Background

Ceylon Tea Brokers PLC (Formerly known as Ceylon Tea Brokers Limited) was founded in
1963, when Messrs Pieris & Abeywardhana Ltd. a pioneering brokerage firm of 42 years,
decided to go into voluntary liquidation. At this stage some of the executives who had gained
experience in the field of brokering, encouraged by some of the clients they had been serving for
years, formed partnership to commence business under the name and style of De Silva,
Abeywardena & Peiris. The pioneering partners were M/s C.J.C. De Silva, R.E.P. Abeywardena
and J. Peiris. Within a short period of time, Mr. Peiris opted to be out of the partnership and M/s
C.J.C. De Silva and R.E.P. Abeywardena continued the partnership.

The partnership of M/s Ceylon Tea Brokers was converted to a limited liability company with
effect from 01-October-1999. On 01-February-2005 the Company was taken over by the Capital
Alliance Group.

Capital Alliance Holdings Limited (CAH) is a full service Investment House based in Colombo.
CAH was founded in October 2000 as an institutional fixed income dealer. CAH now offers a
range of investment products covering equity, fixed income and commodities, making it a fully
integrated Investment House. Clients of CAH are serviced by a dedicated investment advisory
team.

CTB was listed on the ‘Diri Savi’ Second Board of the Colombo Stock Exchange in February
2010, with Rs.14Mn shares being issued at Rs. 2/- per share. The Company was able to raise
Rs.28 Mn from this IPO.

Management
The Board of Directors of CTB comprises nine professional personnel with vast amount of
experience in the tea industry as well as other industries including money & capital markets,
travel & tourism and banking & finance.

Market
Earnings from Exports increased by 8.5% in the third quarter of 2016, reversing the continuous
declining trend observed since March 2015.

However, during the third quarter in 2016, overall tea production and tea exports declined at a
considerable volume mainly due to the drought and unexpected climatic changes in the country.
In addition to that the reduction of fertilizer applications and rising cost of production were also
affected the regional plantation companies signing tri-partite agreement to increase the minimum
wage to Rs. 730/- per day.
Total tea production for the quarter dropped by 18.5% while exports reduced marginally at
0.79% when compared to last year. However Colombo auction prices registered at comparatively
higher prices than the previous quarters in 2016.

Tea Exports
It can be noted that the FOB price for export teas has increased marginally in July 2016,
compared to July 2015. FOB prices in August and September 2016 have increased remarkably in
comparison to 2015. Total exports for quarter 3 of 2016 have also shown a growth.

Top Ten Exporters of Ceylon Tea

Sri Lanka’s biggest importer of tea is Iraq. While Iraq, Iran, Libya, Syria and China have
increased their imports of Sri Lankan Tea, the usual large importers of Sri Lankan tea consisting
of Russia, Turkey and UAE have decreased their imports of Sri Lankan Tea in comparison to
2015.

Global Position
The recovery in crude oil prices will increase the demand for tea with the improvement in
weather conditions which will increase the production of tea. Further, auction prices increased
during the third quarter, after the global slump that was faced as part of the collapse in
commodity prices globally.

Global Tea trading company Van Rees has stated that the outlook for Sri Lanka tea demand is
positive with demand expected from major oil producing countries.

Company
CTB has 7 major competitors namely, Asia Siyaka Commodities, John Keells, Mercantile
Produce Brokers, Lanka Commodity Brokers. Bartleet Product Marketing, Eastern Brokers and
Forbes and Walker Tea Brokers. Forbes and Walkers dominates the market with approximately
22% of market share and CTB is ranked 6th with approximately 9.9% of market share out of the
eight brokers in the market.

