range of products” CIC Holdings PLC INTERIM UPDATE - 4QFY12 CIC HOLDINGS …asiaashan.weebly.com/uploads/5/4/3/2/5432627/cic_4qfy12.pdf · 2018-10-04 · Analyst: Shan Silva [email protected]

Analyst: Shan Silva

[email protected]

Sustainable growth via a diversified range of products

CIC Holdings PLC

INTERIM UPDATE - 4QFY12

CIC HOLDINGS PLC Interim Update 4th Quarter FY12

Analyst – Shan Silva

Email – [email protected]

“Sustainable growth through a diverse

range of products”

mailto:[email protected]

1 | P a g e

CIC Holdings–“Long term Buy”

INTERIM UPDATE-4QFY12

Only “Seed to shelf” agricultural company in the

country

CIC Holdings (CIC.N LKR83.50, CIC.X LKR60.50), posted a healthy gross

profit of LKR5,645.3mn for FY12 Vs a gross profit of LKR4,807mn for FY11

recording a growth of 17.5% YoY. However the profits attributable to the

equity holders were LKR916mn which witnessed a marginal dip of 1%

mainly due to the increased administration cost. The depreciation of LKR

created a foreign exchange loss of LKR82mn which partly attributed to the

contraction in profits.

Contribution from Consumer and Pharmaceutical segment to the

group revenue (35% YoY growth in FY12) and Construction segment (4.6%

YoY growth in FY12) enabled the group to stabilize its returns despite

increasing overhead costs.

Company’s non agricultural sector witnessed a sustainable growth

mainly backed by the booming construction sector coupled with enhanced

disposable income in the country. The boom in the construction sector is

expected to continue with the massive government infrastructure projects

and the new hotel construction and refurbishments taking place.

Revenue from the core agriculture & Livestock sector of the group

witnessed a marginal dip of 0.7% YoY. The agricultural sector in the

country witnessed a marginal growth of 1.5% in the calendar year 2012

compared to the 7% growth in the previous year. Total paddy production

in 2011 declined by 10% to 3.87mn metric tons largely due to the adverse

climate conditions during the Maha season. However we expect increased

consumption of rice going forward due to the increasing price of wheat

flour and its health concerns.

Against this backdrop we expect CIC to record net earnings of LKR1,

078.2mn in FY13E (Up by 17.6%), 1,394.0mn in FY14E (Up by 29.3%) and

1,621.8mn in FY15E (Up by 16.3%). Forward P/E multiples of CIC voting are

expected to be 7.3X, 5.7X & 4.9X for FY12E, FY13E & FY14E. Forward P/E

multiples of CIC nonvoting are expected to be 5.3X, 4.1X&3.5X for FY13E,

FY14E & FY15E.

CIC.N, CIC.X, ASI and C&P Index

Source – Asia Wealth Research


Major Shareholdings

Voting (as at 31st Mar'12) %

Paints & General Industries Limited 53.31%

Sri Lanka Insurance Corporation -

Life Fund 6.54%

Employees Provident Fund 3.77%

Associated Electrical Corporation

Limited 3.61%

Mr.S.K.Wickramasinghe 2.13%

Non Voting (as at 31th Mar'12)

Employees Provident Fund 10.70%

Paints and General Industries Limited 3.32%

E.W.Balasuria & Co (Pvt)Ltd 2.89%

DFCC Bank A/C No 1 1.78%

Mrs.M.S.E.V.E.A.U. Von Stumm 1.57%



50

60

70

80

90

100

110

CIC.N CIC.X C&P ASI

CIC.N - Voting as at 05.07.2012

Average Daily Turnover (LKR mn) 1.62

12 month High/Low 142/78.4

Price Movement-LKR100

1M-LKR85.30 -8.09%

3M-LKR95.60 -17.99%

12M-LKR137.6 -43.02%

Shares Outstanding 72.9

Free Float 30.9%

CIC.X - Non Voting as at 05.07.2012

Average Daily Turnover (LKR mn) 0.70

12 month High/Low 96/53.60

Price Movement-LKR65

1M-LKR55 -1.82%

3M-LKR66 -18.18%

12M-LKR96 -43.75%

Shares Outstanding 21.87

Free Float 80.02%

YE 31 Mar/ (LKR mn) 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015ENet Profit 516.9 493.3 509.8 407.6 589.6 926.6 916.5 1,078.2 1,394.0 1,621.8 +/-% YoY 65.6 -5% 3.3% -20.0% 44.6% 57.2% -1.1% 17.6% 29.3% 16.3%EPS 5.5 5.2 5.4 4.3 6.2 9.8 9.7 11.4 14.7 17.1+/- %YoY -4.6% 3.3% -20.0% 44.6% 57.2% -1.1% 17.6% 29.3% 16.3%PER - Voting 15.3 16.0 15.5 19.4 13.4 8.5 8.6 7.3 5.7 4.9PER - Non Voting 11.1 11.6 11.2 14.1 9.7 6.2 6.3 5.3 4.1 3.5DPS (LKR) 2.8 2.0 1.5 1.0 1.9 2.8 3.2 3.3 4.4 5.1DY (%) Voting 3% 2% 2% 1% 2% 3% 4% 4.0% 5.3% 6.1%DY (%) Non Voting 5% 3% 2% 2% 3% 5% 5% 5.5% 7.3% 8.5%BVPS (LKR) 44.3 53.6 56.8 59.6 67.1 88.0 95.5 105.1 117.2 131.2PBV (Voting) 1.9 1.6 1.5 1.4 1.2 0.9 0.9 0.8 0.7 0.6PBV (Non Voting) 1.4 1.1 1.1 1.0 0.9 0.7 0.6 0.6 0.5 0.5ROE (%) 12.3% 9.7% 9.5% 7.2% 9.3% 11.1% 10.1% 10.8% 12.6% 13.0%

