The market leader, Tokyo Cement's (TKYO) recorded a net profit of LKR291.5 mn in FY10 (down 15.9% YoY) however the 4QFY10 exhibited 108.4% YoY growth to post a net earnings of LKR233.9 mn. Subsequent to the poor 9 months performance, TKYO's 4QFY10 turned around strongly as expected nevertheless the growth has been spearheaded by the sharp dip in depreciation and finance cost whilst the top line has slid 27.3%YoY during the quarter.
The resolution to the national conflict is expected to shape up developments in the North & East and thus TKYO would be able to fulfill the demand with its excess capacity. We expect TKYO to record LKR626.7 mn in FY10 (up 115%YoY). Further, we believe Tokyo cement is poised for demand driven growth especially in FY12 and we expect a conservative 65% YoY increase in net earnings to post LKR1,034.0 mn. We believe the share has strong upside given the positive earnings outlook, on the back of rising demand based on North & East developments, reduction in interest cost and favorable effects of Bio Mass plant.
However, the fluctuating nature of the earnings exhibited in the past and lack of transparency associates a risk factor with the counter. Whilst advising caution due to the risk of fluctuating earnings exhibited, we place more weightage on the catalysts for growth (greater home building demand, larger construction projects, location advantage and strong brand equity) and as a proxy to the reconstruction drive we believe the counter holds significant upside.
Revenue has dipped by 17% YoY to LKR14,634.4 mn in FY10. TKYO’s revenue has dipped by 17.1% YoY to LKR14,634.4 mn in FY10 which is mainly due to a near 12% - 15% YoY dip in sales volume whilst the with marginal variances the price is maintained at circa LKR720/bag (maximum retail price is circa LKR750/50kg bag). During the year the cement imports contracted by 14.9% whilst domestic cement production fell by circa 7.4% mainly on the back of deceleration of private sector construction and home building activities.
Operating at a near 60-65% production capacity (1.8 mn metric tones where a 900,000 metric tones vertical roller mill was commissioned during the year) complemented by an additional 600,000 MT bagging plant, TKYO is positioned to strengthen its revenue base in the future given the increase in demand.
Gross profit increased by 14.8% YoY to LKR3,099.9 mn in FY10. The cost of sales has dipped at a faster rate of 22.8% YoY mainly on the back of relatively lower price of clinker and low vessel charter cost due to oil price dip (the total dip in cost is circa $4/ton), hence the gross profit has grown by 14.8% YoY during the year to post LKR3,099.9 mn. TKYO's gross margins have strengthened from 15.3% in FY09 to 21.2% in FY10 backed by the dip in cost of sales.
EBITDA has fallen by 12.4% YoY to LKR2,179.4 mn in FY10. Subsequent to a three fold increase operating cost has risen to LKR920.5 mn, leading to a 12.4% YoY fall in EBITDA. The main driver of cost increases have been the Nation Building Tax (3% of the top line) being charged here coupled with higher sales commissions and staff salaries.
PBT has dipped by 58.2% YoY to LKR270.3 mn in FY10. The dip in EBITDA coupled with the marginal increases in depreciation (up 3.4%YoY to LKR1,041.1) and finance cost (up 4.0% YoY to LKR867.9 mn) has led the PBT to fall by a staggering 58.2% YoY to LKR270.3 mn during FY10. However, during 4QFY10 the depreciation cost dipped by 48.5%YoY to LKR228.1 mn whilst the finance cost has reduced by 47.3%YoY to LKR161.1 mn due to the dip in interest rates (to a near 11.5% from circa 20% an year ago) whilst the borrowing costs have shot up to LKR1,792.3 mn vs LKR863.7 mn in FY09.
Net profit has dipped by 15.9% YoY to LKR291.5 mn in FY10. Despite a significant fall in PBT the reversal of provision for deferred tax liabilities charged has reduced the taxation and thus the net earnings have dipped by 15.9%YoY to LKR291.5 mn.
Expected Growth and developments in the North & East. Following the entirely resolved terrorist conflict, demand is expected to grow with the new infrastructure and highway developments in the North and developments could be expected to shape up in the rural areas particularly in the North & East. With 1.8 mn MT capacity TKYO is in a strong footing to serve the anticipated increase in demand.
Due to location advantage and the involvement with the Japanese owners (Nippon Coke Engineering Co, Japan and St Anthony's Consolidated Ltd owns 27.5% each) bulk of the development projects in the Eastern province could be awarded to TKYO cement. However the benefits would kick in based on the speed of infrastructure developments whilst we believe that the present excess capacity of the Trincomalee plant will be utilized to cater for the demand created through the east development contracts thereby contributing towards strong earnings growth in the future.
Power generated through the bio mass plant. The new bio mass plant of TKYO currently generates 10MW where as the power requirement to facilitate their internal operations is circa 7.5MW whilst the company supplies the surplus to the national grid. This facility is expected to generate cost savings of around LKR250 mn during FY11. Further, the company announced today that it has incorporated a wholly owned subsidiary "Tokyo Cement Power (Lanka) Ltd” for setting up and operating of power generation, giving an indication that the company would look for more power projects in the future.
Capitalization of Reserves. The company announced the capitalization of reserves where both the voting and non voting shares would be capitalized in the proportion of 1:8 for a consideration of LKR17 per share. However this is subject to the in principle CSE approval and shareholder approval at an AGM.
FY10E net profit to reach LKR626.7 mn, up 115% YoY. The resolution to the national conflict is expected to shape up developments in the North & East and thus TKYO would be able to fulfill the demand with its excess capacity. Accordingly, we believe revenue growth of circa 35% would be achieved via a conservative 15%- 20% volume growth and a 3%-5% price growth. A marked reduction in the cost base is expected through the synergies of the bio mass plant (LKR250 mn savings) and low interest cost. We expect TKYO to record LKR626.7 mn in FY10 (up 115%YoY).
Further, we believe Tokyo cement is poised for demand driven growth especially in FY12 and we expect a conservative 65% YoY increase in net earnings to post LKR1,034.0 mn.
Share is attractive on 8.7XFY12E net earnings. TKYO (voting) currently trades on 14.4X forecast FY11E net profit, 8.7X projected FY12E net profit and 0.4XPBV. TKYO non-voting currently trades on 9.3X forecast FY10E net profit, 5.6X projected FY12E net profit and 0.4XPBV. We believe the share has strong upside given the positive earnings outlook, on the back of rising demand based on North & East developments, reduction in interest cost and favorable effects of Bio Mass plant. However, the fluctuating nature of the earnings exhibited in the past and lack of transparency associates a risk factor with the counter. Whilst advising caution due to the risk of fluctuating earnings exhibited, we place more weightage on the catalysts for growth (greater home building demand, larger construction projects, location advantage and strong brand equity) and as a proxy to the reconstruction drive we believe the counter holds significant upside.
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