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Expolanka Holdings PLC [EXPO.

N0000] LEANER AND MEANER – BUY

Purasisi Jinadasa CAL Research January 2014

See page 10 for important disclaimer

Expolanka Holdings PLC [EXPO.N0000] LEANER AND MEANER – BUY
FYE MAR (LKR mn)
Revenue EBIT Net Profit EPS (LKR) EPS Growth (%) EPS (recurrent) Recurrent EPS Growth (%) DPS Dividend Yield (%) PER (x) – non-recurring ROE (%)

2012
35,400 1,800 1,000 0.54 (2) 0.54 (2) 0.12 1 15.3 11

2013
50,100 1,900 1,100 0.54 1 0.54 1 0.12 1 15.3 12

2014E
55,000 2,200 2,500 1.29 137 0.58 7 0.59 7 6.4 18

2015E
54,100 2,900 1,900 0.96 (26) 0.96 65 0.21 3 8.7 25

Current Price (LKR) 8.3 Target Price (LKR)

12.4
Recommendation

BUY
Date 16-Jan-14

Expo is finally restructuring to emphasize its asset light core air freight business (F&L). The restructuring may provide a one-time gain of c.LKR 2bn by end-1Q2014 and uplift ROE’s from current c.12% to 18% (c.25% by FY15E). Further, CAL expects days-working capital to fall by c.20 post-restructuring. Expo’s core business is well diversified in the region and holds 18%+ of the South Asia-USA* trading route for apparel. We expect this to grow to c.30%, as South Asia-USA airfreight grows at c.6% and apparel airfreight grows at c.20%. Expo is also expected to diversify out of South Asia (c.64% of volume by FY16E vs. c.70% in FY12). CAL’s DCF-based FV for Expo is LKR 12.4 (+49%) and we expect a one-time dividend of LKR 0.46 (7% total dividend yield). BUY
 Well diversified business model: Expo’s core apparel airfreight business operates in 15+ countries and holds a c.18% market share on the South Asia-USA* apparel airfreight trading route (2012). As a result, Expo benefits regardless of changing client sourcing destinations. CAL estimates market share on the South Asia-USA apparel route to rise to c.30% by 2016E. FY14E ROEs to hit c.18%: Shedding of non-core operations will provide an uplift in ROEs to 18% by FY14E. Core business ROEs are sustainable at 2025%. We expect ROEs to improve to 25% by FY15E. Reverting to core competency results in a FV of LKR 12.4 (c.+50%): Given current progress in re-aligning the business, CAL attributes a FV of LKR 9.6 (+16%). However, if restructuring goes according to schedule, our FV is LKR 12.4 (+49%). Further, we expect a recurrent EPS of LKR 0.58 and a one-time bonus dividend of LKR 0.46 (total dividend yield of c.7%): BUY

Market Capitalization (LKR): 16bn Market Capitalization (USD): 124mn 1-year avg. Daily T/O (USD): 36k Free Float: 26.9% 1-year Price H/L (LKR): 8.6/6.5 * South Asia: Sri Lanka, India and Bangladesh

CAL Research Level 5, “Millennium House”, No.46/58, Nawam Mawatha, Colombo 2 Tel: +94 11 231 7786 Email: purasisi@cal.lk

Purasisi Jinadasa

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I.

Shedding the deadweight sets Expo’s FV to rise by 49%+ to LKR 12.4

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Post-restructuring, Expo’s FV is LKR 12.4 (49%+) vs. current FV of LKR 9.6 (+16%) CAL expects a bonus dividend of LKR 0.46 for a total 1-year return of c.55%+ ROE’s to reach c.25% by FY16E as EPS grows at a c.30% Cagr

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II. III.
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Expo’s core airfreight business to drive a 23% EBIT Cagr through FY16E

By FY15E, CAL expects 90% of EBIT to come from core freight business A 20% YoY increase in airfreight volume is possible as world airfreight grows at a 6% Cagr through 2020 Expo is positioned well to gain from this growth (18%+ market share in key routes in 2012) A well-diversified business model mitigates country risk (c.19% of volumes from Sri Lanka in FY13 vs. 22% in FY12) CAL expects c.17% margins (airfreight) to be sustainable through FY16E

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IV. Appendices

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APPENDIX 1 – Income Statement APPENDIX 2 – Balance Sheet

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I.

SHEDDING THE DEADWEIGHT SETS EXPO’S FV TO RISE BY 50% TO LKR 12.4

Post-restructuring, Expo’s FV is LKR 12.4 (49%+) vs. current FV of LKR 9.6 (+16%)

EXPO
Target Capital Structure (D/E) Cost of Equity Cost of Debt Terminal Growth Rate WACC

VALUE
40/60 19% 6.0% 1.0% 14.7%

LKR mn EBIT Total FCF Terminal Value EV Value/Share

2014E 2,194 2,629 19,399 24,311 12.4

CAL Research expects avg. days working capital to reduce by c.20 days (40% improvement) and group EBIT margins to improve from current c.3% to 6% by 2016 following the restructuring.

