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TKYO - Corporate Update - STRONG BUY - 20 09 16
Corporate Update - STRONG BUY
Current Price: LKR 54.9/45.1 Fair Value: LKR 83.0/66.0
“Pillars of Success”
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Tokyo Cement Company (Lanka) PLC, one of the two cement manufacturers in Sri Lanka is expected to grow its earnings at a CAGR of c.20% FY16-FY19E reaching c.LKR 3.0Bn in FY18E and c.LKR 3.4Bn in FY19E. TKYO is expected to grow its earnings mainly through increase in its topline by seizing the opportunities created by the boom in the construction sector coupled with enhanced capacity. FC Research expect TKYO.N and TKYO.X to provide a return of 39% and 37% at LKR 54.9 and LKR 45.1 respectively. STRONG BUY
Construction sector boom to improve topline: TKYO’s topline is expected to register a YoY growth of c.15% and c.17% to reach c.LKR 34.8Bn and c.LKR 40.8Bn in FY17E and FY18E respectively resultant to the boom in the construction sector coupled with the investment into capacity enhancement to reach total plant capacity to 2.8Mn MT that’s coming into effect by end 2016 and increased Maximum Retail Price (MRP) of cement towards the latter part of the 1H2016.
Improved Margins driven by increased volumes and cost efficacies: GP, EBIT and NP margins are expected to register at c.24%, c.11% and c.7% respectively in FY17E as opposed to 23%, 10% and 6.5% recorded in FY16 on the back of lower cost of production coupled with the comparatively lower commodity prices that are yet to recover and cost savings resulting from the increase in renewable energy generation.
Risks associated: Given the nature of the industry TKYO is exposed to exchange rate, fluctuations in commodity price, change in government policy and rivalry competition risks.
TKYO to provide a 58% and 55%return over 18-months period: FC Research expect TKYO.N to achieve a fair value of LKR 83.0 providing a total return of 58% (Dividend yield 7%) over 18-month period. [DCF based LKR 83.8 and PER based LKR 81.4] while TKYO.X to provide a return of 55% at LKR 66.0.
Disclosure:
FFirst Capital Group and its affiliates holds 86,980 shares in TKYO. Neither First Capital Group nor its affiliates have traded in the shares in the three trading days prior to this document, and will not trade in the shares for three trading days following the issue of this document.