a strength that PLC has leveraged. In addition, PLC
complemented its funding with extensive securitization loans (fixed rate
medium term loans secured by mortgaging lease receivables). As per 31st
March 2011, securitization accounted for above 18% in total borrowings.
Debt to equity ratio of the company is currently at 5: 1 as at end FY10/11
from a previous ratio of 3:1, indicating that company is mobilizing more
external funds to owner’s funds. However with the proceeds coming from
the IPO, the debt to income ratio would ease down back to 3:1(based on
total debt as at end 1QFY11/12). However, resorting to more borrowing with
a high debt to equity ratio would be beneficial in a declining interest rate
environment.
Based on the asset liability mismatch the company has negative gaps in the
short term, largely due to other liabilities evidenced by paper and
borrowings. Therefore in the short term the liabilities get reprised before
assets get adjusted for rate changes, indicating that company can reap
benefits in the declining interest rates regime and invariably increasing
spread.
Capital adequacy
As per 30th June 2011, the PLC group is strongly capitalized with LKR10 bn of
share holder’s funds, and this accounted for a growth of 19% of its total
assets as at the same date. Consequently, the total capital adequacy ratio as
at 30th June 2011 is 14.3%, which is sufficiently above the regulatory
minimum of 10%. Consequently, the higher capital adequacy is a result of
PLCL’s lower risk of risk weighted assets which occurs through loans and
leases being pegged with income generating activities. However, the capital
adequacy ratio is further expected to improve with the new capital infusion
of LKR7 bn through the IPO.
DuPont Analysis
DuPont Analysis is a methodology by which the ROE of a company can be
broken down in to its constituent parts. ROE is a measure of how successfully
11 | P a g e
the management of a company has deployed the equity to generate a return
for its shareholders.
The ROE can be shown as a product of Earnings on assets and equity
multiplier. The ratio of assets as a percentage of equity is known as equity
multiplier. Therefore, when the company is making profits, then a high equity
multiplier will multiply earnings as a percentage of equity and will invariably
enhance the ROE. With respect to PLC, the ROE for FY10/11 is 41%, which is
being derived through Earnings on assets of 5.01% and an equity multiplier of
8.16. When compared with a ROE of 22% in FY09/10, the current ROE has
improved because of increase in both Earnings on assets and Equity
Multiplier.
Consequently, the equity multiplier has increased due to the rate of increase
in assets being overtaken the rate of increase in equity. Where, the growth in
total assets being 94% during FY10/11 whilst equity taking a growth of only
36% on the back of escalated retained earnings. The high growth in assets
being financed through the extended borrowings of the company which, the
growth in borrowings for the FY10/11 was 108%.
Accordingly, the Earnings on assets can also be further disaggregated in to
key elements, which are driving Earnings on assets. With reference to the
table, we can see an improvement of Earnings on assets in FY10/11 to 5.01%
from a previous level of 3.29%. However, the improvement has been driven
by lowered operating expenses, loan loss charges, Tax and preference
dividends over average total assets. However, it is noteworthy to mention
that during FY10/11, net interest income and noninterest income over
12 | P a g e
average total assets have decline to 10.36% and 2.21% from a previous level
of 11.82% and 2.23% respectively.
The key driver of ROA for a leading finance company is the interest income.
The net interest income as a percentage of assets can be disaggregated
further.
Net Interest Income / Average Assets = Net Interest margin*
Earnings Asset Ratio
As mentioned above, there are two possible ways to improve the Earnings on
Assets, firstly, it is by improving net interest margin, and secondly it is
through increasing the ratio of interest earning assets (Earnings Asset Ratio).
During FY10/11, the net interest margin has come down from a previously
high of 13%. This has been due to the 46% growth in net interest income
being overtaken by a growth of 63% in average interest earning assets.
Similarly, the ratio of Net Interest Income / Average Assets has also been
curtailed by a slight reduction in the earnings asset ratio.
In summing up, the ROE for FY10/11 has improved on the back of a
significant increase in equity multiplier (average total assets/ average total
equity), whilst reductions in loan loss charges, operating expenses and tax
charges over total average assets further strengthening the improvement.
