Bartleet Religare Securities Earnings Preview - 4Q FY19 | 27 February 2020

Earnings Preview - 4Q FY19

Nikita Tissera
Colombo Dockyard PLC - DOCK SL Head of Research
nikita@bartleetreligare.com I 0115-220390
Weak order book, margins under pressure
Nipuni Weerakoon
Recommendation Current price Target price Research Analyst
nipuni.w@bartleetreligare.com I 0115-220397
SELL 52.40 47.00
We expect the company to post a bottom line of LKR 1.8mn for 4Q FY19 (-99.6% Trading snapshot
YoY) mainly due to losses reported in the ship building segment. We believe, rela- GICS Industry Group Capital Goods
tively low revenue recognition from the only ongoing Iraq project and higher CoGS
under the ship building segment will trigger negative margins for the group. Fur- Market cap (LKR 'mn) 3,765
ther, the slow recovery in ship repair volumes due to the crisis in the industry, Market cap (USD 'mn) 21
along with high competition in the region act as a growth inhibitor for DOCK. With
the new regulatory requirements by IMO for Sulphur Cap and Ballast Water Man- Outstanding equity shares (mn) 72
agement coming into effect from CY2020 and renewed focus on Rapid Response Public Holding (%) - Sep'19 48.9%
Afloat Repair Services, we expect the ship repair segment to remain as the cash cow
52-week High/Low (LKR) 65.70/48.00
over FY19E-20E. However, the company is faced with limited opportunity to secure
new ship building contracts with major customers seen shifting to new emerging YTD ASPI return (%) -7.9%
low cost competitors in the region. This coupled with major projects at negotiation YTD Stock return (%) -15.5%
stage (which we have not factored in our valuation) suggests a weak order book. Beta 0.84
Further, if the European project to build six bulk carriers is factored in, the upside Bloomberg ticker DOCK SL
from the CMP remains below 5%, reiterating SELL. This is mainly attributable to the
thin margins associated with ship building due to high price competition. Hence
we recommend a SELL with a 11% downside on the CMP. Valuation
Ship Repair and Heavy Engineering key - During 3Q FY19, Ship Repair managed to Valuation method DCF
increase its revenue contribution to 55% (previously, 43%). We envisage the segment to CMP (LKR) 52.40
increase its contribution amidst depressed ship building revenue. We expect Ship Repair
Intrinsic value (LKR) 46.57
segment to act as the main revenue driver over FY19E-21E with increased focus on afloat
repairs with the launch of the Rapid Response Afloat Repair Service in May FY19 coupled DPS (LKR) 1.50
with the expansion of afloat repair services at the new Hambantota facility. Further, with
TP based on total return (LKR) 48.07
the company gaining expertise to secure orders for Ballast Water Treatment System in-
stallation which is due by January 2020 will aid segment growth. Hence, we anticipate a Upside (%) -11.1%
revenue growth of 1.1% YoY and 19% QoQ for 4Q FY19. Heavy Engineering, the only Total return (%) -8.3%
segment to report a revenue growth (+35% YoY) in 3Q FY19 (16% contribution vs. previ-
ous 8%) is expected to continue to its contribution, aided by the new project in Africa Rating SELL
which commenced operations during 3Q FY19.

Slow recovery in Ship Building to dampen margin growth - Ship building, however,
Key indicators
faced a significant downfall during 3Q FY19 with revenue halved from a year earlier to FY 18 FY 19E FY 20E FY 21E
LKR 683mn. The segmental contribution to the top line dropped to 27% from 43% in 3Q
EBIT margin (%) 1.0% -14.5% -6.9% -3.92%
FY18 with the delivery of the Cabel laying vessel in July 2019. Hence, revenue recognition
from the two pilot vessels for SL Port Authority (delivered in December) and two Buoy ROE (%) 3.3% -16.9% -6.0% -1.4%
tender ships for the client from Iraq will account for majority of the revenue recognized in P/E (x) 12.0x nm nm nm
4Q FY19. However, high price competition among small scale ship builders resulted in P/BV (x) 0.4x 0.4x 0.5x 0.5x
DOCK securing new contracts worth less than LKR 1bn in 2019 and we have not factored
in any new projects which are at negotiation stage in our valuation. This includes negotia- EPS (LKR) 4.61 (22.10) (6.93) (1.53)
tions with a European client and on few state sector projects, with the latter on hold
amidst recent changes in the political front.
ASPI vs DOCK
Outlook - With the two Buoy tender ships scheduled to be delivered in 3Q 2020E, we ASPI (LHS) DOCK (RHS)
6,750 65
envisage Ship repair will act as the main cash generating segment during our forecast
period. However, assuming the best case scenario, if DOCK secures the European project 6,500
60
to build six bulk carriers, it will form most part of the revenue from 2020E-2022E. Price
6,250
negotiations related to the project are still ongoing which the company expects to final-
55
ise towards end of February. However, given the thin margins and high price competition 6,000
affecting feasibility of the project, the impact to the CMP is calculated at less than 5%.
5,750 50
Hence, this will not trigger a change in our recommendation.
5,500
45
Valuation: - Intense price competition, eroding margins under the ship building segment 5,250
and oil prices still struggling to establish a sustained upward momentum with the corona
5,000 40
virus outbreak would impact the group’s overall performance in our view. Taking above
Feb-19 Apr-19 Jun-19 Aug-19 Oct-19 Dec-19
factors into consideration, we have arrived at a DCF based valuation TP of LKR 46.57 with
a downside of 11.1% on CMP.

