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Chevron Lubricants Lanka PLC Equity Research

Interim Update Q3 FY 14

Quarterly revenue increased by 11% compared to corresponding previous quarter


while gross margin increased to 41% from 36%. Financial income has reduced by 63% SELL
QOQ while distribution cost has reduced by 8% despite the sales growth. Net profit
increased by 23% QOQ. LOLC SEC Valuation LKR 397.30
Share Price LKR 454.90
Upside/(Downside) -12.66%
Investment Considerations Risk Level High
(refer page 07 for recommendation)

Chevron's market share dropped to 53% in 2013 from 55% in 2012 (LLUB enjoyed a market
Share Details
share of 73% in 2009). However, Sri Lankan lubricant market has expanded from 45 Mn
Liters of annual production in 2009 to 53 Mn Liters in 2013 while Chevron's annual sales Bloomberg Ticker LLUB SL
volume has been coming down since 2010 (35 Mn Liters in 2010 to 28 Mn Liters in 2013). CSE Sector Manufacturing
With high competition of liberalization of the industry, LLUB has struggled to maintain its GICS Sector Energy
market share. Market Cap (LKR Mn) 54,588
Issued Quantity (Mn) 120
30-day avg T/O (LKR Mn) 17.99
Oil price plunge has impacted well for the lubricant industry as gross margins are expected to
Beta (6 months) 1.08
improve with sales price of lubricant being intact with robust demand. With the low interest
rate environment and expected downward fuel price change, we expect the demand for Quarter Financial Summary
vehicles to rise, which would bode well for the lubricant products. We believe the lubricant
demand will keep the sales price unchanged despite the fact that the raw material (base oil) LKR Bn FY 13 Q4 FY 14 Q1 FY 14 Q2 FY 14 Q3
can be bought at cheaper price. LLUB and IOC in particular will enjoy the situation as those Revenue 2.82 2.99 2.71 3.08
two are the only authorized parties to blend oil and produce lubricants locally. Net Profit 0.59 0.76 0.68 0.75
S/H's Equity 4.84 5.60 5.80 5.95
LLUB's new plant is expected to have a excess capacity of 10% and we expect a revenue Total Assets 7.05 7.64 6.95 7.70
ROA 38.95 36.77 38.86 38.40
growth of 8% on average in medium term. LLUB's gross margin has improved from 36% in
ROE 56.48 49.82 48.42 49.20
previous corresponding quarter to 41% during Q3 FY14. We expect gross margin to be
around 50% during next year with low raw material prices. Price Multiples
PE (X) 19.64
LLUB's ROE and ROA have gradually come down from FY 11 while now seem to be stabilizing PBV (X) 9.18
around 50% and 40% respectively. Price to Sales (X) 4.71
Divdend Yield (%) 4.40
LLUB is trading at a trailing PE is at 19.64X and PBV is at 9.18X, comparatively higher to the
respective sector multiples at 17.60X and 2.30X. Price Behavior
500
LKR

450
400
350
300
250
200
16-Jan-14 16-Apr-14 16-Jul-14 16-Oct-14
LLUB Share Price
ASI movement (adjusted to LLUB base price)

Per Share Details as at 30.09.2014 (LKR)

Earnings per share (trailing 12m) 23.16


Net Asset Value per share 49.57
Sales per share (trailing 12m) 96.67
Dividend Per Share (trailing 12m) 20.00

Shareholder Details
Valuation
Chevron Ceylon Ltd 51%
LLUB has improved its margins despite the low growth in sales due to severe competition. Aberdeen Asset Management Asia 24%
However, global oil price plummet will benefit LLUB's margins further compared to the Wasatch Advisors Inc 4%
majority of the rest of the competitors who import and distribute lubricants locally. LLUB's Shareholders below 5% 25%
share price has risen by 50% during the last 6 months. Our FCFE model values the counter at Source:CSE, Bloomberg, LOSEC Research

LKR 397.30, taking a cost of equity of 13%. We revise our recommendation to SELL.
Analyst (s)