2 | P a g e

Quarterly Results

Segmental Performance

Quarter Financial Performance

Margin Analysis




Margin 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12

GP Margin 20% 19% 21% 22% 22% 23% 23% 23% 22% 26% 26% 26%

EBIT Margin 10% 7% 15% 8% 9% 11% 11% 8% 8% 9% 11% 9%

PBT Margin 5% 2% 12% 6% 7% 8% 10% 6% 6% 7% 9% 4%

PAT Margin 3% 1% 9% 4% 4% 6% 7% 4% 4% 5% 7% 3%

NP Margin 3% 1% 7% 3% 4% 5% 6% 3% 4% 4% 6% 3%

Quarter Financial Performance

LKR mn 4QFY12 4QFY11 %chg FY12 FY11 %chg2

Revenue 5,679.3 5,407.3 5% 22,477.1 21,045.3 7%

Cost of sales (4,185.3) (4,138.7) 1% (16,831.9) (16,238.1) 4%

Gross profit 1,494.0 1,268.6 18% 5,645.3 4,807.2 17%

Distribution expenses (570.4) (432.8) 32% (1,861.5) (1,490.0) 25%

Administrative expenses (581.7) (523.3) 11% (2,015.2) (1,635.3) 23%

Other operating expenses (5.3) (6.7) -20% (84.9) (9.8) 767%

Operating Profit 337 306 10% 1,683.6 1,672.2 1%

Other Income 83.2 91.1 -9% 174.8 226.9 -23%

Associate Company Profit 75.8 53.3 42% 277.9 231.2 20%

EBIT 495.6 450.2 10% 2,136.3 2,130.3 0%

Finance expenses (248.9) (132.5) 88% (683.6) (500.3) 37%

Profit before tax 246.7 317.7 -22% 1,452.7 1,630.0 -11%

Tax expense (67.9) (101.1) -33% (284.3) (466.9) -39%

Profit after tax 178.8 216.6 -17% 1,168.4 1,163.1 0%

Equity Holders of the Parent 155.6 167.6 916.5 926.6

Minority interest 23.2 49.0 184.1 236.6

Sectoral Revenue 4QFY12 4QFY11 % Chg. FY12 FY11 % chg

LKR mn

Construction Industry 335.7 338.3 -0.8% 956.1 914.4 4.6%

Agriculture & Livestock 3,080.6 3,628.2 -15.1% 14,583.1 14687.3 -0.7%

Industrial Raw Material 133.8 255.3 -47.6% 890.8 987.7 -9.8%

Packaging Industry 311.6 42.0 641.4% 814.4 542.8 50.0%

Consumer & Pharmaceutical 1,915.7 1,174.8 63.1% 5,341.2 3965.7 34.7%

Others 25.2 8.4 200.5% 86.9 68.3 27.2%

Total Revenue 5,802.6 5,446.9 6.5% 22,672.4 21,166.1 7.1%

Intra-group sales (122.7) (49.9) 146.0% (195.3) (120.83) 61.6%

Net Revenue 5,679.9 5,397.0 5.2% 22,477.1 21,045.3 6.8%

3 | P a g e

CIC Holdings

CIC Vetcare Pvt(Ltd)

CIC Feeds Pvt (Ltd)

Ceylinco Pharmaceuticals

Limited

Chemanex Plc

CIC Agribusiness

Pvt (Ltd)

Link Natural Products Pvt(Ltd)

CIC Environmental Management Liquid (Pvt)Ltd

Crop Managemen

t Services (Private Ltd)

Akzo Nobel Paints Lanka

(Pvt)Ltd

Colombo Industrial

agencies Ltd

CIC Cropguard

Pvt(Ltd)

CISCO Speciality Packaging

Pvt(Ltd)

Company Overview

Subsidiaries and equity accounted investees of CIC

4 | P a g e

0

5000

10000

15000

20000

25000

30000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

LKR Mn

Company Overview

A CIC holding is a diversified conglomerate which has a large

presence in the agricultural and livestock industry. The company

also has foot prints in consumer and pharmaceutical industries,

Paints, Industrial raw material and packaging. CIC’s inception dates

back to 1940’s when it was formed as a subsidiary of Imperial

Chemical Industries (ICI) in UK. The company was formerly known as

ICI prior to change of its name to CIC in 1964. The company has

strong market positions in most of its business segments especially

in agricultural business portfolio.

Prominent Agricultural Sector………….

The agricultural sector includes essential food items such as rice,

milk products, eggs, vegetables and fruits. Further CIC remains

largest private sector player in the domestic fertilizer industry. The

fertilizer requirement of tea industry is mainly catered by the CIC.

The company manages three of the Sri Lanka’s largest state owned

farms namely Hingurakgoda (1,300 acres),Pelwehera (634 acres)

and MalwenegamaThalawa (204 acres). The Hingurakgoda farm the

largest farm under the management of CIC produces 130,000

bushels of seed paddy annually contributing 20% to the national

seed paddy production.CIC is also the only private company to have

the most number of paddy lands which is 700 acres.

Livestock and diary production is conducted in

Muthuwella(polonnaruwa district)and Siddhapura(Batticalo district)

Farms with a combined cattle herd of around 1,800 milking

buffaloes which contribute a circa of 5,000Litres of milk daily. CIC

yourgurt , curd and Eggs have a mass market appeal while the

company is in the process of constructing milk processing unit in

Matale for the production of value added liquid milk.