CAL expects a bonus dividend of LKR 0.46 for a total 1-year return of c.55%+
EPS Recurrent Dividend Bonus Dividend

EPS LKR 1.29
CAL expects a bonus dividend of c.50% to be paid from gain on sale of non-core assets. If Expo maintains its recurrent payout ratio of 22%, total dividend for FY14E is likely to be LKR 0.59 (dividend yield of c.7%)

EPS LKR 0.54

Div. yield 7% Div. yield 2%
FY13 FY14E

Source: CAL Estimates

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ROE’s to reach c.25% by FY16E as EPS grows at a c.30% Cagr
70% 60% 50% 40% 30% 20% 11% 10% 1% 0% -10% FY12 -2% FY13 FY14E FY15E FY16E 12% 7% 25% 18% 28% 25% EPS Growth YoY (Recurrent) ROE (Recurrent)

65%

CAL expects ROE’s to avg. 24% over the next three years as the company approaches its freight unit’s sustainable ROE’s of 25%. CAL expects freight EBIT margins to increase from c.29% in FY13 to c.33% in FY16E. EPS is likely to be boosted significantly post-FY14E as costs are rationalized once all noncore businesses are sold

Source: Company Reports and CAL Estimates

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II.

EXPO’S CORE AIRFREIGHT BUSINESS TO DRIVE A 23% EBIT CAGR THROUGH FY16E

By FY15E, CAL expects c.90% of EBIT to come from its core freight business
EBIT LKR (bn) 1.9 2.2 2.9
0% 5% 6%

3.6
0% 5% 0%

3% 13% 5%

1% 12% 7%

CAL expects the company to completely phase out operations in investments by FY15E and int’l trading by FY16E. Travel and leisure is likely to remain within the group during the next couple of years as ROEs meet the minimum requirement of 25%

79%

79%

89%

95%

FY13 F&L Leisure Int'l Trading

FY14E Investments

FY15E

FY16E

A 20% YoY increase in airfreight volume is possible as South Asia airfreight grows at a c.6% Cagr through 2020
450 400 350 300 250 200 150 100 50 15% 2012 16% 2013 South Asia-USA (Expo) 19% 2014E 22% 2015E 24% 2016E 289 330 350 370 391

CAL estimates Expo’s market share of the total apparel trade from South Asia to the USA to be c.16% in 2013 (includes only Bangladesh, India and Sri Lanka). We estimate a c.24% market share on this trade route by 2016E at a 20% YoY increase in volumes. CAL expects apparel airfreight to comprise 85% of total airfreight on this route by 2016E (from c.81% in 2013)

Apparel Air Freight (mn (kgs)

South Asia-USA
Source: Company Reports, Boeing World Air Cargo Forecast 2013 and CAL Estimates

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Expo is positioned well to gain from this growth (18%+ market share in key routes in 2012)
Expo's Market Share in its key trade routes with USA (Apparel Freight)
30% Combined 25% 18% Combined 16% 16% 14% 68% 15% 18% 18% 22% 20% 24%

Expo has consolidated its positioning in Sri Lanka and is gaining market share in India and Bangladesh. CAL expects Expo to have a combined market share of 30% by 2016E in its key markets.

50%

62%

62%

65%

2012

2013 Sri Lanka

2014E India

2015E Bangladesh

2016E

A well-diversified business model mitigates country risk (c.19% of volumes from Sri Lanka in FY13 vs. 22% in FY12)
Expo's Exposure to South Asia (kgs) 74%

2016E Geographical Diversification

Sri Lanka, 15% RoW, 36% 64% India, 25%

2012 2012 2016E

2016E

Bangladesh , 24%

In 2012, c.74% of volumes was generated in Sri Lanka, Bangladesh and India. However, the company is focusing on expanding operations in East Africa and East Asia. In FY13, c.17% of volumes was generated in East Asia (vs. c.11% in FY12). By 2016E, CAL expects Sri Lanka to comprise c.15% of volumes generated

Source: Company Reports and CAL Estimates

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CAL expects c.17% margins (airfreight) to be sustainable through FY16E
GP Margins (Airfreight)

Avg. 16.6%
19.6% 16.7% 17.0% 13.1% 16.1% 17.2% 16.1%

Avg. 16.5%

16.7%

17.0%

Expo has been able to maintain GP margins at an avg. 16.6% for the past 6 quarters despite a slow-down in global trade. CAL expects this to be sustainable over the long-run, considering an improving US economic outlook and global trade

1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14

FY14E

FY15E

FY16E

Source: Company Reports and CAL Estimates

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III.

