LION.N0000 (Lion Brewery Ceylon PLC)

Entire financial intermediation process of the world is highly regulated by respective independent regulators. However very rarely the food and beverage sector is regulated to that extent.

LION annual report 2014/15 discuss about highly regulated industry. Further as per annual report more than 82% of its earnings is paid back to government as tax being a well organized company where all activities are within the limits of legal environment. However 22% of the country's liqour consumption is still fulfilled by illegal means reducing government's revenue.

Revenue from LION is bigger than large NBFIs in SL

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Revenue was continuously growing providing more revenue for government

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However if we isolate PAT , we cannot see the same growth as with Sales revenue. Government tax has eaten up the profit after tax to reach a plateau

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I have seen the price of Food and Beverage company shares grow very much faster than its earnings or dividends

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Market value is not linked to Net Assets as well

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Food and Beverage sector maintain a higher PE ratio and following is PE ration of LION.N

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EPS and Dividends have reached a plateau

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LION.N is trading at 625 and AHPL.N is trading at 60.80 ..( as at 18th Sept 2015 )
Even though LION trades 10 times more than AHPL both pay same dividends...

That shows the different treatment by investors for hotel sector and food and beverage sector..

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Many Sri Lankan companies are now trying to export their production and to GO-GLOBAL..

But for many such the panacea is Maldives.

LION.N products are the leading in Maldives. Further the company continue to invest in US. Company is placing particular emphasis on New York City where the company is employing their own sales staff.

During the year revenue form exports reached Rs 369 Million , a growth of 29% in comparison to the previous year.

369 million out of 32 Billion revenue is not quantitatively high but signals the direction of trying to reach the world market in a highly brand-loyal liquor industry.

Liquor is one area targeted in each budget by government

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Summarized contribution to government

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thanks. Continue your great service!

Beer up by Rs 40 per liter (alcohol below 5%) & Rs 60 per liter (alcohol over 5%) from today....

Ada Derana SMS on3rd Oct 2015


Lets just compare one big NBFI sector player PLC with LION to get an idea of how Taxes of various forms affect Liquor/ Beer and finally LION.N

Revenue of PLC and LION

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PAT of both companies

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Remember an amount almost equal to total revenue of the biggest NBFI is paid as taxes already by LION.

And that's before implementing the new tax formula.



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We are again looking at LION after reading Annual Report 2015/16.

Sri Lanka often found heroes from time to time.  රණවිරුවා was highlighted character during War era and thank to him today we the investors enjoy our returns. Next we found රටවිරුවා who bring forex for us.
Yet no one highlighted the real Hero...බේබද්දා due to religious reasons. Yet the above chart shows how important is බේබද්දා .

So we are evaluating third largest taxpayer to the government...

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The revenue line fit perfectly so far with performance.
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EPS recorded best ever. Yet next year is a challenge due to flood which destroyed its brewery ability at  Biyagama, Kaudwela.

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Like in many F&B companies, the market value remains high
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Dividends remain stable

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PAT increased substantially for the year.

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Government used to squeeze the gold egg laying hen without killing it so far.

Exercise Duty on Beer was increased on tow occasions within a narrow time frame. The first was in October 2015 where the tax was increased by 27% on mild beer and by 32% on strong beer.
In November 2015 taxes on strong beer were raised by further 29%.

This time a marginal reduction in the tax on mild beer was announced, only to be retracted within few days.

Thus within a period of two months excise duty on strong beer increased by a staggering 70% collectively.

Yet other hard liquor duty increased only by 25%.

Post these increases, industry volumes fell immediately, by nearly 40% and is yet to recover. Based on available evidence, the volume lost by the beer industry has gone to other sectors but as per known data arrack sector has gained but marginally.

We often talked about Super Human Beings working in Korea or Japan. But LION mention how their employees tried best to protect the company during flood while the houses of the same employees were badly affected.

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A post balance sheet event , flood affected to the brewery factory first time in history. Insurance coverage will be sufficient to cover the damages.

The third Biggest tax payer of the land has got a due concession .


Following is what I quote with relevant sources.


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 60% tax concession


The Company’s Annual Report for 2015 states that is the third largest taxpayer in the country. In the financial year 2015, excise taxes paid was Rs 20.2 billion whilst corporate taxes amounted to Rs. 878 million and has been lobbying for ‘more consumer and investor-friendly taxes’ on beer. In layman’s language, the company is campaigning for lower excise rates for beer. This is despite earning profits (I.e. PAT- Profit after tax) amounting to a staggering Rs. 2,080,54500 for 2015 recording a shocking 56.39% increase from a PAT of Rs. 1,330,320 recorded in 2014.