CIC also has extensive banana cultivation where company mainly

export quality banana to the Middle East. Banana is being cultivated

in Hingurakgoda and Pelwehera in a total land extent of 150

acres.CIC supplies export quality banana to all leading supermarkets

in Sri Lanka and is also available at Fresheez and Juiceez outlets

owned by CIC.

CIC rice is distinguished for its quality which is processed in a high

tech rice mill established in Maho with the use of Japanese satake

Fertilizer utilization in key

agricultural crops

Fertilizer Subsidy offered by the

government

Movement in the Wholesale Price

Index for Food and Chemical

Products

Source – Department of Census and statistics



0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Paddy Tea Rubber Coconut

MT

0

500

1000

1500

2000

2500

3000

3500

4000

4500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Food Chemicals & Chemical Products

1974=100 (Base Year)

5 | P a g e

Technology. CIC rice is marketed locally under the brand name of

“Golden Crop” while also exported to countries such as Australia,

Canada, Europe, and the Middle East. The agricultural sector

contributes up to a circa of 65% of the total group revenue.

Leading Construction Sector………….

The construction sector of the country is expected to maintain at

optimistic levels with the increasing economic activity in the

country. The boom in the hotel construction projects coupled with

post war rehabilitation and infrastructure projects will enhance the

demand for CIC construction sector. The construction sector of CIC

mainly contains CIC paints and the coatings business which comes

under the company’s associate Akzo Nobel Paints Lanka.

AkzoNobel owns the Dulux brand which constitutes nearly 40% of

the market share in the paints industry. The sector contributes a

circa of 4% to the total group revenue.

Robust Consumer and Pharmaceutical

segment…………….

Consumer and Pharmaceutical segment encompasses a range of

pharmaceutical, surgical, diagnostics and food and personal care

products which includes renowned brands such as Johnson

&Johnson, CavinKare and Link Natural. The newly formed food

subdivision aims to establish a diverse portfolio of convenient foods

that have mass market appeal. Food subdivision engages in sale of

canned fish and other bulk food products such as dhal, dried sprats

etc. Consumer and Pharmaceutical segment contributes a circa of

24% to the total group revenue.

Industrial Raw Material Segment………..

Industrial raw material division consist manufacturing of paint

lattices and adhesives in its emulsion polymerization plant. The

company also supplies raw materials to the paint, ink, rubber,

textile, packaging and food and personal care industries. Further CIC

maintains a strategic partnership with Nalco, the largest water

treatment company in the world to provide a range of water

treatment solutions to the Sri Lankan market. This segment

contributes a circa of 4% to the total group revenue.

Packaging and Material Segment…..

CIC packaging and material segment contain CISCO specialty

packaging division which manufactures plastic bottles and related

accessories. More than 50% of the products are sold to leading

Paddy production, Yield and

extent harvested

Total milk collected within the

country Vs Price of fresh milk

Source – Central Bank of Sri Lanka



600

650

700

750

800

850

900

950

1000

2000

2500

3000

3500

4000

4500

5000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Production (mt '000) Yield per Hec (Kg) Net extent Harvested (hec'000)

LKR Samba Kekulu

2005 39.27 30.57

2006 37.42 29.51

2007 52.76 45.91

2008 77.15 64.23

2009 74.82 61.68

2010 70.8 54.81

2011 70.35 56.36

Rice Price Per Kg

Litres'000

0

10

20

30

40

50

60

-

20,000

40,000

60,000

80,000

100,000

120,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Total Milk Collected within the Country,Litres '000

Price of Fresh milk (Dairy), 750ml

LKR /750ml

6 | P a g e

Carbonated soft drink manufacturers while CISCO also caters to

cosmetics and agro divisions within the group.

Other Industry……

Other industry segment mainly includes Chemanex a quoted

subsidiary of CIC.Chemenex is involved mainly in the export

industrial chemicals and woven gloves for specialized global

markets. The businesses are all in B to B category which exports its

products to over 37 countries mainly located in European, Middle

Eastern and Asian regions.Chemanex consist four subsidiary

companies (Chemenex Ltd , Chemenex exports (Pvt)Ltd,Chemanex

Adhesives (Pvt)Ltd, Yasuri Lanka (Pvt)Ltd, Cal Export Lanka (Pvt)Ltd)

and two associates.

Financial Review

Impressive growth in gross profits

The Gross Profit increased by 18% in 4QFY12 compared to

corresponding period the previous year, Further YoY Gross Profit

Margin has also improved to a circa of 26% from 23%.However, the

main contributor for the top line being agricultural and live stock

segment showed a decline of 15.1% QoQ while cumulative revenue

from agriculture witnessed a marginal dip of 0.7%. During FY12 the

agricultural segment didn’t achieve the expected results. This was

mainly due to the adverse climate conditions which affected the

overall agricultural sector of the economy.

In addition the fertilizer business being the core income generator

in the agricultural segment went through a turbulent time period

during FY12. The depreciation of LKR and the delay in the subsidy

reimbursement has narrowed the margins from the business.

Further the main buyer of the CIC fertilizer, the plantations sector

has been underperforming due to increased cost of production and

poor tea prices in international markets.

Nonconventional segments drive the profits…….

For the FY12 business segments which show highest growth in

turnover include Packaging industry (50% YoY , CAGR of 15% from

2005 to 2012), Consumer and Pharmaceutical (35% YoY, CAGR of

23% from 2005 to 2012),Other (27% YoY , CAGR of -1.9% from 2005

to 2011) and Construction Industry (5% YoY , CAGR of 4% from

2009 to 2012).