APPENDICES

APPENDIX 1 – Income Statement

FYE MAR (LKR mn)

FY12 35,415 (29,308) 6,106 633 (489) (4,455) 1,796 (137) 5 1,664 (455) 1,210 (176) 1,033 0.54 0.12 1.4% 15.5

FY13 50,075 (41,954) 8,122 491 (627) (6,103) 1,882 (227) 15 1,670 (392) 1,279 (218) 1,061 0.54 0.12 1.4% 15.3

FY14E* 55,001 (45,967) 9,034 2,124 (522) (6,547) 4,089 (234) 10 3,865 (903) 2,962 (438) 2,524 1.29 0.59 7.0% 6.4

FY15E 54,124 (45,698) 8,426 124 (513) (4,832) 3,205 (339) 2,866 (669) 2,196 (325) 1,871 0.96 0.21 2.9% 7.7

FY16E 63,729 (53,764) 9,965 147 (604) (5,690) 3,818 (160) 3,658 (855) 2,803 2,388 1.22 0.27 3.7% 6.1

Revenue Cost of Sales Gross Profit Other Operating Income and Gains Selling and Distribution Expenses Administrative Expenses Operating Profit Finance Cost Associate Profit (net tax) Profit Before Tax Income Tax Expense Profit Minority Interest Profit EPS DPS Dividend Yield PER (non-recurring)

* FY14E EPS Recurrent: LKR 0.58; FY14E DPS Recurrent: LKR 0.13

Source: Company Reports and CAL Estimates

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APPENDIX 2 – Balance Sheet
BALANCE SHEET
ASSETS Non-Current PP&E Investment property Intangible assets Investments in subsidiaries Investment in associates Other financial assets Deferred income tax assets Current Assets Inventories Trade and other receivables Prepayments Other financial assets Other investments Income tax recoverable C&CE Total Assets EQUITY AND LIABILITIES Stated Capital Reserves Retained earnings Non-controlling interests Total Equity Non-current Liabilities Financing and lease payables Deferred income tax liabilities Retirement benefit obligation Current Liabilities Financing and lease payables Trade and other payables Income tax liabilities Total Equity and Liabilities

FY12

FY13

FY14E

FY15E

FY16E

3,420 227 75 562 47 1,104 8,151 725 434 236 23 2,349 17,355 4,098 119 4,037 964 9,219 384 82 265 1,645 5,412 349 17,355

4,221 509 89 619 46 1,155 11,559 1,045 389 111 29 2,576 22,348 4,098 73 4,910 1,156 10,237 703 76 292 1,960 8,725 356 22,348

5,021 597 92 29 46 1,178 10,399 1,100 388 111 29 2,766 21,756 4,098 16 2,276 1,594 7,984 378 76 337 2,653 9,932 356 21,716

5,705 283 96 46 1,305 8,922 1,082 388 111 29 4,546 22,513 4,098 34 3,416 1,919 9,466 895 76 380 2,597 8,421 356 22,513

6,555 71 100 46 1,369 10,496 1,275 388 111 29 4,820 25,260 4,098 1 5,276 2,333 11,709 2,500 76 434 1,175 8,959 356 25,260

Source: Company Reports and CAL Estimates

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DISCLAIMER

This document has been prepared and issued on the basis of publicly available information, internally developed data and other sources, believed to be reliable. Capital Alliance Securities (Private) Limited however does not warrant its completeness or accuracy. Opinions and estimates given constitute a judgment as of the date of the material and are subject to change without notice. This report is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The recipient of this report must make their own independent decision regarding any securities, investments or financial instruments mentioned herein. Securities or financial instruments mentioned may not be suitable to all investors. Capital Alliance Securities (Private) Limited it’s directors, officers, consultants, employees, outsourced research providers associates or business partner, will not be responsible, for any claims damages, compensation, suits, damages, loss, costs, charges, expenses, outgoing or payments including attorney’s fees which recipients of the reports suffers or incurs directly or indirectly arising out actions taken as a result of this report. This report is for the use of the intended recipient only. Access, disclosure, copying, distribution or reliance on any of it by anyone else is prohibited and may be a criminal offence.

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Contacts
Research Team
Tel No: +94 11 231 7777 (General) Email: teamresearch@cal.lk

Purasisi Jinadasa Tel No: +94 11 231 7786 Email: purasisi@cal.lk Udeeshan Jonas Tel No: +94 11 231 7746 Email: udeeshan@cal.lk Thushani De Silva Email: thushani@cal.lk Devin Karunaratne Email: devin@cal.lk

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