Damith Wasantha

+94 117 880837


damithwa@lolcsecurities.com

16 January 15
Recommendation Guidance, Important Disclosures and Analyst Certification: Page 07
Interim Update: Chevron Lubricants Lanka PLC | 16 January 15

Graph 01: Quarterly Revenue and Profit Graph 02: Quarterly GP margin

4,000 45%
3,500 40%
35%
3,000
30%
2,500 25%
LKR Mn

2,000 20%
15%
1,500
10%
1,000 5%
500 0%

FY 11 Q1

FY11 Q2

FY11Q3

FY11 Q4

FY 12 Q1

FY12 Q2

FY12 Q3

FY12 Q4

FY13 Q1

FY13 Q2

FY13 Q3

FY13 Q4

FY14 Q1

FY14 Q2
0
FY 11

FY11

FY11

FY11

FY 12

FY12

FY12

FY12

FY13

FY13

FY13

FY13

FY14

FY14
Q2

Q3

Q4

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2
Q1

Q1

Source: Bloomberg Source: Bloomberg


Graph 03: ROA and ROE Graph 04: Capital Expenditure

1,600
80%
1,400
70%
60% 1,200
50% 1,000
40% 800
30% 600
20% 400
10% 200
0% 0
FY 11 Q1

FY11 Q2

FY11Q3

FY11 Q4

FY 12 Q1

FY12 Q2

FY12 Q3

FY12 Q4

FY13 Q1

FY13 Q2

FY13 Q3

FY13 Q4

FY14 Q1

FY14 Q2

FY 11 Q1

FY11 Q2

FY11Q3

FY11 Q4

FY 12 Q1

FY12 Q2

FY12 Q3

FY12 Q4

FY13 Q1

FY13 Q2

FY13 Q3

FY13 Q4

FY14 Q1

FY14 Q2
ROE ROA

Source: Bloomberg Source: Bloomberg

Graph 05: Brent Crude Oil Price Movement Graph 06: Exchange Rate Movement
Crude Oil prices declined 132 Exchange rate has slightly increased
140 rapidly during past few months
but remained stable overall in 2014.
and the situation will bode well
131.5 We expect the exchange rate
120 for the LLUB
fluctuations to have low impact on
100 131 LLUB.

80 130.5
60
130
40
129.5
20

0 129
01/16/14 04/16/14 07/16/14 10/16/14 01/16/14 04/16/14 07/16/14 10/16/14 01/16/15

Source: Bloomberg Source: Bloomberg

2 | LOLC Securities Limited


Interim Update: Chevron Lubricants Lanka PLC | 16 January 15

Valuation

We have taken into account a cost of equity of 13% and a free cash flow terminal growth of 5%. We expect oil prices
to remain low in next year as well. We have conservatively taken a mid-term growth of 10%. Our FCFE model values
the counter at LKR 397.30. At the current share price, LLUB is trading at forward PE of 18.31X and a forward PBV of
8.89X.

LLUB's trailing multiples are quite high compared to domestic manufacturing sector's and global peer companies'
multiples which can be justified by the high ROE of LLUB.

Table 01: Valuation Sensitivity Matrix

Cost of Equity
Share price in LKR
20% 12% 13% 14% 15%
3% 451.60 398.80 342.70 322.10 293.40
Terminal
Growth

4% 498.80 433.90 367.10 343.10 310.20


Rate

5% 561.70 479.00 397.30 368.80 330.30


6% 649.80 539.10 435.70 400.90 354.90
7% 781.90 623.30 486.20 442.20 385.60

Source:CSE, Bloomberg, LOSEC Research

Table 02: Peer Comparison

Market Cap (USD Mn) PE (x) PBV (X) Dividend ROE %


Name
Yield %
Chevron Lubricants Lanka Plc (Sri Lanka) 415 19.64 9.18 4.40 49.20
Lanka Ioc Plc (Sri Lanka) 234 7.13 1.66 2.60 25.45
Laugfs Gas Plc - Voting (Sri Lanka) 121 12.96 2.21 4.81 17.67
Alon Usa Energy Inc (United States) 742 39.78 1.14 3.75 2.86
Adams Resources & Energy Inc (United States) 230 n.a 1.40 1.60 8.30
Pantry Inc (United States) 861 57.69 2.54 n.a 3.99