Revenue Contribution FY12

Quarterly Expenses

Quarterly Margins



4%

64%4%

4%

24%

0%

Construction Industry Agriculture & Livestock

Industrial Raw Material Packaging Industry

Consumer & Pharmaceutical Others

0

100

200

300

400

500

600

700

3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12

Administration Distribution Finance Expenses

0%

5%

10%

15%

20%

25%

30%

GP Margin EBIT Margin PBT Margin PAT Margin NP Margin

Quarterly Margins



-80%-60%-40%-20%0%20%40%60%80%100%120%

0

50

100

150

200

250

300

350

400

450

Net profit QoQ Growth

LKR mn

7 | P a g e

However Agricultural and Livestock (-0.7% YoY, CAGR of 21% from

2005 to 2012) and Industrial Raw Material (-9.8% , CAGR of 6%

from 2005 to 2012) witnessed negative growth during FY12.

The packaging segment witnessed a healthy growth mainly because

of exceptional rise in food and beverage bottling and the demand

from the cosmetics segment. Consumer and Pharmaceuticals also

experienced a robust growth where higher disposable incomes

drove the demand especially for Johnson & Johnson and Link

natural product range.

Chemanex group of companies which are coming under the “other”

category saw a dip in its top line of 6.5% for FY12 while the bottom

line made a loss of LKR10.6mn.Chemanex which is mainly catering

to international markets saw its demand being affected with the

gloomy economic outlook in US and Europe.

During FY12 CIC acquired 82.35% equity stake in Ceylinco

Pharmaceuticals. CIC had to record a post acquisition loss of

LKR16.84mn upon consolidation. This could be partly attributable to

the marginal dip in net profits attributable to the equity holders.

Escalation in overhead costs……….

Cost of sales for FY12 increased by 3.7% YoY while the turnover

grew at a higher rate of 6.8%. Prime contributors to the group

revenue Agriculture and live stock segment saw its revenue

expenditure almost stagnant despite the decline in the revenue

while Consumer and Pharmaceutical saw its revenue expenditure

increase by 39%.This was mainly due to the increased cost of

imported raw materials with the depreciation of LKR. CIC purchases

47% of its raw materials locally while 53% Is being imported.

Group operating costs for the year increased with the hike in line

with the revenue where distribution and administration costs

increased by 25% and 23% YoY respectively. However, other

expenses for the quarter increased to a substantial figure of

LKR84.9mn from LKR 9.8mn a year ago due to the reduction in the

fair value of equity investment portfolio coupled with the net loss

on foreign currency translation. This was a common phenomenon in

other listed companies since stock market was on a bear run during

the past two quarters.

Inorganic Expansion results in augmented finance

cost…….

The overall finance cost witnessed a rise of 37% in FY12 mainly due

to increase in the financial leverage coupled with the overall

increase in the interest rates of the economy.

Segmental Profit


16%

52%5%

10%

16%1%

Construction Industry Agriculture & Livestock

Industrial Raw Material Packaging Industry

Consumer & Pharmaceutical Others

0

200

400

600

800

1000

1200

2008 2009 2010 2011 2012

Agriculture and Livestock Consumer and Pharmecuitical

Construction Industrial Raw material

Packaging Material

LKR

CAPEX On each segment


8 | P a g e

The gearing level in FY12 is 41.7% while as at FY11 gearing stood at

33.9% where the company intends to use inorganic growth

opportunities to expand its business. Short term Interest bearing

borrowings are mainly tied in fertilizer business which is driven by

subsidies.

Working capital Position

CIC’s liquidity position is volatile due to its low cash reserves

compared to the high amount of short term debt. As at 4QFY12

short term borrowings stood at LKR7.7 bn while cash and bank

balance was 655mn. Hence cash and cash an equivalent (CCE) to

short term debt is around 0.06X as at 31st March 2012. Further

short term borrowings constitute for a circa of 90% of the total

borrowings in CIC.

Segmental wise Return on Assets

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2008 2009 2010 2011 2012

Agriculture and Livestock Consumer and Pharmecuitical Construction

Industrial Raw material Packaging Material

QUICK PERFORMANCE REVIEW 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Profitability

Revenue Growth 8.1% 1.2% 11.1% 5.9% 26.7% 6.8% 15.8% 18.6% 10.4%

Gross Profit Margins 23.3% 22.1% 19.9% 20.2% 22.8% 25.1% 22.2% 22.1% 22.1%

EBIT Margin 44.1% 40.9% 40.0% 46.3% 39.5% 32.9% 35.1% 35.4% 35.4%

EBT Margin 8.8% 7.8% 5.0% 6.5% 7.7% 6.5% 6.6% 7.1% 7.5%

Net Profit Margin 3.5% 3.6% 2.6% 3.5% 4.4% 4.1% 4.1% 4.5% 4.8%

Efficiency

Trade Receivables Days 78 92 97 81 75 71 70 68 65

Payables Days 70 91 84 133 107 145 117 100 90

Inventory Days 77 93 95 106 91 106 95 84 80

Current Ratio 1.5 1.2 1.2 1.2 1.2 1.1 1.1 1.1 1.1

Interest Cover 4.7 2.9 1.7 2.3 3.8 2.7 3.1 4.1 5.1

Gearing(debt/(debt+equity)) 20.5% 17.3% 29.3% 29.9% 33.9% 41.7% 39.5% 37.0% 34.4%

Debt servicing cost ratio 53.6% 46.6% -0.4% 71.8% 13.6% -1.2% 40.6% 46.3% 52.2%

Investor Ratios

ROE 9.7% 9.5% 7.2% 9.3% 11.1% 10.1% 10.8% 12.6% 13.0%

EPS - Voting 5.2 5.4 4.3 6.2 9.8 9.7 11.4 14.7 17.1

PBV - Voting 1.6 1.5 1.4 1.2 0.9 0.9 0.8 0.7 0.6

PBV - Non Voting 1.1 1.1 1.0 0.9 0.7 0.6 0.6 0.5 0.5

P/E - Voting 16.0 15.5 19.4 13.4 8.5 8.6 7.3 5.7 4.9

P/E - Non Voting 11.6 11.2 14.1 9.7 6.2 6.3 5.3 4.1 3.5

9 | P a g e

DUPONT ANALYSIS

DuPont analysis is used to analyze the return on equity (ROE) by

breaking it into three main components: Profit margin, Asset

turnover and Leverage factor. Following is the application of DuPont

analysis for CIC.

