EQUITY | SRI LANKA | MATERIAL

EARNINGS UPDATE |08 AUG 2018

ALUMEX PLC [ALUM.N0000]

MAINTAIN BUY
25.0
ALUMINIUM CRASHES, ALUMEX GAINS
20.0 0.8
4.6
Fair Value: FY19E - LKR 20.0 [+30%] 15.0

Total Return with DPS 35% [AER of 60%]

10.0
15.4 15.4
ALUM’s earnings dropped by -7%YoY recording at LKR 40Mn, while the dip in profit is 5.0
attributable by way of heavy interest component on the back of loans taken to fund the
capacity expansion. In line with our expectations, ALUM attained a stronger GP margin of 0.0
26%, predominantly on gains made by crash in global aluminium prices. We maintain our Current FY19E
revenue and earnings for FY19E at LKR 5.2Bn and LKR 465Mn respectively. Although share Current Price Expected Capital Gain Dividend upto 31.3.2019
price has depreciated marginally by 2% (from May update), at LKR 15.4, we maintain our fair
value at LKR 20.0 for FY19E providing an annualized return of 60%. MAINTAIN BUY FIRST CAPITAL RESEARCH
LKR (Mn) 1QFY18 1QFY19 YoY FY17 FY18 YoY Nisansala Kuruppumudali +94 11 263 9866
Earnings (LKR 'Mn) nisansalat@firstcapital.lk
Revenue 891 917 3% 4,728 4,512 -5%
Gross Profit 189 237 25% 1,446 1,060 -27%
EBIT 85 111 29% 1,050 646 -39%
PBT 59 50 -16% 1,016 515 -49%
Net Profit 43 40 -7% 753 364 -52% KEY DATA

Balance Sheet (LKR 'Mn) CSE Ticker ALUM.N0000

Bloomberg Ticker ALUM SL
Shareholder's Equity 2,210 2,158 -2% 2,316 2,253 -3%
Share Price (LKR) 15.40
Borrowings 480 1,158 141% 512 1,134 121% 52w High (LKR) 24.00
NAVPS 7.4 7.2 7.7 7.5 52w Low (LKR) 13.90
Avg. Daily Volume (Shares) 75,217
Earnings down by -7%YoY, primarily weighed down by heavy interest component
Avg. Daily Turnover (LKR) 1,374,748
ALUM’s earnings was recorded at LKR 40Mn, -7%YoY drop primarily contributed by the net
Issued Share Capital (Shares 'Mn) 299.3
finance cost of LKR 61Mn, +100%YoY. Revenue has improved marginally by +3%YoY however,
Market Cap (LKR 'Mn) 4,609
volumes have not recovered at the same pace as overall demand for aluminium products,
Market Cap (USD 'Mn) 29
amidst the slowdown in the construction sector. With margins strengthening, economy
*1 USD = LKR 159
showing signs of improvement and new capacity being available since June 2018, we maintain
our earnings growth of +28% (LKR 465Mn) and +44% (LKR 672Mn) for FY19E and FY20E. NP
margin for the period remained relatively steady at 4% in 1QFY19, with a slight drop compared
to 1QFY18 of 5%. Price Performance (%) 1 mth 3 mths 12mths
ALUM 6% -6% -31%
GP & EBIT Margin show signs of improvement on the back of cost control
ASPI 1% -6% -6%
In line with our expectation of GP margins to grow at 24% for FY19E, margins grew for 1QFY19
at 26%, the recovery of margins is primarily attributable to cost control measures and the ALUM vs ASPI
marginal increase in prices. EBIT margins reached 12% from 10% in 1QFY18, primarily on the
gains made by the crash in aluminium prices negating the adverse effect of the dual impact in
105
the rise of operational costs, both administration and distribution expenses rose significantly 100
by +20%YoY and +23%YoY respectively. 95
90
Revenue grew by a marginal 3%, new volumes yet to boost top line growth 85
80
ALUM revenue improved marginally at +3%YoY to LKR 917Mn, but the recovery in revenue is 75
expected at a stronger level with new increased capacity to 1,800Mt per month being available 70
65
since June. However, on expectation of slow recovery in the construction sector, we maintain 60
our revenue target for FY19E at LKR 5.2Bn (+15%YoY).
Heavy volatility in aluminium with global price wars
With the imposition of US sanctions on Russal, the biggest maker of the metal outside of China, ALUM ASPI
had an adverse global impact on the world supply, as aluminium surging +40% in 2 weeks during
April. However, prices returned to normalcy with Trump uplifting the ban momentarily until Minimum Return for BUY:
further discussions to be held in Oct 2018. Currently, world market aluminium prices have Buy Below [AER of 17% with DPS]: LKR 19.5
become stabilized below USD 2,100. ALUM categorized as “Grade B” counter (Refer page 08 for
recommendation criteria of Grade A, B & C stocks)
ALUM maintains a BUY on new capacity for FY19E
With new capacity fully available since June and possible recovery in demand in FY19E, we Disclosure on Shareholding:
maintain ALUM at a BUY on FY19E fair value of LKR 20.0. First Capital Group hold 170,600 shares of ALUM and will
not trade in this share for three trading days following the
ANALYST CERTIFICATIONS AND REQUIRED DISCLOSURES BEGIN ON PAGE 9 issue of this document.
 “Aluminium crashes, Alumex gains”