It is learnt that during the tax holiday awarded till November, Lion Breweries has already imported an astounding 200,000 litres of beer into the country, depriving a staggering Rs 72 million of tax rupees to the government hitherto and had also ordered consignments amounting to another 2,000 containers.
Sources say that the total tax monies lost to the state would amount to Rs 5,565 million as at existing capacity but would incur more losses in the event Lion imports more.


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It is learnt that during the tax holiday awarded till November, Lion Breweries has already imported an astounding 200,000 litres of beer into the country, depriving a staggering Rs 72 million of tax rupees to the government hitherto and had also ordered consignments amounting to another 2,000 containers.
Sources say that the total tax monies lost to the state would amount to Rs 5,565 million as at existing capacity but would incur more losses in the event Lion imports more.
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60% tax concession for Lion Breweries

Lion Brewery after the flood
The maker of Lion Beer took nearly half a year to get its brewery back in full operation after floods destroyed machinery worth Rs2.9 billion
March 15, 2017
4 min read

Listed beer maker Lion Brewery Ceylon’s 75 million litre per annum brewery is back in full operation after floods in May 2016 shut it down for nearly six months. Sales of popular local beer Lion, and Carlsberg, plummeted despite tax concessions to import beer for resale here.
7 feet

Height of the flood waters that inundated the brewery
57%

Drop in beer sales to Rs15 billion in the nine months to December 2016
130%

Drop in profits to a Rs613 million loss at end-December 2016


Impacts from floods and high tax on Lion Brewery is temporary, says Fitch

The credit rating agency expects sales to boom from 2017 due to rising incomes, urbanisation and tourism

Floods invaded listed Lion Brewery Ceylon’s beer-making facility in May 2016, impeding operations for nearly six months. Shareholders responded by exiting the stock, but credit rating agency Fitch Ratings Lanka thinks the damage is temporary. Before the floods, Lion Brewery was taking a big hit from a tax policy that made ‘hard’ liquor like arrack cheaper. Since September 2015, the tax on beer increased 70%, driving down beer industry volumes by 40%, the company said in its December 2016 quarter filing. Taxes on arrack increased by just 25%, but sales grew 14% as consumers switched from beer. The Kelani River breaking banks is an annual occurrence during the south-western monsoon, inundating homes and roads for several days at Biyagama, a manufacturing zone 50 minutes west of Colombo.

For 18 years, the floods never bothered the brewery there operated by Lion, a unit of listed conglomerate Carson Cumberbatch. The brewery was well protected by a flood-proof wall and pumps diverting any seepage back into the river. However, these proved ineffective when the south-western monsoon brought two whole days of non-stop rains in 2016, inundating the brewery with flood waters reaching up to seven feet.

The flooding destroyed machinery, equipment and stocks on the ground level of the brewery, leaving enough beer for just 15 days demand. It took Lion Brewery about six months to normalise operations, according to available quarterly results filed for December 2016 and published in February 2017. Shareholder reaction to the flood’s impact on Lion Brewery was negative. The share price fell 14% from 17 May to 30 September 2016, as sales dropped 47% during this period and profits by 175%.

During all this, Fitch Ratings Lanka remained unmoved. Despite the flooding, the brewer’s AA- rating was maintained with a Stable outlook, meaning that Fitch saw no reason to believe the rating would change in the short term. “Lion’s credit profile is supported by its market leadership, entrenched domestic brands and limited product substitution due to the high technical competence required for brewing beer in contrast to manufacturing spirits,” it said.

Lion Brewery operates a plant brewing over 75 million liters of beer annually for two popular labels, Lion and Carlsberg, bottled and canned at its Biyagama plant. Its brands include Lion Lager, Lion Stout, Lion Strong, Carlsberg and Carlesberg Special Brew. Lion Beer, brewed to a 160- year recipe introduced by British occupiers, is popular among locals and tourists, and is exported to the US, Canada, the UK, Japan and the Maldives in small quantities. Exports contribute less than one per cent to total revenue, amounting to Rs35.5 billion in the year ending March 2016.

To prevent local sales from going under, Denmark-based Carlsberg, which holds 25% of Lion Brewery, deployed four breweries it operates elsewhere in Asia to brew Lion Beer for the Sri Lankan market.

Sourcing raw materials and the brewing process took weeks. Lion Brewery quickly restored its boilers, generators and pumps destroyed by the flooding, but replacing electric equipment and panelling took longer as it was sourced from overseas and made-to-order. By end-December 2016, the company had imported beer worth Rs687 million for resale here. For Fitch Ratings Lanka, the flooding and high taxation were temporary setbacks. “Beer sales will recover from 2018 financial year (which starts in April 2017) onwards, supported by rising urbanisation, increasing tourist arrivals and higher per capita income, helping the company gain lost market share,” the rating agency said in an August 2016 rating report.