Source:CSE, Bloomberg, LOSEC Research

3 | LOLC Securities Limited


Interim Update: Chevron Lubricants Lanka PLC | 16 January 15

Table 03: Return comparison


S&P SL 20
% LLUB ASI Index LIOC
Index
3 months 33.79 4.78 5.16 19.42
6 months 49.15 12.70 13.42 46.70
YTD 13.84 3.44 4.32 -3.67
1 year 63.63 23.44 24.47 47.83
Source:CSE, Bloomberg

Graph 07: Share Price Movement


2,000,000 150
Volume Price
1,500,000 SMAVG (50) SMAVG (100) 130
Volume

1,000,000 110

Rs
500,000 90

- 70
100
RSI (14)
75
50
25
0
1/17/12 7/17/12 1/17/13 7/17/13 1/17/14 7/17/14

Source:CSE, Bloomberg

Graph 08: PE Chart Graph 09: PBV Chart

25 12

10
20
8
15
6
10
4
5
2

0 0
1/17/12 7/17/12 1/17/13 7/17/13 1/17/14 7/17/14 01/17/12 07/17/12 01/17/13 07/17/13 01/17/14 07/17/14
PE ratio Highest Average Lowest PBV ratio Highest Average Lowest

Source:CSE, Bloomberg Source:CSE, Bloomberg

Graph 10: Price per Sales Graph 11: Dividend Yield


5 8
7
4 6
5
3 4
3
2 2
1
1 0
1/17/12 7/17/12 1/17/13 7/17/13 1/17/14 7/17/14
0
1/17/12 7/17/12 1/17/13 7/17/13 1/17/14 7/17/14
RCL dividend yield Highest Average Lowest
Price to Sales ratio Highest Average Lowest

Source:CSE, Bloomberg Source:CSE, Bloomberg

Graph 12: CSE PE Chart Graph 13: CSE PBV Chart


16 2.2
15
2
14
13 1.8
12 1.6
11 1.4
10
1.2
9
8 1
01/17/12 07/17/12 01/17/13 07/17/13 01/17/14 07/17/14 1/17/12 7/17/12 1/17/13 7/17/13 1/17/14 7/17/14

ASI PE ratio Highest Average Lowest ASI PBV ratio Highest Average Lowest

Source:CSE, Bloomberg Source:CSE, Bloomberg


4 | LOLC Securities Limited
Interim Update: Chevron Lubricants Lanka PLC | 16 January 15

Table 04: Forecast Financial Statements


Figures in LKR Mn FY 2012 FY 2013 FY 2014 (9M) FY 2015 (F) FY 2016 (F) FY 2017 (F)
Income Statement
Revenue 11,754 11,202 8,777 12,096 12,955 13,874
Cost of Revenue -7,942 -7,077 -5,120 -7,016 -6,477 -6,937
Gross Profit 3,812 4,125 3,657 5,080 6,477 6,937
Operating Expenses -468 -376 -468 -406 -435 -466
Operating Income 2,948 3,175 2,948 4,055 5,381 5,766
Net Non-Operating Gains (Losses) 211 213 -68 -10 74 192
Pretax Income 3,142 3,454 3,142 3,978 5,388 5,892
Income Tax Expense -854 -922 -854 -1,062 -1,438 -1,572
Income Before XO Items 2,288 2,532 2,288 2,917 3,950 4,320
Net Profit att. to shareholders 2,288 2,532 2,288 2,917 3,950 4,321