CTB currently has approximately 80 buyers including Akbar Brothers Ltd., George Steuart Teas
(Pvt) Ltd., Jafferjee Brothers, Imperial Teas (Pvt) Ltd., Anverally & Sons (Pvt) Ltd. and Stassen
Exports (Pvt) Ltd. who are leading tea exporters in the market.
Comprehensive Statement of Income

FYE 31-March 2012 2013 2014 2015 2016 2017

APR-
SEP
  AUD AUD AUD AUD AUD (MGT)
TURNOVER            
124,43 161,31
Brokerage 107,967 5 3 160,735 125,189
Storage 54,309 51,577 63,407 72,713 70278
97,199
Lot Fee 3,343 3,679 4,444 4,948 4648
Bulk Tea Sales / Sundry
Income 20,193 24,132 30,035 39,872 31281
203,82 259,19
  185,811 3 9 278,268 231,396 97,199
Cost of Sales 39,081 43,879 50,078 68,728 60,453 16,304
159,94 209,12
GROSS PROFIT 146,730 4 2 209,540 170,943 80,895
101,40 130,86
Admin & Estab 90,589 2 7 152,840 144,627 42,397
Selling & Dist'n 32,511 41,962 74,331 53,139 33,612 6,223
OPERATING PROFIT 23,630 16,580 3,923 3,561 (7,296) 32,275
Call M. int/ (OD int acc.) - - - -
Depreciation 4,664 5,779 6,146 8,551 5,887
Other Non- Cash - - -
PFT AFT NC CHGS 18,966 10,802 (2,223) (4,990) (13,183) 32,275
Other Income - 2,800 - -
Other Expenses - - - -
PFT BEF FIN CHGS 18,966 13,602 (2,223) (4,990) (13,183) 32,275
164,49 207,57
Finance Income 141,858 2 9 159,220 106,026
LT Debt Interest 8,645 5,246 471 1,008 694
113,72 125,53
ST Debt Interest 86,306 2 4 73,871 51417
Other Fin Chgs 1,855 2,692 2,117 6,488 5,034
Bad Debt Provision - - - 0
121,66 128,12
Total Finance Expense 96,806 0 2 81,367 57,145 19747
Net Finance Income 45,052 42,832 79,457 77,853 48,881 -19,747
PFT BEF TAX 64,017 56,434 77,234 72,863 35,698 12,528
Income Tax 7,493 16,657 21,034 18,125 9,754 3262
Extraordinary Items - - - 0
PROFIT AFTER TAX 56,524 39,777 56,200 54,738 25,944 9,266
Dividend 22,804 28,500 19,380 28,500 28500
Other Comprehensive Income (578) (75) (373) -314 85
Adjustment from SLAS to - - - 0 0
LKAs/SLFRSs*
Profit B/F (22,554) 10,588 21,791 58,238 84,162
Profit C/F 10,588 21,791 58,238 84,162 81,691

As at 31-March 2012 2013 2014 2015 2016 2017

APR-
SEP
  AUD AUD AUD AUD AUD (MGT)
FIXED ASSETS (W.D.V.)          
Land & Buildings - - - 0
Office Equipment 17,215 20,131 21,024 22,261 14308
Vehicles 8,120 7,466 14,118 14,446 18324
Furniture & Fittings 7,869 10,235 10,561 10,999 23,908
Other Fixed Assets 959 1,028 1,225 1,332 1,333
  34,163 38,860 46,928 49,038 57,873
Less: Accumulated
DEPRECIATION 16,615 21,402 26,904 33,188 27,680
  17,548 17,458 20,025 15,850 30,193 27,186
 
OTHER NON CURRENT
ASSETS
Intangible Assets 1,233 1,627 1,652 5,664 5,216 4,481
Capital WIP - - - 0
Loans to Tea Suppliers 98,509 123,649 97,633 35,609 43,674 215,314
Deferred Taxation 1,310 - - 912 775 775
  118,600 142,733 119,309 58,035 79,858 247,756
 
CURRENT ASSETS
Q. Assets Cash and Bank 47,489 33,204 169,636 51,870 90539 94,416
Loans to Tea
Suppliers 29,685 46,800 39,334 123,207 55253 133,009
Advances to Tea
Suppliers 471,129 540,477 882,174 605,793 387630
Trade Receivables 168,739 243,215 160,772 268,158 223375
Other
7,100 8,042 23,459
Debtors/Receivables 25,836 19160 530,789
Others Inventory - - -

