Laugfs Gas Ltd

Initial Public Offering

21st October 2010

No of Securities to be Issued Voting Non Voting Issue Price Voting Non Voting Opening of Offer Earliest Closing Latest Closing Rs. 23.00 Rs. 15.00 4th November 2010 4th November 2010 25th November 2010 75,000,000 52,000,000

Laugfs Gas Ltd (LGL) is engaged in the business of import, storage and distribution of Liquefied Petroleum Gas (LPG) and related products in Sri Lanka. Laugfs Eco Sri (Pvt) Ltd (LEL), Laugfs Leisure Ltd (LLL) and Laugfs Property Developers (Pvt) Ltd (LPDL) are subsidiary companies of LGL which are in the business of operating vehicle emission testing centers, hotel management and property development respectively. Industry

Initial Public Offer The company would be listed on the Diri Savi Board of the Colombo Stock Exchange subsequent to the Initial Public Offer. The minimum subscription per application is 100 shares for any class of shares, while applications exceeding minimum subscription should be in multiples of 100 shares. Applications can be made for either class of shares or in combination of both classes of shares. The allotment of the shares will be as follows.
Employees Dealers & Customers Others 10% 10% 80%
'000 Mt

Liquefied Petroleum Gas Industry LPG industry has experienced continuous growth as a prominent source of energy. Shell Gas Lanka Ltd dominated the market for a period of 5 years. The industry was liberalized in 2001 with the entrance of Laugfs to the market. L.P Gas Sales in Sri Lanka
200 190 180 170 160

Voting Sharehoders Subsequent to Of fering Mr W K H Wegapitiya Mr U K Thilak De Silva Laugfs Holding Limited Employees Dealers & Customers Public Holding Total

No of Shares 43 43 260,000,000 7,500,000 7,500,000 60,000,000 335,000,086

% Holding 0.00% 0.00% 77.61% 2.24% 2.24% 17.91% 100%

150 140 2004 2005 2006 2007 2008 2009

Source CBSL

Bulk of the LPG requirement is imported to the country and stored and distributed by Shell and Laugfs. Laugfs transports imported gas using road transport to the storage facility in Mabima while Shell uses a pipe based transport system which is less costly. The industry operates under strict safety and price regulations. Pricing is governed by the Consumer Affairs Authority where the prices are linked to the world market prices and a margin is allowed on the landed cost. Laugfs is allowed a margin of 30% on the landed cost

while Shell is allowed a margin lower than that. At present, prices are revised every 2 months. Under the safety standards refilling of cylinders by a third party is not allowed. According to the prospectus only 25% of households use LPG as a fuel for cooking purposes. Therefore the industry has high growth potential. Opening of the North East region and the growth in tourism are also expected to boost demand. Leisure Industry With the recovery of the tourism industry in Sri Lanka, we expect the tourist arrivals to approach 600,000 in 2010 (up approximately 34% YOY). Further, according to the Tourism Ministry of Sri Lanka, plans are underway to increase tourist arrivals to 2.5Mn by 2016. Property Development Industry Sri Lanka property sector was stagnant over the last 3 years. However we expect the property sector (and prices) to appreciate rapidly in the coming years with the growth in demand. Company Today Laugfs enjoy a 28% market share in the overall LPG business. Majority of the LPG requirement of LGL is imported while approximately 30% of its requirement is sourced from the Ceylon Petroleum Corporation (CPC). LGL purchases CPCs total production at a subsidized cost which is assured by the order given on 30 March 2009 by the Supreme Court. This has enabled LGL to offer gas at a lower price to the consumer compared to Shell. LGL has a storage capacity of 2,500 MT in Mabima - Sapugaskanda while the distribution of products is carried out through 13 main distributors and 1,665 dealers. Vehicle emission testing operations of LEL are offered through 19 fixed centers, 37 semi fixed centers and 51 mobile testing centers around the country. The leisure sector of LGL is represented by management of Emerald Bay Hotel and Temple Tree Resort & Spa in Induruwa. The hotels will

be managed by LGL for a period of three years and the agreements will terminate in 2011. Financial Analysis
Figures in Rs Mn Revenue Gross Profit Net Profit EPS (Rs) BV(Rs) Net Profit Prior to the Accounting Policy Change FY07/08 FY08/09 FY09/10 FY10/11(4Mths) 3,714 215 (85) (0.33) 3.14 N/A 4,514 814 229 0.94 4.47 309 5,592 1,048 528 2.03 10.92 218 2,241 467 262 1.01 11.93 N/A

The group revenue increased 24% YOY in FY09/10 while the gross profit gained 29% during the same period. The gross profit margin improved from 18% to 19% in FY09/10. During the year 31 March 2010, LGL changed the accounting policy with respect to the non refundable deposits, recognition of cost of sales and sales relating to cylinders. The group recorded a net profit of Rs.528 Mn in FY09/10. The revenue contribution from trading of LPG was 95% while the profit contribution was a significant 99%. The net profit (NP) margin of the group increased from 5.05% to 9.45% in FY09/10. The revenue and profit growth can be attributable to the favorable pricing strategy and the growth in demand. Revenue growth has continued during the first four months of FY10/11 and increased 40% compared to the same period last year according to the unaudited figures. Profit for the period reached Rs.262 Mn compared to Rs.187 Mn for the four months ended July 2010. Proceeds of IPO Use of IPO Funds
17% 20% 43% 20%

Expansion of Energy Operations Settlement of Debt Investment in Hotel Investment in Property Development

