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Sri Lanka Equities

John Keells Stock Brokers (Pvt) Ltd.

A JKSB Research Publication

October 2011

Lourdeena Kudaliyanage


Rs. 32.10
ODEL 1H FY2012 NBVPS (Rs.) Issued Capital (Shares 'mn) Voting Market Capitalisation Rs. 'mn Forecast earnings to equity FY12E Rs. 'mn FY 12E EPS Rs. PER (x) 11.79 145 4,653 T his 6 mths Apr -Sep 11 262 Previous Apr - Sep 10 1.81 Change (%) 17.78

Revenue (Rs. M) 1,733 1,528 13 Gross Operating Net Profit Profit Profit (Rs. M) (Rs. M) (Rs. M) 684 199 122 587 194 101 17 2 21


EPS (Rs.)* 0.84 0.69 21

* Based on current share count

ODEL reported moderate earnings growth for 1HFY12, +21% YoY to Rs. 122.2m, supported by 1) steady top line growth (+13% YoY ) boosted by increased sales volumes across all brands; and 2) a significant reduction in income tax expenses (-51% YoY ), following a decrease in the corporate tax rate from 35% to 28% coupled with a reversal in deferred tax provision. Net margins remained flat at 7%. Group turnover reached Rs. 1.7bn in 1HFY12, +13% YoY, driven primarily by increased sales volumes as a result of stable growth in same store sales coupled with contribution from newly opened stores in Kandy and Wattala. Gross margins remained broadly stable during the quarter at 39% (vs. 38% in 1HFY11), while operating margins dipped slightly to 11% (vs. 13% in 1HFY11) due to an increase in both administrative and distribution expenses, +30% YoY and 19% YoY respectively. Management attributes the increase in operating expenses to 1) higher promotional and advertising costs related to new store openings; 2) investment in knowledge capital (as part of the companys strategy of benchmarking itself against international competition in terms of store layouts, service levels, ambience, etc); and 3) an increase in head count, in-line with the expansion in store count. Finance expenses rose sharply in 1HFY12, +53% YoY to Rs. 44.7m, as the company incurred additional bank borrowings in order to fund its store expansion. The company plans to further extend its retail reach over the medium term through a series of well timed store openings in urban and semi urban cities in Colombo and outstation cities. It intends to open three new stores during the year, taking its total store count to 19 outlets by end Dec 2011. Despite its relatively aggressive capital expenditure plans, ODEL maintains a healthy balance sheet with Rs. 15m in cash and bank balances as at 1HFY12. Its gearing ratio was 74% as at end September 2011. ODELs 1HFY12 inventory turnover reduced to 1.7x (lower than the FY11 value of 2.5x) as the company has begun to hold inventory for its two new Kandy stores, which are scheduled to be opened later this year. Its receivables collection period amounted to 21 days in 1HFY12, while its payment period was 56 days, taking its cash operating cycle to ~183 days. The company announced an interim dividend of Rs. 0.25 per share, payable on 11th

Indexed performance of ODELagainst ASPI for 1HFY12


ASPI - Indexed

ODEL - Indexed




November 2011.

Earnings Outlook

We project Sri Lankas fashion retail market to record a strong growth trajectory over 2012-16E, driven by favourable operating conditions in the country. Domestic demand should see a sharp upturn, as rising disposable incomes and higher affluence levels

This document is published by John Keells Stockbrokers (Pvt.) Limited for the exclusive use of their clients. All information has been compiled from available documentation and JKSBs own research material. Whilst all reasonable care has been taken to ensure the accuracy of the contents of this issue, neither JKSB nor its employees can accept responsibility for any decisions made by investors based on information contained herein.

2 l John Keells Stock Brokers (Pvt) Limited l Odel PLC

translate to increased footfall at stores and an incremental increase in average basket values for fashion retail operators. Tourism related sales proceeds should also remain strong over the medium term, with the government targeting 2.5m visitors by 2015E. ODEL has, in our view, successfully established a unique brand identity in Sri Lankas highly fragmented fashion retail industry, and hence does not have any close competitors in the overall market in terms of scale, ambience, and quality/range of clothing offered. As such, we believe it should be a prime beneficiary of the projected industry growth. Given the companys strong growth potential, we conservatively project FY12E full year earnings to reach Rs. 262m (+25% YoY), with a strong pickup in sales volumes during 3QFY12 which is typically the strongest quarter for the company. This translates to an FY12E EPS of Rs. 1.81. At a price of Rs. 32.10, ODEL is trading at a FY12E P/E multiple of 17.8x, at a 34% premium to the FY12E sector average of 13.3x. We believe a slight premium to the sector is warranted, given the companys superior competitive positioning in Sri Lankas fast growing fashion retail market.

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