Equity Multiplier

Equity multiplier indicates how a company uses debt to finance its

assets which is also called as the financial leverage. A high equity

multiplier shows that company is heavily relying on debt in financing

their business. CIC demonstrate a relatively higher financial leverage

with high level of borrowings prevailed throughout the past. From

2007 to 2012 company witnessed an increase in the equity multiplier

from 2.0X to 2.8X. Interest bearing borrowings are mainly invested in

subsidy driven fertilizer business which posses a strategic importance

for the future growth of the business.CIC also utilizes debt financing

for expansion of its dairy farms and upgrading the existing farms.

With the current gearing ratio of 41.7% company expects to optimize

its capital structure in order to enhance the value of the firm.

Furthermore, RAM ratings have assigned a long term credit rating of

A for CIC which enables the company to benefit from low cost of debt

financing.

Asset Turnover

Asset turnover depicts the amount of sales revenue generated from

the total assets of the company. Hence it measures the effective

utilization of assets. CIC has experienced a fundamentally strong asset

turnover historically. However there has been a marginal dip in the

ratio during FY12. This was mainly owing to the expansion in the diary

segment and packaging segments where the total asset base in the

company saw an increase of 36% compared to the revenue growth of

7%. Reaffirming this during FY12 CIC incurred the highest capital

expenditure in the history ever, recording LKR1.8bn.

NP Margin

Net profit margin depicts how much the company earns as profits out

of their total revenue. CIC has historically maintained an average net

profit margin of 3.5% while achieving a sustainable net profit margin

of 4.1% for FY12.

Equity Multiplier

Asset Turnover

NP Margin

1.70

1.90

2.10

2.30

2.50

2.70

2.90

3.10

2007 2008 2009 2010 2011 2012

0.70

0.80

0.90

1.00

1.10

1.20

1.30

1.40

2007 2008 2009 2010 2011 2012

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

2007 2008 2009 2010 2011 2012

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

2007 2008 2009 2010 2011 2012

Dupont Analysis 2007 2008 2009 2010 2011 2012

NP Margin 3.5% 3.6% 2.6% 3.5% 4.4% 4.1%Asset Turnover 1.36 1.17 1.12 1.03 1.05 0.86Equity Multiplier 2.02 2.25 2.47 2.52 2.40 2.88ROE 9.7% 9.5% 7.2% 9.3% 11.1% 10.1%




10 | P a g e

The group couldn’t maintain the same NP margin levels as last year

mainly due to the amplified administration cost during the year. The

rising energy cost and the depreciating LKR was partly attributable to

this. Furthermore the post acquisition loss of Ceylinco

Pharmaceuticals in 4QFY12 also affected the margins.

ROE

The increase in ROE depicts the increase in returns to the equity

holders of the group. In contrast to the 9.7% ROE in FY10, CIC

witnessed a significant growth to derive an ROE of 11.1% for

FY11.However for FY12 ROE stood at 10.1% due to the escalated

distribution and administration cost which squeezed the margins.

However we expect a shift in ROE with new investments in diary

segment materializing and robust performance of the group’s

consumer and pharmaceutical segments. However counter ROE is

comparatively lower compared to the chemicals and pharmaceuticals

sector ROE of 12.3%.

Peer DuPont Review

ROE

Source – Bloomberg

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

2007 2008 2009 2010 2011 2012

CIC

Holding

NP Margin 4.1% 7.02% 2.29% -28.66% 10.20% 9%Asset Turnover 0.86 1.08 1.14 62.10 1.57 1.53Equity Multiplier 2.88 1.49 2.95 1.03 1.8 1.64ROE 10.1% 11.26% 7.71% -1835.70% 29.04% 22%

Peer AnalysisJ.L

Morrisons

Lankem

CeylonSingalanka

Muller and

Phipps

Union

Chemicles

Lanka


11 | P a g e

Risk Factors

Vagaries in the agriculture segment

Agriculture segment of CIC is exposed to climatic or natural risks such

as draughts and floods which can diminish the future earnings of the

company. Further agriculture is commonly considered as long

gestation investments that ties cash flows for lengthy periods hence

creating the risk of working capital mismanagement.

Policy Risk

The fertilizer segment which is the key earnings generator in the

agricultural segment is highly regulated on selling prices and bounded

by specific chemical compositions formulated by the national

fertilizer secretariat. Further adding on to the risk, the company has

witnessed delays in subsidy payments by government which is

demonstrated by the increase in the other receivables in balance

sheet. As at the end of FY12 fertilizer business had a subsidy

receivable of LKR6.8bn.

Changes in the market conditions

Consumer and pharmaceutical division continues to face stiff

competition while it is also exposed to changes in the consumer

preferences. However through diversification the company has been

able to spread operations over a wide range of consumer products.

Macroeconomic Risk

The depreciation of LKR will increase the cost of imported raw

materials especially in the business segments such as industrial raw

material, CIC feeds and Chemanex. For instance sharp increase in the

cereal prices in the global market affect negatively on CIC feeds.