Risk Management
Interest rate risk
Profitability of companies operating in the financial services industry is
significantly linked with volatility of the interest rates. And the volatility of
interest rates may affect the spread between lending and borrowing rates. A
maturity miss match may exist between the lending portfolio and
corresponding funding that could affect the interest rate spreads due to
interest rate volatility. With reference to the PLC, the lending is mainly on
fixed rates where as borrowings have a significant presence of floating rate
financing. This can lead to deterioration of spreads and profits in a rising
interest rate scenario. As mentioned in the Liquidity and funding section to
this report, PLCL’s Asset Maturity mismatch has negative gaps in the short
term, indicating that if the interest rates take an upward trend then the
borrowings would become more expensive due to liabilities are getting
readjusted to new rates prior to reprising of assets.
Competition with other institutions
PLCL and its subsidiaries operate in a highly competitive industries facing
competition from various institutions. PLCL and Peoples Finance PLC (PF)
may face competition from LCB’s, RFC’s LSB’s. These institutions may offer
13 | P a g e
products and services similar to those offered by PLCL and PF. This
competition may reduce or limit their lending, borrowing capacity and
interest spreads.
However, the unique positioning of PLC group as a total financial solutions
provider may enable PLCL and its subsidiaries to stay ahead of its
competition. Furthermore, the backing of Parent Peoples Bank, together with
the financial strength of PLCL, would equip the company’s subsidiaries with a
competitive advantage.
Liquidity Risk
Liquidity risk for a company in the financial services sector is the risk that it
will be unable to meet its obligations as they become due. This risk could
arise due to several factors including an over reliance on a particular source
of funding, changes in credit rating or market wide phenomena.
Furthermore, the lack of liquidity may pose solvency issues for PLC group.
However the company currently manages a diversified funding portfolio
consisting of equity and borrowings from banks and other financial sector
institutions, whilst Peoples Finance PLC utilize public deposits as a source of
funding. Therefore, the PLC group and its subsidiaries are not overly reliant
on any particular source of financing, thereby limiting the liquidity risk.
Credit Risk
The customers of PLCL and PM may not repay their borrowing in due course.
And the collaterals for these loans may be insufficient to recover the
outstanding amount in the event of default. In such a scenario the PLC group
would face with high nonperforming assets and this would require for high
levels of provisions which can curtail the profitability. However, company is
maintaining adequate levels of provisioning, where NPL cover ratio
exceeding 100%. And also company is adapting a more comprehensive
analysis of credit worthiness before granting the loan facilities. Therefore the
credit risk is addressed effectively.
Future Outlook
Expansion of branch network
PLCL intends to expand its existing branch network by increasing its presence
in areas which would directly benefit from the burgeoning rural economy in
Sri Lanka. Also emphasis would be placed on increasing the company’s foot
print in the North and East. This would enable the group to collect more
deposits as well as expand the loan book.
14 | P a g e
Expansion of Margin Trading Business
PLCL commenced its margin trading operations in March 2011 after receiving
approval from the SEC. the company expects to achieve significant growth in
the future on the strong performance recorded by the CSE in the two
preceding years. This new segment of operations has been well augmented
by a customized automated ICT system developed in house.
Sourcing Requisite funds for portfolio growth
The surge in demand for lease and HP financing experienced by PLCL is
expected to continue in line with the future prospects of the industry.
Therefore, PLCL intends to aggressively pursue multiple channels of funding,
both local and foreign, in addition to its existing sources, to raise adequate
debt and equity capital to support the growth.
Peoples Insurance limited (PI)
PLCL’s position as the market leader in leasing and HP segment continue to
give PI a key advantage as it tries to further establish itself in the general
insurance sector. Furthermore, the backing of the ultimate parent Peoples
Bank also serves as a significant advantage for PI.
Peoples Micro Finance Limited (PM)
PM is expected to grow its micro financing products by utilizing the existing
rural presence enjoyed by PLCL whilst further engaging with communities of
Sri Lanka that have little or no access to financial services.
Valuation
Valuations & Recommendation
With the falling interest rates and favorable macroeconomic fundamentals
prevailing in the economy, strengthened with new capital infusion of LKR7
bn, we believe that PLC would achieve an earnings asset growth of 22% for
the FY11/12. However, due to tense competition posed through other
finance institutions including LCB’s RFC’s, LSB’s, the market share of PLC
would deplete but would remain as a key player in SLC’s sector. Therefore,
we believe the interest spreads would squeeze in medium to long term, from
a current level of 9% to a long term average of 6%-7%.