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 2
Segmental Performance

Operating segment revenue

Revenue (LKR 'mn) 3Q 19 3Q 18 YoY growth

Ship Repair 1,421 1,707 -16.7%
Ship Building 683 1,733 -60.6%
Heavy Engineering 415 307 34.9%
Material Sales 49 259 -81.3%

Gross profit results

3Q 19 3Q 18
(LKR 'mn) Gross Profit GP Margin Gross Profit GP Margin
Ship Repair 132 9.3% 0 0.0%
Ship Building (87) -12.7% 167 9.6%
Heavy Engineering 71 17.1% 102 33.0%
Material Sales 16 33.7% 22 8.5%

Geographical segment revenue breakdown (2018)

10%
24%
India
Singapore
Sri Lanka
44% 41%
Japan
Other
12%

Source: Company Annual Report

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Valuation

Valuation estimates

DCF based valuation results in a TP of LKR 46.57, with a downside of 11.1% on CMP. Key assumptions used in
the valuation are as follows;

• Risk free rate (Five year treasury bond rate) - 9.61%

• Equity risk premium - 7.0%
• Beta - 0.84 (based on DOCK share price Vs. ASPI movement)
• WACC - 12.7%
• Terminal growth rate - 2.0%

Valuation sensitivity

Risk Free Rate

46.57 9.00% 9.50% 9.61% 10.00% 10.50% 11.00%

1% 46.20 44.81 44.52 43.51 42.29 41.15

Terminal
2% 48.49 46.90 46.57 45.42 44.05 42.77
Growth Rate
3% 51.28 49.43 49.04 47.73 46.15 44.69
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Income statement - Annual
All numbers in LKR '000 2016 2017 2018 2019E 2020E 2021E

Net turnover 10,735,674 12,929,096 14,946,583 11,930,449 10,729,546 10,174,008

YoY growth % -30.4% 20.4% 15.6% -20.2% -10.1% -5.2%

Cost of Sales (9,165,303) (11,162,224) (13,619,343) (11,547,645) (9,464,722) (8,718,046)

YoY growth % -36.0% 21.8% 22.0% -15.2% -18.0% -7.9%

Gross Profit 1,570,371 1,766,872 1,344,333 382,803 1,264,824 1,455,962

YoY growth % 40.2% 12.5% -23.9% -71.5% 230.4% 15.1%
Gross profit margin % 14.6% 13.7% 9.0% 3.2% 11.8% 14.3%

Other operating Income 133,583 190,033 1,024,141 286,331 268,239 305,220

Total SG & A expenses (2,003,424) (2,111,008) (2,216,085) (2,397,155) (2,274,972) (2,159,649)

YoY growth % 5.9% 5.4% 5.0% 8.2% -5.1% -5.1%

EBIT including non-recurring items (299,470) (154,103) 152,389 (1,728,021) (741,909) (398,467)
Non-recurring items (1,528) 5,244 1,610 - - -
EBIT excluding non-recurring items (297,942) (159,347) 150,779 (1,728,021) (741,909) (398,467)
YoY growth % -51.2% -46.5% -194.6% -1246.1% -57.1% -46.3%

EBITDA excluding non-recurring items 161,850 274,768 583,538 (1,256,571) (239,143) 94,718
YoY growth % -203.1% 69.8% 112.4% -315.3% -81.0% 139.6%

