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8/6/2019 Royal Ceramics Lanka PLC- review -june 2011

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LANKA SECURITIES RESEARCH PUBLICATION

New Investments: RCL recently entered into paint market with the acquisition of “Colorbrite” brand manufacture Ever

Paint and Allied Manufacture (Pvt) Limited. Colorbrite is an established brand with over 30 years of history and boasts of a

considerable market among medium scale paint industries in Sri Lanka. Moreover, RCL expect to invest around Rs.3.0bn to

build its 3rd tile factory which will add further 12,000 sqm per day to the total capacity. With these accelerated business

expansions we expect RCL to have growing business operations despite the rising cost of energy and raw material.

Sound track record: During past five years RCL’s net earnings has improved by a CAGR of 34.7% while maintaining 17.3%

CAGR in revenue. Tile segment has contributed almost 88.0% to the total revenue while the rest is accounted by sanitary

ware. The robust performance continued in the last year as well where the net profit for FY11 increased by 51.3%YoY to

Rs.1.5bn along with a top ‐ line growth of 29.2%YoY to Rs.5.8bn. With the acquisition of 3.5mn shares of Hayleys Plc in FY11,

RCL owns an equity investment portfolio of Rs.1.9bn which has a market value of Rs.2.6bn as at 31 st Mar 2011.

Most discounted among the peers:

17.7%YoY profit growth in FY12E: We anticipate RCL to record a net profit of Rs.1.7bn (+17.7%YoY) and Rs.1.9bn

(+13.0%YoY) respectively for FY12E and FY13E with sustain profit margins. Revenue is expected to increase by 17.0%YoY to

reach Rs.6.7bn in FY12E and by 27.3%YoY to reach Rs.8.6bn in FY13E. Expected increase in tile consumption in both local

and export markets and construction boom may have positive impact on turnover levels in future.

Attractive forward price multiples: The trailing PER of RCL is at 11.8x which is relatively low compared to the tile sector

PER of 13.8x and manufacturing sector PER of 16.6x. For the forecasted earnings of Rs.1.7bn in FY12E and Rs.1.9bn in

FY13E, the forward PER is at 10.0x and 8.8x respectively indicating the potential price appreciation that can materialise in

the medium to long term.

Mispriced at present?: After the capitalization of reserves in January 2011, RCL share price has been hovering around

Rs.150.0 ‐ Rs.165.0 in the past five months mostly due to the market sentiment and lack of interest in the fundamentally

sound counters. Nevertheless according to our valuations performed using the discounted free cash flow method indicates

a value per share of Rs.196.00 for RCL which is an upside of 26.5% from the current market price of Rs.155.0.

Target price of Rs.252.70 for FY12E: Moreover our twelve month target price for RCL is Rs.252.70. The expected return in

the twelve month horizon will be 37.7%. (Capital gain: 36.2% and dividend yield: 1.5%). Therefore, considering the sound

earnings track record, strong management, substantial growth prospects and the attractive valuations we recommend the

stock as a BUY.

he information contained in this report, researched and compiled for purposes of information do not purport to be complete description ofthe subject matter referred to herein. In preparing this report care has been exercised to

llect information from sources which we believeto be reliable although we do not guarantee the accuracy and completeness thereof. Lanka Securities (Pvt) Ltd. And/or its affiliates and/orits directors, officers and employees shall

t in any way be responsible or liable for loss or damage which any person or party may sustainor incur by relying on the contents of this report and acting directly or in directly in any manner whatsoever.

Code MPS (Rs.)

Revenue (Rs.mn) Net profit (Rs.mn) Trailing PER (x) Quarter YoY% Year YoY% Quarter YoY% Year YoY %

CERA 140.3 2,294.3 5.3 8,898.0 11.6 103.9 (12.4) 259.4 (34.0) 16.2

LWL 150.0 2,292.3 1.3 8,736.6 10.1 161.1 (21.3) 407.8 (14.7) 20.1

RCL 155.0 1,527.3 13.9 5,751.4 29.2 439.7 39.9 1,459.1 51.3 11.8

TILE 125.0 805.9 (3.9) 3,020.7 5.9 149.7 (2.3) 506.0 33.5 13.1

Key Input Data FY12E FY13E Continuing Value WACC (%) 5.5 5.4 12.0

ROIC (%) 20.4 18.1 21.2

Growth (%) 25.2 21.7 8.0

ROYAL CERAMIC LANKA PLC 08 th JUNE 2011