Deposits/Prepayments 14,420 24,520 24,617 25,199 16982

Short term
investments (FDs, Repos) - - -
Intercompany -
Capital Alliance Holdings - - -
 Commissioner
General of Inland Revenue - - -
1,299,99 1,100,06
  738,562 896,258 2 3 792,939 758,214
CURRENT LIABILITIES
Bank Overdraft - Seylan Bank
Bank Overdraft - DVB
Bank Overdraft - Sampath 295,836 548,500 502,562 202,571 389,877 396,669
Bank
Bank Overdraft - Commercial
Bank
Term Loan - NDB - - 10,000 240,000
231,983
STL - Sampath Bank 75,000 100,000
Accrued Expenses 4,774 2,232 6,746 8,184 6,291
Commercial Papers 150,000 125,000 484,066 100,000
Provision for Taxation / Tax
Payables 1,916 7,560 13,717 6,432 1,176 4313
Trade Payables 86,372 109,084 188,213 277,193 144,947
Other Payables / Provision for 154,134
Expenses 11,549 11,501 10,583 19,916 6,547
1,217,00
  651,835 875,591 6 930,415 649,957 787,099
 
Net Current Assets 86,726 20,667 82,986 169,648 142,982 (28,885)
 
  205,326 163,400 202,296 227,683 222,840 218,871
 
SOURCE OF FINANCE
Share/Stated Capital 128,000 128,000 128,000 128,000 128000 128,000
Profit and Loss Account 10,588 21,791 58,238 84,162 81689 79,069
Share Based Payment - - 70 208 -994 -994
Total Net Worth 138,588 149,791 186,308 212,370 208,695 206,075
 
Term Loans 10,000 5,000 - 0
366
Commercial Papers - - - 0
Debentures 50,000 - - 0
Retirement Benefit Obligation 6,738 8,261 10,086 11,608 11983 12430
Deferred Taxation - 349 962 0
Loan Payable to Capital
Alliance Finance PLC - - 4,940 3,707 1416
Deferred Expenditure - - - 0
  66,738 13,610 15,988 15,315 13,399 12,796
 
  205,326 163,400 202,296 227,685 222,094 218,871
             
FYE 31-March 2012 2013 2014 2015 2016

  AUD AUD AUD AUD AUD

Cash Flow From Operating
Actvities

Profit Before Taxation 64,017 56,434 77,234 72,863 35,697

Adjustments for;

Depreciation/Amortisation 4,664 5,779 6,146 8,552 8,636

(164,49
Interest Income (141,858) 2) (207,579) -159,220 -3,406

Interest Expense 96,806 121,660 128,122 81,367 57,145

Specific Provision for Impairement 1,702 10,923 37,594 20,162 15,563

Provision for Bad and Doubtful
Debtors - - -
Provision for Employee
Benefit/Retiring Gratuity 1,717 2,409 2,468 2,758 2,808

Share Based Payment - - 70 139 -1,202

Profit/(Loss) on Disposal of Property,
Plant & Equipment
Operating Profit Before Working
Capital Changes 27,049 31,643 44,055 26,621 115,241
 
(Increase)/Decrease in Loans to Tea
Suppliers (65,049) (53,177) (4,112) -42,011 44,326
(Increase)/Decrease in Trade and (154,86
Other Receivables (38,930) 6) (274,768) 166,036 277,839
Increase/(Decrease) in Trade and
Other Payables 8,900 20,124 86,713 99,750 -147,507
Increase/(Decrease) in related party
payables 3
(156,27
Cash Used in Operations (68,030) 6) (148,113) 250,396 289,899
 
Retirement Benefit Obligations Paid (116) (961) (1,016) -1653 -2,191
Income Tax Paid (16,070) (9,354) (14,264) -27181 -15,031
Net Cash Flow Used in Operating (166,59
Activities (84,215) 2) (163,392) 221,562 272,677
 
Cash Flow From Investing Activities
Interest Paid - - - 0
Interest Received 141,858 164,492 207,579 159220 3,406
Acquisition of Property, Plant and
Equipment (9,846) (6,607) (8,069) -2112 -20,231
Acquisition of Intangible Assets (1,437) (866) (669) -6277 -2,300
Purchase of Property, Plant and
Equipment - - - 0