Estimate Revision

In LKR Mn FY19E-O FY19E-R % Change FY20E - O FY20E - R % Change

Earnings Estimate
Revenue 5,207 5,207 0% 6,017 6,017 0%
Gross Profit 1,243 1,243 0% 1,519 1,519 0%
EBIT 742 742 0% 1,040 1,040 0%
Profit before Tax 629 629 0% 909 909 0%
Net Profit 465 465 0% 672 672 0%
Adjusted EPS 1.6 1.6 2.2 2.2
Growth YoY 28% 28% 44% 44%
Balance Sheet Estimate
Shareholders' Equity 2,253 2,253 0% 2,821 2,821 0%
Borrowings 1,134 1,134 0% 933 933 0%
Adjusted NAVPS 7.5 7.5 10.2 9.4
Ratio Estimate
ROE (%) 19% 19% 24% 24%
PER (x) 10.3 9.9 7.1 6.9
PBV (x) 1.9 1.9 1.7 1.6

Valuation Table

P/E 31 March FY15 FY16 FY17 FY18 FY19E FY20E FY21E

Estimates (LKR 'Mn)
Revenue 3,307 3,995 4,728 4,512 5,207 6,017 7,051
EBIT 611 813 1,050 646 742 1,040 1,421
Net Profit 477 589 753 364 465 672 963
Adjusted EPS (LKR) 1.6 2.0 2.5 1.2 1.6 2.2 3.2
YoY % Growth 26% 24% 28% -52% 28% 44% 43%
DPS (LKR) 1.0 1.0 1.5 1.1 0.8 1.1 1.6
Valuations
PER (x) 9.7x 7.8x 6.1x 12.7x 9.9x 6.9x 4.8x
PBV (x) 2.7x 2.4x 2.0x 2.0x 1.9x 1.6x 1.4x
Div Yield (%) 6.5% 6.5% 9.4% 6.8% 5.0% 7.3% 10.4%

Valuation Summary

Expected ALUM price for FY19E Return

PER based target price 18.7 Target Price 20.0
DCF Valuation based target price 21.5 Current Price 15.4
Average Target Price 20.1 Capital Gain (LKR) 4.6
Target price after Rounding off 20.0 Dividend (LKR) FY19E 0.8
Capital Gain % 30%
Dividend Yield % 5%
Total Return % 35%
Annualized Return % 60%

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 “Aluminium crashes, Alumex gains”

Discounted Cash flow Valuation

DCF based Valuation

Enterprise Value 7,978
(-) Debt (2,203)
(+) Cash 672
Total Value of Equity 6,446
No. of shares 299
Target Price 21.5

WACC COE
Ke 18% Rf 9.5%
Kd 14% Rm 16.5%
D/E Assumption 40 / 60 Growth % 3.0%
Terminal Growth (%) 3% β 1.37
WACC 15% Adjusted β 1.25
Ke =Rf+β(Rm-Rf) 19%

PER Valuation

60

50

40

30

20

10

8 10 12 14 16 Price
Source: CSE, Company Annual Reports and First Capital Research Estimates

PER based Valuation

FY19E Earnings (LKR 'Mn) 465
No. of Shares ('Mn) 299
FY19E EPS 1.55
Expected Average PER 12.0x
Price at 12.0x FY19E Earnings 18.7

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 “Aluminium crashes, Alumex gains”

Appendix I: Statement of Income and Expenses

Income Statement (LKR Mn) FY15 FY16 FY17 FY18 FY19E FY20E FY21E
Y/E 31st March
Revenue 3,307 3,995 4,728 4,512 5,207 6,017 7,051
Less - NBT -66 -80 -94 -90 -104 -120 -141
Net Revenue 3,241 3,916 4,635 4,422 5,103 5,897 6,910
Cost of Sales -2,343 -2,739 -3,188 -3,362 -3,860 -4,377 -4,962
Gross Profit 899 1,177 1,446 1,060 1,243 1,519 1,947
Other Income and Gains 17 13 26 29 29 29 29
Selling and Distribution Cost -59 -90 -105 -171 -130 -120 -141
Administrative Expenses -246 -287 -317 -273 -400 -389 -414
Operating Profit 611 813 1,050 646 742 1,040 1,421
Finance Cost -14 -35 -48 -151 -133 -151 -139
Finance Income 15 23 14 20 20 20 20
Profit Before Tax 613 801 1,016 515 629 909 1,302
Income Tax Expenses -136 -212 -263 -150 -164 -236 -338
Profit for the Year 477 589 753 364 465 672 963