EBITDA margin % 1.5% 2.1% 3.9% -10.5% -2.2% 0.9%

EBIT margin % -2.8% -1.2% 1.0% -14.5% -6.9% -3.9%

Finance Income / (Cost) 51,130 289,767 308,500 288,500 294,549 295,180

Recurring profit before tax (246,812) 130,420 459,279 (1,439,521) (447,360) (103,287)
YoY growth % -54.0% -152.8% 252.2% -413.4% -68.9% -76.9%
Income tax expense (40,723) (109,570) (123,414) (143,952) (44,736) (5,164)
Profit after taxation (Recurring) (287,535) 20,850 335,865 (1,583,473) (492,096) (108,452)
YoY growth % -51.9% -107.3% 1510.9% -571.5% -68.9% -78.0%

NP Margin % -2.7% 0.2% 2.2% -13.3% -4.6% -1.1%

Minority Interest 2,283 740 5,875 4,750 5,905 1,301

Owners of the Company (Recurring) (287,535) 20,110 329,990 (1,588,224) (498,001) (109,753)

Earnings per share - BRS adjusted (1) (4.02) 0.35 4.61 (22.10) (6.93) (1.53)
EPS Reported (2) (4.05) 0.35 4.61 - - -

Source: Company Financial Reports and BRS Equity Research

Note 1: EPS adjusted for share split, consolidations and non recurring information
Note 2: Based on earnings as reported (unadjusted for non-recurring) share data adjusted for splits
 5
Balance sheet - December ended

All numbers in LKR '000 2016 2017 2018 2019E 2020E 2021E

Non Current Assets

Property Plant & Equipment 4,126,068 3,912,488 4,246,805 4,491,182 4,524,893 4,438,668
Intangible Assets 38,213 25,039 11,233 11,233 11,233 11,233
Other Investments 175,367 16,191 17,981 17,981 17,981 17,981
Other financial Assets including Derivatives 417,203 465,689 549,117 549,117 549,117 549,117
Deferred Tax Asset 134,018 107,006 125,088 125,088 125,088 125,088
4,890,869 4,526,413 4,950,224 5,194,601 5,228,312 5,142,087

Current Assets
Inventories 1,310,425 745,516 821,934 596,522 536,477 508,700
Trade and Other Receivables 11,228,832 7,179,216 5,823,456 5,010,788 4,506,409 4,273,083
Other financial Assets including Derivatives 150,648 164,764 243,155 243,155 243,155 243,155
Cash and Cash Equivalents 2,665,157 5,060,826 4,914,690 4,005,122 3,791,220 3,930,900
15,503,317 13,676,007 12,039,360 10,091,713 9,313,386 9,191,964

Total Assets 20,394,186 18,202,420 16,989,584 15,286,314 14,541,699 14,334,051

Equity and Reserves

Stated Capital 714,396 714,396 714,396 714,396 714,396 714,396
Foreign Exchange Equalisation Reserves 4,857 10,790 21,993 21,993 21,993 21,993
Available for sale reserves 27,305 16,082 17,872 17,872 17,872 17,872
Retained Earnings 9,162,035 9,149,286 9,391,113 7,695,101 7,161,171 7,015,488
Shareholders funds 9,908,593 9,890,554 10,220,207 8,524,195 7,990,265 7,844,582
Minority Interest 53,432 59,873 76,512 81,262 87,168 88,469
Total Equity 9,962,025 9,950,427 10,296,719 8,605,457 8,077,432 7,933,051

Non Current Liabilities

Deferred Tax - 1,053 12,561 12,561 12,561 12,561
Retirement Benefit Obligation 854,257 915,103 859,965 868,054 875,096 881,153
854,257 916,156 872,526 880,615 887,657 893,714

Current Liabilities
Trade and Other payables 2,054,263 3,778,412 3,008,839 2,863,308 2,575,091 2,441,762
Interest Bearing Borrowings 7,409,743 3,494,446 2,712,300 2,812,297 2,912,294 3,012,291
Other financial Liabilities including Derivatives 18,617 - - - - -
Tax Provision 56,286 34,623 83,968 109,402 73,986 37,992
Dividends payable 26,191 26,152 15,152 15,152 15,152 15,152
Bank Overdrafts 12,804 2,204 80 83 86 89
9,577,904 7,335,837 5,820,339 5,800,241 5,576,609 5,507,286

Total Liabilities 10,432,161 8,251,993 6,692,865 6,680,856 6,464,266 6,401,000

Total Equity and Liabilities 20,394,186 18,202,420 16,989,584 15,286,314 14,541,699 14,334,051

Source: Company Financial Reports and BRS Equity Research

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Cash flow statement
All numbers in LKR '000 2016 2017 2018 2019E 2020E 2021E