Proceeds from Disposal of Short/Long

Term Investments
Proceeds on Sale of Property, Plant
and Equipment - 2,460 - 0

Net Cash Flow Generated from

Investing Activities
Cash Flow from Financing Activities
Shares Issued - - - -
Interest Paid (69,115) (96,336) (117,113) -81,367 -57,145
Loan Repayments Made During the
Year (5,000) (5,000) (15,341) -100,000 -566,548
Proceeds from Commercial Papers
Issued 150,000 125,000 479,585 100,000 101,021
Proceeds from Debeture Issued
Repayment of Commercial Papers (150,00
Redeemed - 0) (128,989) -484,066 -201,021
Loans Obtained from Parent Company 67,310 180,000 30,000 -
Loan Obtained from Related Party
Loan Obtained 26,400 403,766 350,000
(235,00
Settlements Made to Parent Company (192,516) 0) (108,240) -
Redemption of Debentures Issued - (50,000) 0 -
Dividend Paid (22,804) (28,500) (19,380) -28,500 -28,500
Net Cash Flow Used in Financing (259,83 (190,167
Activates (72,125) 6) 146,921 ) -402,193
 
Net Decrease in Cash and Cash (266,94
Equivalents (25,766) 9) 182,370 182,225 -148,637
Cash and Cash Equivalents at the (248,34 (332,925
Beginning of the Year (222,581) 7) (515,295) ) -150,700
Cash and Cash Equivalents at the (515,29 (150,700
End of the Year (248,347) 6) (332,925) ) -299,337
 
 
Favorable Balances
Fixed Deposit - - 4,608 4887 4,887
Cash in Hand 61 65 95 70 70
Cash at Bank 47,428 33,139 164,933 46914 85,583
  47,489 33,204 169,636 51,871 90,540
 
Unfavorable Balances
(548,50
Bank Overdrafts (295,836) 0) (502,562) -202571 -389,877
 
Cash and Cash Equivalents for (515,29 (150,700 (299,337
Cash Flow Purpose (248,347) 6) (332,925) ) )
 

Profitability & Performance

The Company recorded an increase in the turnover growth rate from 9.7% (FY 2011/2012 – FY
2012/2013) to 27.2% (FY 2012/2013 to FY 2013/2014). Sales have continuously grown up to
FY 2014/15, with the increase in volumes and the favorable prices which prevailed during this
period. However, sales have dropped by 16.8% during FY 2016 due to a decline in quantity of
tea handled and drop in auction prices .Further, decline in oil prices and geopolitical uncertainty
in many of Sri Lanka’s key export destinations contributed to the reduction in auction prices. A
breakdown of the Company’s turnover is as follows;

The Company’s gross profit margin has averaged 79% over the period April 2011 – April 2016.
Expenses such as rent & rates, security for stores, electricity for stores etc. have been considered
under cost of sales, and rent & rates constitutes the major portion of cost of sales.

The operating profit margin of the Company reflects a downward trend from FY 2012/2013
(8.1%) – FY 2013/2014 (1.5%) and FY 2014/2015 (1.3%) with a negative operating profit of
-3.2% in FY 2015/16. This trend during the period FY 2013/14 and FY 2014/15 is due to the
increase in administration and establishment expenses and selling and distribution expenses due
to an increase in office rent and staff salaries.. However in FY 2015/16 administrative expenses
have declined along with selling and distribution expenses. This is mainly due to a drop in
salaries , wages and overtime from Rs. 82.5Mn to Rs.75.5Mn. A decline in the sales can also be
attributed to the decrease in selling and distributions costs due to a drop in warehouse related
expenses as a result of drop in quantities handled.

It should be noted that finance income (interest earned from advancing to tea factories/sellers)
constitutes a major portion of the Company’s turnover. However, from FY 2011/2012 onward
the Company has resorted to representing the finance income/interest earned as an adjustment to
the finance expense and representing the net finance income/expense.

The rate of growth of finance income has improved from FY 2011/2012 - FY 2012/2013
(16.0%) to FY 2012/2013 – FY 2013/2014 (26.2%). However a decline in the finance income
can be noted in FY 2014/2015 by 23.3%. This can be attributed to a decline in interest earned on
advances to tea suppliers. Advances to tea suppliers declined by 45.6% in FY 2014/2015 from
Rs. 882.2Mn to Rs. 605.8Mn due to the drop prices obtained resulting from the poor market
conditions. In 2016, Finance Income declined further by 33% from Rs. 159Mn to Rs.106Mn.
Advances to suppliers also declined from Rs.605Mn to Rs.387Mn. This is due to the poor market
conditions that continued through early 2016.