EPS 1.6 2.0 2.5 1.2 1.6 2.2 3.2

Source : Company Annual Reports and First Capital Research Estimates

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 “Aluminium crashes, Alumex gains”

Appendix II: Statement of Financial Position

Balance Sheet (LKR Mn) FY15 FY16 FY17 FY18 FY19E FY20E FY21E
As at 31st March
Non-current Assets
Property, Plant and Equipment 1,273 1,293 1,916 3,289 3,221 3,218 3,228
Intangible Assets 17 39 42 46 49 52 54
1,290 1,333 1,958 3,335 3,270 3,270 3,282
Current Assets
Inventories 765 862 1,149 1,787 1,562 1,203 1,551
Trade and Other Receivables 343 508 864 989 781 903 1,058
Advances and Prepayments 27 38 126 60 60 60 60
Other Current Financial assets 1 1 1 0 0 0 0
Cash and Cash Equivalents 210 138 165 216 672 763 815
1,351 1,547 2,306 3,067 3,089 2,944 3,498
Total Assets 2,641 2,880 4,264 6,403 6,359 6,214 6,779

Equity and Liabilities

Stated Capital 284 284 284 284 284 284 284
Reserves 738 685 780 665 665 665 665
Retained Earnings 668 930 1,252 1,303 1,536 1,872 2,354
Total Equity 1,690 1,898 2,316 2,253 2,485 2,821 3,303

Non-Current Liabilities
Interest Bearing Loans and Borrowings 3 0 512 1,134 1,033 933 833
Retirement Benefit Liability 64 80 91 108 108 108 108
Deferred Tax Liabilities 99 86 106 222 222 222 222
166 165 709 1,464 1,363 1,263 1,162

Current Liabilities
Trade and Other Payables 724 670 1,107 1,095 1,081 1,182 1,340
Interest Bearing Loans and Borrowings 15 3 48 1,170 1,000 500 500
Provisions 5 7 9 6 6 6 6
Income Tax Liabilities 42 136 75 35 44 62 88
785 816 1,238 2,686 2,511 2,130 2,314
Total Equity and Liabilities 2,641 2,880 4,264 6,403 6,359 6,214 6,779

NAVPS 5.6 6.3 7.7 7.5 8.3 9.4 11.0

Source : Company Annual Reports and First Capital Research Estimates

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 “Aluminium crashes, Alumex gains”

Appendix III: Statement of Cash flow

Cashflow Statement (LKR Mn) FY15 FY16 FY17 FY18 FY19E FY20E FY21E
Y/E 31st March
Cash Flows from Operating Activities
Profit Before Taxation 613 801 1,016 515 629 909 1,302
Adjustments for,
Finance Cost 3 1 6 118 133 151 139
Finance Income -8 -10 -9 -14 -20 -20 -20
Provision for Retirement Benefit Liability 12 9 12 19 0 0 0
(Profit) / Loss on Disposal of PPE -8 -5 2 -6 0 0 0
Provision For Bad Debts -1 13 -8 10 0 0 0
Depreciation and Amortisation 83 107 110 116 197 207 220
Operating Profit Before Working Capital Changes 693 916 1,129 758 939 1,247 1,642
(Increase) / Decrease in Inventories -180 -105 -295 -653 225 359 -348
(Increase) / Decrease in Trade and Other Receivables -15 -179 -366 -161 208 -122 -155
(Increase) / Decrease in Advances and Prepayments -6 -11 -88 66 0 0 0
Increase / (Decrease) in Trade and Other Payables 119 74 439 -14 -15 101 158
Cash Generated from Operating Activities 611 696 818 -5 1,358 1,585 1,297
Finance Cost Paid -3 -1 -6 -118 -133 -151 -139
Income Tax Paid -124 -198 -284 -171 -155 -218 -312
Retirement Benefit Liability Paid -2 -2 -4 -7 0 0 0
Net Cash From Operating Activities 482 494 524 -300 1,070 1,216 846