Similarly, PLC group together with its subsidiary Peoples Finance PLC would
be in a favorable position in terms of attracting funds to fuel its lending.
Peoples Finance PLC is expected to play a key role in attracting funds to the
group, while PLCL with its support from the Parent company and improved
credit ‘A (lka) stable ‘would attract more debt in terms of funding.
15 | P a g e
Taking into consideration of aforesaid conditions we forecast a net profit of
LKR3.9bn for FY11/12 achieving a growth of 50% YoY and yet a 4% decline in
FY12/13 (due to reversal of LKR1.6bn provisions being included in FY11/12
profits) delivering a net profit of LKR3.7 bn.
In terms of earnings to price multiple; the ordinary share is attractively
valued at 9.3x (based on normalized profits adjusted for the LKR1.6 bn
reversal of reserves) and 7.8x on FY11/12E and FY12/13E earnings
respectively (based on the issue price of LKR18.0).
Further, on a Dividend discount (DDM) based valuation, we arrived at an
intrinsic value of LKR23.47 per share. Although we do not expect a significant
shift in cost of equity as the firm wishes to gradually shift towards its optimal
capital structure, the changing macro economic conditions would affect the
terminal growth rate. Hence we have assumed a cost of equity variation of
11.50%- 13.50% and a long run growth rate variation of 4%-2% resulting in a
price variation of LKR19.39 – LKR29.73.
Furthermore, based on a Residual Income Valuation Methodology we arrived
at an intrinsic value of LKR27.00.
Based on the above mentioned valuation methods, the ordinary share would
generate good value at its offer price of LKR18.0. Hence, the investor
appetite for PLC would remain strong. Therefore, strong upside could be
expected in the short to medium to long term. SUBSCRIBE.
16 | P a g e
Sensitivity Analysis (Based on dividend
valuation methodology)
PLC would have a potential target price of
LKR23.47 within a low of LKR19.39 and a high of
LKR29.73.
17 | P a g e
Research
Sales
Retail Sales
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described herein at any time and may make a purchase and/or sale, or offer to make a purchase and/or sale of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principal or
agent. Asia Securities may make markets in securities or other financial instruments described in this publication, in securities of issuers described herein or in securities underlying or related to such securities. Asia Securities may have recently
underwritten the securities of an issuer mentioned herein. The information contained in this report is for general information purposes only. This report and its content is copyright of Asia Securities and all rights reserved. This report- in whole or in
part- may not, except with the express written permission of Asia Securities be reproduced or distributed or commercially exploited in any material form by any means whether graphic, electronic, mechanical or any means. Nor may you transmit it or
store it in any other website or other form of electronic retrieval system. Any unauthorised use of this report will result in immediate proceedings.
Institutional Sales
Branches
Service Centers
Senior Analyst
Amali Perera (94-11)5320256
Corporates
Minoli Mallwaarachchi (94-11)5320259
Nirmala Samarawickrama (94-11)5320253
Dilan Wijekoon (94-11)5320253
Thilina Ukwatta (94-11)5320253
Shan Silva (94-11)5320251
Economy
Dhanusha Pathirana (94-11)5320254
Travis Gomez (94-11)5320000
Statistician
Nuwan Pradeep (94-11)5320257
Sabri Marikar (94-11) 5320224 077 3-576868 [email protected] Niroshan Wijayakoon (94-11) 5320208 0777-713645 [email protected] Niyaz Aboobucker (94-11) 5320213 0777-727352 [email protected] Anura Hedigallage (94-11) 5320211 0777 -713663 [email protected] Chelaka Hapugoda (94-11) 5320240 0777 -256740 [email protected] Chaminda Mahanama (94-11) 5320223 0777 -556582 [email protected] Hiran Bibile (94-11) 5320238 0777 -352032 [email protected] Arshwin Amarasekara (94-11) 5320215 0773 -717220 [email protected]