Finance expense incurred by CTB also shows a decline from Rs. 81Mn to Rs.57Mn caused by a
decline in short term debt interest. The said expense had increased by 25.7% from FY
2010/2011 to FY 2011/2012 and from FY 2011/2012 to FY 2012/2013, due to an increase in
short term debt interest, caused by an increased quantum of overdraft facilities obtained to
finance its working capital requirement, however with the current market conditions, the
company’s requirement has declined and the current short term debt amounts to Rs.770Mn. ( As
at 23-01-2017).

Net finance income has shown a decline from FY 2013/14 ( Rs. 79Mn) to FY 2014/15
(Rs.78Mn) and a further decline in FY 2015/16 to Rs.48Mn due to the decline in finance income.
Due to the factors mentioned above, profit after tax/net profit margin reflects a decline from Rs.
56.2Mn/21.7% to Rs. 54.7/19.7% pertaining to FY 2013/2014 & FY 2014/2015 and further
decline to Rs. 25.9/11.2% in FY 2015/16. The performance of the Company for the first six
months of FY 2016/2017 indicates a decline in income with a revenue of Rs. 97.2Mn. This is
due to the overall decline in tea production prevalent in the country due to adverse weather
conditions leading to a decrease in quantity handled by the Company.

Liquidity

Advances to tea suppliers (tea factory owners) comprise the majority of current assets (i.e.: as
at 31-March-2015, 55% of current assets were represented by advances to tea suppliers and in
2016 48.9% of current assets were represented by advances to tea suppliers). In addition, trade
receivables/buyers of CTB also constitute a significant portion of current assets – 24.4% as at 31-
March-2015 and 28.17% as at 31-March-2016, and loans to tea suppliers amounted to 11.2% as
at 31-March-2015 and 7% as at 31-March-2016. However, a decrease in current assets of 27%
can be noted as at 31-Mar-2016. This is due to a decrease in advances to tea suppliers, and
decrease in debtors in receivables which is in line with the decrease in turnover in 2016. This is
due to a decline in stock values due to a decline in tea prices in the market. However, as at 30th
September 2016 an improvement can be noted with loans and advances to suppliers and
receivables and debtors have reached Rs.663.7Mn due to the improvement in the tea market
during the latter stages of 2016.

The main contributory item to current liabilities is trade payables of Rs. 144Mn (22.3%) of
current liabilities as at 31-March-2016. Further, a considerable portion of current liabilities
comprise overdrafts amounting to 61.3% of current liabilities as at 31-March-2016. It should be
noted that with CTB’s view of becoming less dependent on its parent company – CAH, it has
reduced its borrowings from CAH over the past few years and the outstanding to CAH as at 31-
March-2016 amounted to only Rs. 1.1Mn compared to Rs. 199Mn which was due as at 31-
March-2011. This item is also reflected under current liabilities, and CTB is required to repay
these borrowings based on the cash flow position of the Company and not as a stringent monthly
commitment. It should be noted that the balance of Rs.1.1Mn due to CAH has remained the same
from 2014-2016.

Capital Structure

CTB’s net worth as at 31-March-2016 comprises of stated capital of Rs. 128.0Mn and revenue
reserves of Rs. 81.6Mn and share based payment of Rs-0.99Mn. While revenue reserves show a
slight drop from Rs.84Mn in 2015 to Rs.81Mn in 2016, the overall growth in revenue reserves
from 2012 - 2016 is noted.

No long term debts are reflected in the balance sheet.

LT Debt to equity ratio

LT Debt to equity ratio, shows the financial leverage that the company using. Ceylon Tea
Brokers are not financing their capital structure though the long term debt. It is a good indicator.

Total Liabilities/ Net worth.

Above measures the ability to settle the total liabilities though out the assets of the company and
with reference to the Total Liabilities/ Net worth ratio of the Ceylon Tea Brokers, they have
reduce their Total Liabilities/ Net worth ratio as 6.6,4.5 and to 3.2. Current liabilities and long
term liabilities are decreased and total equity has increased though out the 2014,15 and 2016.