However company is in a position to pass at least a half of the

relevant cost increment to the end consumer creating a less impact

on profitability. In the contrary the depreciation of LKR will help to

boost export revenue from business segments such as Chemanex.

Further the tendency for higher interest rates would slow the growth

potential in the construction sector which can have a negative

influence on CIC paints and industrial chemical business.

Furthermore government taxes on products such as maize, sorghum

& soya bean, the importation of chicken eggs by the state and

inconsistent government policies are some of the long term threats

CIC faces.

Rising Energy cost

The rising fuel prices will have a negative influence on CIC

Agribusiness and Chemanex which absorbs a large proportion of the

total energy costs. During FY12 a circa of 534,982 litres of fuel was

utilized by CIC feeds business while CIC agri consumed 243,900liters

Exchange rate movement USD Vs

LKR

Historical Crude oil price

movement

Expected inflation and interest

rate (AWLR) movement




105

110

115

120

125

130

135

140

LKR/USD

LKR/USD

0

5

10

15

20

25

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

f

20

13

f

20

14

f

AWLR% Inflation rate%

30

50

70

90

110

130

150

7/

1/

20

06

11

/1

/2

00

6

3/

1/

20

07

7/

1/

20

07

11

/1

/2

00

7

3/

1/

20

08

7/

1/

20

08

11

/1

/2

00

8

3/

1/

20

09

7/

1/

20

09

11

/1

/2

00

9

3/

1/

20

10

7/

1/

20

10

11

/1

/2

01

0

3/

1/

20

11

7/

1/

20

11

11

/1

/2

01

1

3/

1/

20

12

Crude Oil USD

USD per barrel

12 | P a g e

Of fuel during the same period. Furthermore CIC source 60% of its

electricity cost through thermal while rest 40% is generated through

hydro demonstrating high vulnerability towards rising fuel prices.

However CIC intends to reduce its dependency on fuel by utilizing

alternative sources of energy. Company already uses paddy husk

instead of furnace oil to generate steam for its boiler plants. Further

CIC’s Fertilizer business which makes a significant contribution to the

group revenue is also vulnerable to the global oil price movements.

FUTURE OUTLOOK

It is expected the world population will grow to 9.2bn by 2050 and in

turn double today’s global food requirement .In order to cater this

demand the food production will have to be increased 70% by

2050.Hence as the largest private sector player in the agriculture

sector, which is processing and trading most important agricultural

commodities and fertilizer, CIC has a huge potential going

forward.CIC also continues to be a pioneer in introducing novel and

innovative methods to modern farming communities. Company

highly focuses on developing technologically advanced seeds which

have higher yields and better protection. CIC owns and operate seed

and soil laboratories while its tissue culture laboratory is one of the

most advanced facilities in Sri Lanka. It is believed the increasing

global food requirement will also create a derived demand for

fertilizer business. There has been a large increase in the usage of

fertilizer in the newly liberated lands in Northern and Eastern regions.

CIC Agri is also prominent for specialty rice where CIC research centre

at Pelwehera introduced Red Basmati which helps to control diabetes

and other ailments.CIC exports specialty rice to countries such as

France, USA, UK, Australia, New Zealand and Canada.

The per capita consumption of rice in Sri Lanka is close to 36.3Kg per

household for a month where annual country requirement is 2.3

million tons each year. The average wheat consumption per

household is at 2.7kg per month. It is expected the wheat prices

would increase going forward due to the continuous depreciation of

Sri Lankan exchange rate. Hence it is believed people will shift from

wheat consumption to rice in the coming years. At the moment CIC

has a rice yield of 8 tons per hectare which is double the national

average.

CIC plans to upgrade Hingurakgoda and Muthuwela farms in order to

cater the growing demand of dairy industry in the country. Further in

its pipeline of future investments CIC also intends to set up a diary

milk processing operation in Dambulla with a 25,000litre capacity

per day at a total cost of approximately LKR450 million.

Household Consumption of rice Vs

wheat

Average Wheat Flour prices



Agricultural Sector GDP Vs Nominal

Growth in the sector


0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

2006 2007 2008 2009 2010 2011

Current Prices Nominal growth

LKR

0

10

20

30

40

50

60

70

80

90

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Wheat Flour Price

LKR

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

30

32

34

36

38

40

42

44

46

48

1981 1986 1991 1996 2002 2005 2007 2010

Average Household consumption of Rice (Kg per month)

Average Household consumption of wheat (Kg per month)

Kg Kg

13 | P a g e

CIC has also taken a major initiative to expand overseas where the

company has made a joint venture with the largest supermarket

chain in Bangladesh “Rahimafrooz”. Company plans to acquire lands

for cultivation in Bangladesh where the project is expected to boost

revenue from FY2013 onwards.

The paint business of CIC continues to be unprecedented leader in

the market while continuing to grow through product innovations.

Company launched “Weathershield Max” coming under

weathershield range and “DynacoatMiluz” an addition to the sikkens

range during the year.The newly launched “Ambience” luxury

designer paints and “three in one” washable paints performed well as

expected.

The herbal healthcare segment led by Link Natural (Pvt) Ltd witnessed

a 17% growth in the turnover during FY12. Link natural maintains the

market leadership position in the manufacture of generic ayurvedic

pharmaceuticals. Link natural’s flagship brands such as Samahan and

Sudantha continues to possess attractive margins making a significant

contribution to the bottom line.

Under Consumer products division Johnson & Johnson marketing unit

witnessed a 44% growthin profits during FY12.The segment continues

to introduce new value additions to the market such as Neutrogena

range of personal care products. Furthermore the Johnson and

Johnson has become the third largest player in Sri Lanka with regard

to baby cologne, creams and lotion. The food subdivision which was

newly formed engages in sales of canned fish and other bulk food

products such as dhal, dried sprats etc. CIC plans to enhance the

product portfolio of the food sub division targeting the mass market

while capitalizing on existing distribution channels.

