LWL Corporate Update - STRONG BUY - 20 09 16

LANKA WALLTILES PLC

Initiating Coverage - STRONG BUY

Current Price: LKR 106.3 Fair Value: LKR 170.0

“Undervalued Wall-tile manufacturer”

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Lanka Walltiles PLC, is a key player in the domestic construction subsector with a market share of 45%, together with its subsidiary/ associate companies offer a product portfolio ranging from wall-tiles, floor-tiles to aluminium products. LWL’s earnings is expected to grow at a CAGR of c.13% FY16-FY19E reaching c.LKR 1.8Bn in FY18E and c.LKR 1.9Bn in FY19E. LWL is expected to grow its earnings mainly driven by the increased demand deriving from the domestic market coupled with the benefit of comparatively lower production costs. FC Research expect LWL to provide a return of 78% at LKR 170.0. STRONG BUY

Domestic demand to boost revenue: LWL’s topline is expected to grow at a CAGR of c.8% over FY16-FY19E to reach c.LKR 18.4Bn and c.LKR 19.8Bn in FY17E and FY18E respectively mainly driven by the increased demand stemming from the domestic construction subsector which is witnessing a boom in the residential property and real estate resultant to the rise in the urbanization that stands at 18% at present coupled with increased disposable income levels.

Improved GP, EBIT and NP margins: Cost efficacies arising from the investment into plant modernization, economies of scale deriving from increased volumes coupled with comparatively lower commodity prices to reduce the overall cost of sales thus record it at c.LKR 13.5Bn in FY18E with a CAGR of 8% over FY16-FY18E in comparison to the revenue of c.LKR 18.4Bn (CAGR of c.9% over FY16-FY18E) leading to an increase in LWL earnings to c.LKR 1.8Bn in FY18E amidst improved GP, EBIT and NP margins of c.32%, c.19% and c.13% respectively.

LWL to provide 78% return over 18-months period: FC Research expect LWL to achieve a fair value of LKR 170.0 providing a total return of 78% (Dividend yield 18%) over 18-month period. [DCF based LKR 186.4 and PER based LKR 146.1]

Risks associated: Changes in government policy, competition from less costly imports and fluctuations in exchange rates are the risks exposed by LWL.

Disclosure on Shareholding:

First Capital Group and its affiliates hold 433,516 shares in LWL. 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.