Source Prospectus

The proceeds of the IPO will be utilized as follows; Business Expansion Rs.505 Mn

diversifying into hotels and property where the company does not possess a proven track record (cost estimate of Rs.500 Mn for a four star 100 room hotel also seems doubtful). Retiring debt during a low interest rates period - Generally the cost of equity is perceived to be higher than cost of debt. Thus LGL will not be able to enjoy the cost benefit arising from debt. Financial Forecast We have assumed a revenue growth rate of 20% for FY10/11 keeping in line with the expected growth of the industry. NP margin is assumed at 13.83% which is comparable to margin recorded in FY09/10 (after adding back the finance cost and tax). A tax at a rate of 20% was considered as the concessionary tax rate is expected to increase in April 2010. Accordingly, we estimate an EPS of Rs. 2.02 for FY10/11 with a forecasted net profit of Rs.783 Mn. Valuation

Expansion of the existing 2,500 MT storage and filling capacity of LGL - Rs. 425 Mn Expansion of the distribution network of LGL Rs.40 Mn. LGL plans to add 6 main distributors and 335 dealers to the existing distribution network. Introduction of new LP gas products Rs.40 Mn Settlement of financial facilities obtained by LGL Rs.850 Mn. Mn. Equity investment in LLL to build and operate a hotel in Chilaw Rs.500 Mn LLL Mn. plans to commence construction of a four star 100 room hotel in Karupakane in Chillaw. The soft opening of the hotel is planned for 2012. Equity investment in LPDL to build and operate service apartments/motel at Havelock Road Rs.425 Mn The proposed Mn. service apartment complex will consist of 72 apartments which is to be completed in 2012. Equity investment in LEL to settle the financial facilities obtained by LEL Rs. 225 Mn

In the absence of an ideal proxy, we have considered Chevron Lubricants PLC (LLUB) as a comparative company for the P/E based valuation. LLUB is predominantly engaged in the business of importing, blending, distributing and marketing of lubricant oils. Thus both LLUB and LGL use refined products of crude oil as the raw material for their respective operations. At present LLUB trades at a forward P/E of 13X based on earnings for FY10. Hence a forward P/E of 13X is appropriate for LGL. Thus we estimate the intrinsic value at Rs.26.00. The trailing P/E at Rs.26 is 20X. Sentiment Factors The above mentioned risks create an uncertainty over the long term profitability. However the investor sentiment appears to be strong. Thus it may result in satisfactory short term gains in the secondary market. BUY

Risks Competition with a government owned LPG supplier (as a result of the government buying back operations of Shell). Regulated pricing - LPG prices have a direct impact on inflation and hence would be economically and politically sensitive. Further prices are susceptible to change (eg petroleum industry) with the possible entry of a government owned entity. Dependency on CPC - Cost savings on freight charges enables LGL to offer its products at a lower price. LGL faces the possibility of CPC supplying to a government owned LPG supplier going forward. The management could lose focus on LGLs core operations (trading of LPG) by

Incom e St a t ement - R s Mn Revenue COS Gross Profit Other Income and Gains Selling and Distribution Cost Administrative Expenses Finance Cost Profit Before Tax Income Tax Profit for the Year Profit Attributable to Equity Holders

FY08/09 4,541 (3,728) 814 144 (256) (212) (199) 291 (62) 229 243

FY09/10 FY10/11(4M t hs) 5,592 (4,544) 1,048 169 (283) (161) (189) 584 (56) 528 527 2,241 (1,774) 467 54 (104) (68) (48) 300 (38) 262 262

B a la nce Sheet - R s Mn Asset s N on C ur r ent Asset s Property, Plant and Equipment Intangible Assets C ur r ent Asset s Inventories Trade and Other Receivables Cash and Bank Balances Tot a l Asset s Eq uit y a nd L ia b ilit ies C a p it a l a nd R eser ves Stated Capital Reserves Retained Earnings Minority Interest N on C ur r ent L ia b ilit ies Interest Bearing Loans and Borrowings Deferred Tax Liabilities Deferred Income Retained Benefit Liabilities Current Liabilities Trade and Other Payables Refundable Deposits Income Tax Liabilities Interest Bearing Loans and Borrowings Tot a l Eq uit y a nd L ia b ilit ies

FY08/09

FY09/10 FY10/11(4M t hs)

2,614 2,614 2 213 1,111 78 1,402 4,018

4,489 4,489 53 198 1,005 481 1,684 6,226

4,490 4,490 53 186 831 426 1,443 5,986

60 714 378 1,152 10 721 72 270 6 1,070 574 710 24 478 1,787 4,018

780 1,212 847 2,839 588 158 273 13 1,032 417 790 15 1,133 2,355 6,226

780 1,212 1,109 3,101 515 274 161 13 962 682 828 34 378 1,922 5,986

N D B Stockbrokers (Pvt) Ltd 5th Floor # 40, NDB Building Nawam Mawatha Colombo 02 Tel: Tel: +94 11 2314170 (Hunting) Fax: +94 11 2314180 +94 11 2314181 Prasansani Mendis prasansini@ndbs.lk

Sales Research Waruna Singappuli waruna@ndbs.lk Gihan R. Cooray gihan@ndbs.lk

Viranthi Kumarage viranthi@ndbs.lk

Aroos Faleel aroosfaleel@ndbs.lk

Ranmini Vithanagama ranmini@ndbs.lk

Channaka Munasinghe channaka@ndbs.lk

Sanjaya Prabath sanjaya@ndbs.lk

Auburn Senn auburn@ndbs.lk

Jayantha Samarasinghe jayantha@ndbs.lk

Sidath Kalyanaratne sidath@ndbs.lk

Uditha De Silva uditha@ndbs.lk

Taamara De Silva taamara@ndbs.lk

This document is based on information obtained from sources believed to be reliable, but we do not make any representations as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken as substitution for the exercise of judgment by addressee. N D B Stockbrokers (Pvt) Ltd and its associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.