During FY12 CIC acquired 82.35% equity stake in Ceylinco

Pharmaceuticals limited. With the acquisition company expects to

manufacture its own pharmaceutical product range In future.

Historical Movement of the Food

ratio

*The ratio of expenditure on food and drink to

total expenditure is called the food ratio and it

is generally presented as a percentage. The

food ratio has been declining due to the

increase in the disposable income.Out of the

total expenditure on food , cereals (rice,

wheat flourect) and prepared food are the two

major groups which are consumed in large

quantities.


Historical Comparison of Crude Oil Vs Fertilizer Prices


30%

35%

40%

45%

50%

55%

60%

65%

70%

1981 1986 1991 1996 2002 2005 2007 2010

Food Ratio

95

100

105

110

115

120

300

320

340

360

380

400

420

440

460

480

500

Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12

Fertilizer Price Crude Oil

USDPer tonne USDPer barrel

14 | P a g e

Valuation

Considering the diversified business nature of the company backed by

the vigorous growth witnessed in agricultural and consumer &

pharmaceutical segments of the company we believe the counter has

a strong upside potential. In the current market context with the

availability of 4th quarter results we now expect CIC to post net

earnings of LKR1, 078.2 mn for FY2013E (up 17.6% YoY), LKR1, 394mn

(up 29.3% YoY) for FY2014E and reach LKR1, 621.8mn (up 16.3% YoY)

for FY2015E.

P/E Based Valuation

In terms of price to earnings based valuation CIC voting is trading at a

PER of 8.6X based on FY12 figures, while at the current price levels

the counter is trading at a projected PER of 7.3X for FY13E, 5.7X for

FY14E and 4.9 for FY15E.Further CIC voting is currently trading at an

attractive PBV of 0.9X which we expect to improve to a PBV of 0.8X

for FY13E, 0.7X for FY14E and 0.6X for FY15E respectively.

CIC Nonvoting is trading at a PER of 6.3X based on FY12 figures, while

at the current price levels the counter is trading at a projected PER of

5.3X for FY13E, 4.1X for FY14E and 3.5 for FY15E.Further CIC

Nonvoting is currently trading at a PBV of 0.6X which we expect to

improve to a PBV of 0.5X and 0.4X for FY14E and FY15E.

Price Assimilation Based Valuation

Based on an analysis of a historic 52 week price movement (CIC

Voting), we derived a price volatility of 15.7% on a mean of LKR109.7.

Furthermore, it is assumed that the same upside momentum is

witnessed pushing the price to LKR90.7 (from the current level of

LKR78.4), the forward PE multiples would increase to a figure of 7.9X

and 6.1X for FY13E and FY14E respectively.

Non Voting share has also price volatility of 16.4% on a mean of

LKR74.10 over a 52 week period. Furthermore, it is assumed that the

same upside momentum is witnessed pushing the price to LKR62.8

(from the current level of LKR54), the forward PE multiples would

increase to a figure of 5.5X and 4.3X for FY13E and FY14E

respectively.


CIC.N : LKR.83.50 FY10 FY11 FY12 FY13E FY14E FY15E

EPS (LKR) 6.2 9.8 9.7 11.4 14.7 17.1

P/EBIT 5.1 4.2 4.3 3.9 3.3 3.0

P/E 13.4 8.5 8.6 7.3 5.7 4.9

PBV 1.2 0.9 0.9 0.8 0.7 0.6

Sector P/E 7.7

Sector PBV 1.0

Market P/E 11.4

Market PBV 1.8

CIC.X : LKR 60.50 FY10 FY11 FY12 FY13E FY14E FY15E

P/EBIT 3.7 3.0 3.1 2.8 2.4 2.2

P/E 9.7 6.2 6.3 5.3 4.1 3.5

PBV 0.9 0.7 0.6 0.6 0.5 0.4

Sector P/E 7.7

Sector PBV 1.0

Valuation Dashboard

15 | P a g e

*CIC.N - Price band of LKR90.7 is based on an upside growth of

15.7%, derived via a 12 month standard deviation of the market.

Price band of LKR142.0 is the highest traded price over the past 12

month period.

*CIC.X- Price band of LKR62.83 is based on an upside growth of

16.4%, derived via a 12 month standard deviation of the market.

Price band of LKR96 is the highest traded price over the past 12

month period.

DCF Valuation

Based on the on the free cash flow to firm valuation (FCFE) and

considering three year explicit forecast period CIC Voting is trading at

a discount of 20.4% to the intrinsic value of LKR100.5 per share

against a benchmark price of LKR83.50.The H model methodology

has been applied for the forecast at a weighted average cost of

capital (WACC) of 16% and a long term growth rate of 5%.

Based on the above valuation we consider a “Long

Term Buy” recommendation on CIC.N and CIC.X.