Cash Flows from Investing Activities

Acquisition of Property, Plant and Equipment and IA -342 -142 -644 -1,479 -131 -207 -232
Proceeds from Sale of Property, Plant and Equipment 9 5 16 6 0 0 0
Finance Income Received 8 10 9 14 20 20 20
Net Cash Flows Used In Investing Activities -324 -127 -619 -1,458 -112 -188 -212

Cash Flows from Financing Activities

Repayment of Interest Bearing Loans and Borrowings -33 -14 -3 -6 -100 -100 -100
Proceeds from Interest Bearing Loans and Borrowings 0 0 512 1,008 0 0 0
Dividend Paid -174 -425 -434 -314 -233 -336 -482
Net Cash Flows from / (Used in) Financing Activities -209 -440 75 687 -333 -437 -582

Net Increase in Cash and Cash Equivalents -50 -72 -21 -1,071 625 592 51
Cash and Cash Equivalents at the Beginning of the Year 261 210 138 118 -954 -328 263
Cash and Cash Equivalents at end of the Year 210 138 118 -954 -328 263 315
Source : Company Annual Reports and First Capital Research Estimates

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 “Aluminium crashes, Alumex gains”

Appendix IV: Top 25 Shareholders

Top 25 shareholders - (% held) 1QFY19 4QFY18 QoQ 1QFY18 YoY

Hayleys PLC 52.6% 52.6% - 52.6% -
Akbar Brothers Pvt Ltd A/C No.1 13.5% 13.5% - 13.5% -
Rosewood (Pvt) Ltd - Account No.01 9.8% 9.8% - 9.8% -
Dean Foster (Pvt) Ltd A/C No.1 4.8% 4.8% - 4.8% -
Mr. D.W.P.N.Dediwela 3.6% 3.6% - 3.6% -
Sampath Bank PLC/Dr.T.Senthilverl 0.8% 0.8% 0.0% 0.0% 0.8%
Dr.T.Senthilverl 0.4% 0.4% 0.0% 0.0% 0.4%
Mrs.G.Vasunthara 0.5% 0.0% 0.5% 0.0% 0.5%
Peoples Bank 0.5% 0.5% - 0.0% 0.5%
Ceylon Investment PLC A/C No.1 0.5% 0.5% - 0.8% -0.3%
Mr.T.H.D.I.U.Thrimanne 0.4% 0.4% - 0.4% -
Asia Securities (Pvt) Ltd (Trading Account) 0.3% 0.3% - 0.0% 0.3%
Insite Holdings (Pvt) Ltd 0.3% 0.3% - 0.3% -
Mr.K.D.H.Perera 0.3% 0.3% - 0.3% -
Hatton National Bank PLC A/C No.4 (HNB Retirement Pension Fund) 0.3% 0.3% - 0.3% 0.0%
Arunodhaya Industries (Private) Limited 0.3% 0.3% - 0.3% 0.0%
People's Leasing & Finance PLC/Hi Line Trading (Pvt) Ltd 0.3% 0.3% - 0.0% 0.3%
Arunodhaya Investments (Private) Limited 0.3% 0.3% 0.0% 0.3% 0.0%
Arunodhaya (Private) Limited 0.3% 0.3% 0.0% 0.3% 0.0%
Commercial Bank of Ceylon PLC A/C No.01 0.2% 0.2% - 0.2% -
Mr. M.L.Hirdaramani 0.2% 0.2% - 0.2% -
Mr.S.J.Hirdaramani 0.2% 0.2% - 0.2% -
The Ceylon Chamber of Commerce Account No.02 0.2% 0.2% - 0.2% -
Mr.K.N.J.Balendra 0.2% 0.2% - 0.2% -
Guardian Fund Management Limited/The Aitken Spence & Associated Companies
0.2%Executive Staff Provident
0.2% - Fund0.2% -

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 “Aluminium crashes, Alumex gains”

Appendix V: Recommendation criteria

Categorization Company Category Buy Hold Sell

Grade A S&P SL20 Companies T.Bill + 5% & Above T.Bill + 1% & Above Below T.Bill + 1%

Grade B Rest of the Companies T.Bill + 8% & Above T.Bill + 3% & Above Below T.Bill + 3%

Grade C Companies less than LKR 1Bn Market Cap T.Bill + 11% & Above T.Bill + 6% & Above Below T.Bill + 6%

Categorization Company Category Buy Hold Sell

Grade A S&P SL20 Companies 14.46% 10.46% 10.46%

Grade B Rest of the Companies 17.46% 12.46% 12.46%

Grade C Companies less than LKR 1Bn Market Cap 20.46% 15.46% 15.46%

Weighted Average 1-year T-bill rate during Jun 2018: 9.46%

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 “Aluminium crashes, Alumex gains”

Research Disclosure

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