Total Debt : Equity ratio

Total Debt : Equity ratio, calculate, total debt as a percentage of the owner’s equity.Ceylon Tea
Brokers able to reduce their Total Debt : Equity ratio though the last three years from 5.4 in
2014, 2.9 in 2015 and 2.4 in 2016.

Ceylon Tea Brokers are not financing their capital structure though the long term debt ,
therefore, total debt equal to the current liabilities. When analyzing the debt structure of the
company, in 2014, they are having huge bank overdraft, but in 2015 bank overdraft has
decreased and company has got a new short term loan from the sampath bank, again in 2016
bank overdraft has increased due to that reason total debt to the equity ratio , increased.

Interest Coverage Ratio.

 Though the Interest coverage ratio, company measures the debt servicing capacity of the
company. Shows that how many times the interest charges are covered though the EBIT out of
which they paid.in 2014 interest coverage ratio was 1.7 and in 2015 it has increased by 0.3,again
in 2016 it has decreased to 1.7.

Liquidity

Liquidity is the ability of a business to meet financial obligations as they come due in the
short term, without disrupting the normal operations of the business.

According to the measures taken from Ceylon Tea Brokers PLC there are two main figures under
Liquidity. Those are:

- Working Capital

- Current Ratio/Quick Asset Ratio

Working Capital

The capital of a business which is used in its day-to-day trading operations.

Current Assets – Current Liabilities.

If we consider the financial years 2014, 2015 and 2016 we can identify a variation between
values in working capital.

In 2014,

Current Assets = 1,299,992

Current Liabilities = 1,217,006

Therefore, Working Capital = 1,299,992 - 1,217,006 = 82,986

In 2015,
Current Assets = 1,100,063

Current Liabilities = 930,415

Therefore, Working Capital = 1,100,063 – 930,415 = 169,648

In 2016,

Current Assets = 792,939

Current Liabilities = 649,957

Therefore, Working Capital = 792,939 - 649,957 = 142,982

According to these calculation in 2015 the working capital has been increased drastically when
compared to the year 2014. But in 2016 the amount has been decreased again.

Overall decision that can be taken by looking at these financial figures is that there is a
possibility to cover the Current Liabilities using the Current Assets of the Ceylon Tea Brokers
PLC.

Current Ratio

Indicates the extent to which current assets, when liquidated, will cover current obligations.

Current Ratio = Current Assets/Current Liabilities

The total current assets have been decreased in 2015 and 2016 when compared to
2014(1,299,992).Because in 2014 Assets Cash and Bank amount and Advances to Tea Suppliers
amount has been increased.

When considering total current liabilities it also has been decreased in 2015 and 2016 financial
years when compared to 2014(1,217,006). In 2014 Commercial Papers and the Tax Payable
amounts coming under current liabilities have been increased.

Following are the calculated current ratios for Ceylon Tea Brokers PLC for the years of 2014,
2015 and 2016

Current Ratio of year 2014 is,

1,299,992/1,217,006 = 1.1

Current Ratio of year 2015 is,

1,100,063/930,415 = 1.2

Current Ratio of year 2016 is,

792,939/649,957 = 1.2

In 2015 and 2016 there is no variation between Current Ratios that the company observed.

Quick Asset Ratio

The Quick Ratio is a liquidity ratio that measures the ability of a company to pay its current
liabilities when they come due with only quick assets.

(Current Assets – Stocks - Prepayments)/Current Liabilities

Ceylon Tea Brokers PLC is engaged in tea brokering, warehousing and financing. So the
company does not directly involving with Stocks.

When consider about the prepayments,

In 2014 the amount is 24,617

In 2015 the amount is 25,199

In 2016 the amount is 16982.

Based on the available information the Quick Ratio can be calculated as follows,

Quick Asset Ratio of the year 2014,

(1,299,992 - 24617)/1,217,006 = 1.1

Quick Asset Ratio of the year 2015,

(1,100,063 – 25,199)/930,415 = 1.2

Quick Asset Ratio of the year 2016,

(792,939 - 16982)/649,957 = 1.2

According to these ratios we can assume that the Quick Asset Ratios are equal to the Current
Ratios in 2014, 2015 and 2016 years for the company.