*Cost of debt - 3 year T bill rate plus

1%(Ram ratings has assigned a long

term credit rating of A which depicts a

credit risk margin of 1%)



100.51 14% 15.0% 16% 17.0% 18%

7% 139.9 125.0 118.3 104.1 96.5

6% 125.5 113.8 108.4 96.9 90.5

5% 114.2 104.9 100.5 90.8 85.4

4% 105.3 97.6 93.9 85.7 81.1

3% 97.9 91.5 88.4 81.4 77.3

WACC

G

ro

wth

Ra

te(L

on

g T

erm

)

Key Inputs

WACC 16%

Beta 1.10

Market Premium 4%

Risk Free Return 13%

Cost of equity 17%

Cost of debt 12%

Debt/(Debt+Equity) Ratio 29%

Short term growth rate 7%

Long term growth rate 5%

Assimilation of Price Movement

LKR ( Voting) 90.70 142.00 90.70 142.00 90.70 142.00

PE 9.38 14.68 7.97 12.48 6.17 9.65

PBV 0.95 1.49 0.86 1.35 0.77 1.21

LKR ( Non Voting) 62.83 96.00 62.83 96.00 62.83 96.00

PE 6.50 9.93 5.52 8.44 4.27 6.53

PBV 0.71 1.09 0.66 1.01 0.60 0.91

FY12 FY13E FY14E

FY12 FY13E FY14E

16 | P a g e

CIC Vs Indices

ASI vs. CIC.N & CIC.X

The above radar charts benchmark the CIC.X & CIC.N

performance against the relevant index in terms of PE, PBV

and Dividend Yield.

C&P Vs CIC.N & CIC.X


0.0

0.5

1.0

1.5

2.0

2.5 PE

PBV

ROE

DY

ASI CIC.N CIC.X

0.0

0.5

1.0

1.5

2.0

2.5 PE

PBV

ROE

DY

C&P CIC.N CIC.X

Market Performance Sector Performance

As at 05/07/2012 CIC.N CIC.X ASI C&P

P/E 8.6 6.3 11.4 7.5

PBV 0.9 0.6 1.8 0.9

ROE 10.1% 10.1% 15.7% 12.3%

DY(%) 3.8% 5.3% 2.5% 2.5%

17 | P a g e

Financial Summary



Income statement 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

For the year ended 31st March

Revenue 13,953.7 14,121.8 15,684.1 16,610.5 21,045.3 22,477.1 26,037.0 30,892.3 34,092.8

Gross profit 3,255.4 3,115.3 3,115.0 3,363.4 4,807.2 5,645.3 5,791.4 6,815.4 7,521.6

EBIT 1,434.8 1,272.7 1,246.8 1,558.3 1,899.1 1,858.4 2,032.7 2,412.5 2,666.2

Finance Cost 308.4 438.3 734.6 687.3 500.3 683.6 658.2 587.9 519.1

PBT 1,233.7 1,095.8 776.6 1,083.6 1,630.0 1,452.7 1,707.6 2,207.8 2,568.6

Tax 435.9 323.6 278.4 356.3 466.9 352.1 392.7 507.8 590.8

Profit to equity holders 493.3 509.8 407.6 589.6 926.6 916.5 1,078.2 1,394.0 1,621.8

Balance Sheet

As at 31st March 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Non Current assets 3,837 5,033 4,792 5,378 7,478 9,080 10,249 11,294 12,341

Cash and cash equivalents 625.5 226.1 760.2 701.0 666.7 655.5 750.5 1,104.1 1,659.0

Other Current assets 5,795.0 6,828.2 8,390.1 9,976.4 11,851.9 16,366.2 15,948.6 15,875.5 15,612.5

Total Assets 10,257.5 12,087.6 13,942.2 16,055.7 19,997.0 26,101.6 26,947.9 28,273.9 29,612.9

Long term debt 521.0 544.2 479.3 408.4 352.2 383.0 450.3 459.0 475.5

Other Long term Liabilities 367.4 382.8 429.2 544.5 880.9 1,012.3 1,059.0 1,105.1 1,144.0

Short term liabilities 4,291.1 5,780.5 7,383.3 8,739.9 10,422.5 15,656.5 15,481.0 15,602.5 15,563.8

Total Equity 5,078.1 5,380.1 5,650.4 6,363.0 8,341.8 9,049.8 9,957.4 11,107.1 12,429.5

Total Liabilities and equity 10,257.5 12,087.6 13,942.2 16,055.8 19,997.4 26,101.6 26,947.7 28,273.8 29,612.8

Research

Assistant Manager - Research

Amali Perera (94-11)5320256 [email protected]

Corporates Economy

Minoli Mallwaarachchi (94-11)5320259 Dhanusha Pathirana (94-11)5320254 Dilan Wijekoon (94-11)5320249 Travis Gomez (94-11)5320000 Shan Silva (94-11)5320251

Yogini Yogarasa (94-11)5320361 Statistician

Nuwan Pradeep (94-11)5320257

Sales

Institutional Sales Retail Sales Sabri Marikar (94-11) 5320224 077 3-576868 [email protected] Shiyam Subaulla (011)- 5320218 0773-502016 [email protected]

Niroshan Wijayakoon (94-11) 5320208 0777-713645 [email protected] Gagani Jayawardhana (011)- 5320236 0714-084953 [email protected]

Niyaz Aboobucker (94-11) 5320213 0777-727352 [email protected] Priyantha Hingurage (011)- 5320217 0773-502015 [email protected]

Anura Hedigallage (94-11) 5320211 0777 -713663 [email protected] Neluka Rodrigo (011)- 5320214 0777-366280 [email protected]

Manjula Kumarasinghe (94-11) 5320211 0777 -874310 [email protected] Subeeth Perera (011)- 5320227 0714-042683 [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]

Branches 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 0773-687307 [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] Gayan Perera (031)-5676880 0772-544044 [email protected]

Service Centers 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]

ASIA WEALTH MANAGEMENT CO. (PVT) LTD 21-01, West Tower, World Trade Centre,

Echelon Square, Colombo -1, Sri Lanka

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Documents

range of products” CIC Holdings PLC INTERIM UPDATE - 4QFY12 CIC HOLDINGS …asiaashan.weebly.com/uploads/5/4/3/2/5432627/cic_4qfy12.pdf · 2018-10-04 · Analyst: Shan Silva [email protected]