Shiyam Subaulla (011)- 5320218 0773-502016 [email protected]
Gagani Jayawardhana (011)- 5320236 0714-084953 [email protected] Priyantha Hingurage (011)- 5320217 0773-502015 [email protected] Neluka Rodrigo (011)- 5320214 0777-366280 [email protected] Subeeth Perera (011)- 5320227 0714-042683 [email protected]
CSE Floor CSE,01-04, World Trade Centre, Colombo – 1. Thushara Adhikari (011)-5735122 0773-688202 [email protected] M G Suranjana (011)-5763539 0773-954994
Kiribathgoda Level 2-6,Udeshi City Shopping complex, No 94,Makola Rd,Kiribathgoda Danushka Boteju (011)-5634803 0716-270527 [email protected] Suranga Harshana (011)-5734773 0783-452500 [email protected] Kurunegala Union Assurance Building, No.6,1st Floor, Rajapilla Rd, Kurunagala. Asanka Samarakoon (037)-5628844 0773-690749 [email protected] Gayan Nishsanka (037)-5642717 0777-105356 [email protected] Bandula Lansakkara (037)-5643580 0773-925852 Matara E.H.Cooray Building, Mezzanine Floor, No:24, Anagarika Darmapala Mw, Sumeda Jayawardena (041)-5677525 0773-687027 [email protected] Matara Lalinda Liyanapathirana (041)-5677526 0778-628798 [email protected] Galle Peoples Leasing Building, 2nd Floor, No.118,Matara Road, Galle Ruchira Hasantha (091)-5629998 0773-687027 [email protected] Ushan Sachith (091)-5676767 0778-628798 [email protected] Negombo
Asia Asset Finance, 171/1, Station Road, Negombo. Uthpala Karunatilake (031)-5676881 0773-691685 [email protected]
Negombo
Asia Asset Finance, 171/1, Station Road, Negombo. Uthpala Karunatilake (031)-5676881 0773-691685 [email protected]
Gayan Perera (031)-5676880 0772-544044 [email protected]
Kandy k3-L1,Level 01,kcc, No 5 ,Dalda Veediya, Kandy. Nilupul Hettiarachchi (081)-5628500 0773-691816 [email protected] Radhika Hettiarachchi (081)-5625577 0777-810694 [email protected] Hambantota Hambanthota Chamber of Commerce, Thangalle Road, Hambantota. Gayan Sanjeewa (047)-5679240 0715-536309 [email protected] Anusha Muthumali (047)-5679241 0772-351716 [email protected] Shermin Ranasinghe 0772-378352 [email protected] Ampara 2
nd Floor, T.K.S. Building, D.S. Senanayake Street, Ampara. Ravi De Mel (063)-5679071 0772-681995 [email protected]
Madushanka Rathnayaka (063)-5679070 0779-036577 [email protected] Jaffna 11-8, First Floor, Stanley Road, Jaffna Gratian Nirmalan (021)-5671800 0777-567933 [email protected] S.Puviraj (021)-5671801 0775-096969 [email protected] Wennappuwa Asia Asset Finance, No.176, Negombo Road, Katuneriya. Sajith Iroshan (032)- 5673881 0773-740208 [email protected] Sandun Athulathmudali (032)- 5673882 0772-533331 [email protected] Moratuwa Asia Asset Finance, No.18, New De Zoysa Rd, Moratuwa. Hashan Lalantha (011)-5238662 [email protected] Charith Perera (011)-5238663 [email protected] Panadura Asian Alliance Building, 293, Galle Road, Panadura Ranganath Wijetunga (038)-5670400 0715-120723 [email protected] Asanka Chaminda (038)-5670407 0713-559552 [email protected]
Research
Sales
Retail Sales
Institutional Sales
Branches
Service Centers
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agent. Asia Securities may make markets in securities or other financial instruments described in this publication, in securities of issuers described herein or in securities underlying or related to such securities. Asia Securities may have recently
underwritten the securities of an issuer mentioned herein. The information contained in this report is for general information purposes only. This report and its content is copyright of Asia Securities and all rights reserved. This report- in whole or in
part- may not, except with the express written permission of Asia Securities be reproduced or distributed or commercially exploited in any material form by any means whether graphic, electronic, mechanical or any means. Nor may you transmit it or
store it in any other website or other form of electronic retrieval system. Any unauthorised use of this report will result in immediate proceedings.