Balance Sheet
Cash & Near Cash Items 2,517 2,485 2,216 3,151 4,890 6,538
Accounts & Notes Receivable 985 990 1,305 1,094 1,171 1,254
Inventories 2,132 1,929 2,110 1,912 1,765 1,891
Total Current Assets 5,635 5,666 5,630 6,419 8,089 9,945
Total Long-Term Assets 311 1,387 2,074 1,797 1,680 1,575
Total Assets 5,946 7,052 7,705 8,216 9,769 11,520
Accounts Payable 190 360 1,011 357 330 353
Other Short-Term Liabilities 477 0 0 0 0 0
Total Current Liabilities 1,733 2,090 3,100 2,087 2,060 2,083
Total Long-Term Liabilities 87 122 204 122 122 122
Total Liabilities 1,820 2,212 1,756 2,209 2,182 2,205
Share Capital 600 600 600 600 600 600
Retained Earnings & Other Equity 3,526 4,240 5,349 5,407 6,987 8,715
Total Equity 4,126 4,840 5,949 6,007 7,587 9,315
Total Liabilities & Equity 5,946 7,052 7,705 8,216 9,769 11,520

Cash Flow Statement


Net Income 2,288 2,532 2,189 2,917 3,950 4,321
Depreciation & Amortization 44 76 32 190 177 165
Changes in Non-Cash Capital 527 73 -268 -90 42 -185
Cash From Operations 2,914 2,716 2,085 3,016 4,169 4,300

Capital Expenditures -68 -1,128 -736 -600 -60 -60


Increase in Investments 0 0 - 0 0 0
Cash From Investing Activities -63 -1,128 -734 -600 -60 -60

Dividends Paid -1,380 -1,620 -1,620 -1,799 -2,370 -2,592


Change in Short-Term Borrowings 0 0 0 0 0 0
Cash from Financing Activities -1,345 -1,620 -1,620 -1,799 -2,370 -2,592
Net Changes in Cash 1,505 -32 -269 617 1,739 1,648

Source:CSE, Bloomberg, LOSEC Research

5 | LOLC Securities Limited


Interim Update: Chevron Lubricants Lanka PLC | 16 January 15

Table 05: Forecast Ratios


FY 2012 FY 2013 FY 2014(9M) FY 2015 (F) FY 2016 (F) FY 2017 (F)
Profitability Ratios
GP Margin (%) 32% 37% 42% 42% 50% 50%
NP Margin (%) 19% 23% 26% 24% 30% 31%
ROE (%) 55% 52% 49% 49% 52% 46%
ROA (%) 38% 36% 38% 35% 40% 38%
Earnings per share (LKR) 19.06 21.10 19.06 24.30 32.92 36.00
Dividend per Share (LKR) 11.50 13.50 15.00 15.00 19.75 21.60

Credit Ratios
Debt/Equity Ratio (%) 0% 0% 0% 0% 0% 0%
Interest Coverage (X) 0.00 0.00 0.00 0.00 0.00 0.00
Total Assets/Equity (X) 1.44 1.46 1.37 1.37 1.29 1.24
Net Debt/EBIT (X) 0.16 0.00 4.00 0.00 0.00 0.00

Liquidity Ratios
Current Ratio (X) 3.25 2.71 1.82 3.08 3.93 4.77
Quick Ratio (X) 2.02 1.79 1.14 2.16 3.07 3.87
Asset Turnover Ratio (X) 1.98 1.59 1.14 1.47 1.33 1.20
Net Asset Value per share (LKR) 34.38 40.33 49.57 50.06 63.22 77.62

Growth Ratios
Revenue Growth YOY% 6% -5% 5% 7% 7% -100%
Earnings growth YOY% 14% 11% 13% 35% 9% -100%
Total Assets YOY% 37% 19% 9% 19% 18% -100%
Total Debt YOY% -100% 0% 0% 0% 0% 0%

Investment Ratios
PE Ratio (X) 11.41 12.53 19.64 18.31 13.52 12.36
Price to Book Value (X) 6.33 6.55 9.18 8.89 7.04 5.73
Dividend Yield (%) 5.29% 5.11% 4.40% 3.37% 4.44% 4.85%

Source:CSE, Bloomberg, LOSEC Research

6 | LOLC Securities Limited


Interim Update: Chevron Lubricants Lanka PLC | 16 January 15

Recommendation Guidance

BUY expected return > 10% in excess of benchmark return


SELL expected return less than benchmark return
HOLD expected return between 0% and 10% in excess of benchmark return

Investment Horizon: 3 years


Benchmark Interest Rate: Average Weighted Fixed Deposit Rate (AWFDR) published by Central Bank of Sri Lanka.