Cash Flow from Operating Activities

EBIT (299,470) (154,103) 152,389 (1,728,021) (741,909) (398,467)

Depreciation and Amortization 459,792 434,115 432,759 471,450 502,766 493,185

Provision for Gratuities 138,763 148,128 150,896 149,400 149,500 149,500
(Profit)/loss on disposal of PPE 1,528 (5,244) (1,610) - - -
Provision for bad and doubtful debt 12,208 (7,825) 75,765 - - -
Provision for Obsolete Inventories 7,429 29,101 (7,566) - - -
Provision for/(Reversal) of Warranty Provision - 1,076 37,368 - - -
(Profit) on sale of investments valued at available for sale - (3,614) - - - -
Dividend Income (32) - (10) - - -
Forex (Gain) / Loss 69,575 117,037 - - - -

Operating cash flow before changes in working capital 382,454 524,299 806,380 (1,107,171) (89,643) 244,218
Changes in Working Capital (2,304,090) 6,377,080 470,032 892,548 276,208 127,774
Cash generated from Operations (1,921,636) 6,901,379 1,276,412 (214,623) 186,564 371,992

Interest paid (100,244) (91,788) (39,972) (46,996) (43,686) (45,186)

Gratuities paid (154,360) (146,202) (168,727) (141,311) (142,458) (143,443)
Tax paid (108,802) (114,185) (84,404) (118,518) (80,152) (41,158)
Net Cash from Operating Activities (2,285,042) 6,549,204 983,309 (521,449) (79,731) 142,205

Investing Activities
Purchase of property, plant & equipment (191,052) (208,974) (770,462) (715,827) (536,477) (406,960)
Acquisition of Intangible Assets (39,446) (709) - - - -
Proceeds from disposal of PPE 8,764 7,579 2,531 - - -
Dividends Received - - 10 - - -
Interest Received 154,249 284,369 221,978 335,496 338,235 340,366
Net cash used in investing activities (229,014) (178,092) (315,527) (380,331) (198,242) (66,595)

Financing Activities
Loans obtained / (settled) 11,583,387 6,489,451 6,752,188 100,000 100,000 100,000
Dividends paid (13,397) (39) (118,788) (107,788) (35,929) (35,929)
Net Cash in financing activities 2,816,348 (3,915,336) (900,934) (7,788) 64,071 64,071

Increase/(Decrease) in Cash and Cash Equivalents 302,292 2,455,776 (233,152) (909,568) (213,902) 139,680

Source: Company Financial Reports and BRS Equity Research

 7
Top 20 Shareholders as of 30.09.2019

Name of shareholder No. of shares %

1 Onomichi Dockyard Company Ltd 36,648,051 51.00%

2 Employees Provident Fund 11,744,009 16.34%

3 Sri Lanka Insurance Corporation Ltd-General Fund 3,592,998 5.00%

4 Sri Lanka Insurance Corporation Ltd-Life Fund 3,536,548 4.92%

5 Sri Lanka Ports Authority 2,186,191 3.04%

6 Employees Trust Fund Board 1,736,660 2.42%

7 National Savings Bank 1,234,706 1.72%

8 Bank of Ceylon No.1 Account 897,625 1.25%

9 Bank of Ceylon No.2 A/C 335,900 0.47%

10 Star Packaging (Private) Ltd 235,000 0.33%

11 Lanka Milk Foods 219,948 0.31%

12 Harnam Holdings SDN BHD 200,026 0.28%

13 Mr S M B Obeysekera and Mrs C N Obeysekara 200,000 0.28%

14 Associated Electrical Corporation Ltd 175,210 0.24%

15 Mercantile Investments and Finance PLC 169,050 0.24%

16 Mr B.D.J.C Suchendra 166,000 0.23%

17 E.W Balasuriya & Co. (Pvt) Ltd 165,123 0.23%

18 DFCC Bank A/C 1 160,000 0.22%

19 Asha Financial Services Ltd/Ms H.C Kalansooriya 151,500 0.21%

20 Askold (Private) Limited 150,000 0.21%

Source: Company Financial Reports
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Stock Ratings
Recommendation

Expected absolute returns (%) over 12 months

Buy
More than 10%
Hold
Between 10% and 0
Sell
Less than 0%

Expected absolute returns are based on the share price at market close unless otherwise stated. Stock recommendations are based on absolute upside
(downside) and have a 12-month horizon. Our target price represents the fair value of the stock based upon the analyst’s discretion. We note that future
price fluctuations could lead to a temporary mismatch between upside/downside for a stock and our recommendation.

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 9

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