Risk Level Evaluation

High: Maximum price volatility to be up or down more than 50% monthly


Medium: Maximum price volatility to be up or down between 25% - 50% monthly.
Low: Maximum price volatility to be up or down less than 25% monthly.
Risk Level is calculated taking the historical standard deviation measures.

Financial Glossary

EPS = Earnings per Share


ROA = Return on Assets (adjusted net profit/average total assets)
ROE = Return on Equity (adjusted net profit/average total equity)
CAGR = Compound Annual Growth Rate ((End Value/Start Value) ^ (1/number of years) -1)
GP= Gross Profit
EBITDA= Earnings before interest, tax, depreciation and amortization
PBT= Profit before tax
PAT= Profit after tax
NP= Net Profit
PBV= Price to book value ratio
PE= Price to earnings ratio

Analyst certification: The Analyst(s) who is/are responsible for compiling or co-compiling this research and whose names appear as the analyst(s) of the research certify that the
views expressed in this research accurately reflect the personal view of the analyst(s) about the subject securities and issuers and/or other subject matter as appropriate and has
taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. No part of the compensation received by the analyst(s) was, is or will
be directly or indirectly related to specific inclusion of specific recommendation or views in this research. On a general basis analysts performance appraisal may be influenced by
quality of the content and efficacy of the research. The analyst(s) who is/are responsible for compiling or co-compiling this research and whose names appear as the analyst(s)
receive compensation based on overall revenues of LOLC Securities Limited and its holding company (Lanka ORIX Company PLC LOLC Group), which may include brokerage
revenue from transactions involved with the securities mentioned in this research.

General Disclaimer: LOLC Securities Limited is a company incorporated in Sri Lanka and licensed by the Securities and Exchange Commission of Sri Lanka to operate as a
stockbroker/stock dealer in Sri Lanka. LOLC Securities Limited is a trading member of Colombo Stock Exchange. This research is based on information from sources that LOLC
Securities Limited believes to be reliable. Whilst reasonable care has been taken to ensure accuracy of the information presented in the research, LOLC Securities Limited does not
give a guarantee on the accuracy of the information presented in the paper nor will take the responsibility on investment decisions taken based on the information provided by the
research and hence LOLC Securities Limited nor its employees accepts any liability whatsoever for any loss arising from investments decisions taken using the information provided
in this paper. The reader also should note this paper does not give recommendations to any particular category of investors and investor should consult investment advisors for
further clarifications regarding risks involved in investing in equity market. Investing in securities has inherent risks with no guaranteed return and price may be subjected to significant
volatilities. No part of this report should be considered as a solicitation to buy or sell any security or product or to engage in or refrain from engaging in any transaction. LOLC
Securities Limited or its employees may or may not hold positions in the securities discussed in the research and the information provided in the research should not be construed as
a buy or sell instruction for any securities mentioned in the research, Unless otherwise specifically mentioned. This research is intended for general use for clients of LOLC Securities
Limited and must not be copied in whole or in part or distributed to any third party for commercial use without permission from LOLC Securities Limited. If the reader is not the
intended recipient please inform LOLC Securities Limited immediately by return email to research@lolcsecurities.com. LOLC Securities Limiteds other staff including sales people,
traders and other professionals may provide oral or written market commentaries or trading strategies to our clients which reflect opinions which are contrary to the opinions
expressed in this research which may be influenced by different circumstances.

7 | LOLC Securities Limited


Interim Update: Chevron Lubricants Lanka PLC | 16 January 15

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