Namunukula Plantations (NAMU) – Stronger Earnings Through Crop Diversification

• Namunukula Plantations (NAMU.LKR127.60) recorded a net profit of LKR146.7mn in FY10 (vs. net earnings of LKR40.7mn in FY09) mainly on the back of the 19.2% YoY growth in top line backed by attractive Net Sales Averages ( NSA’ s) achieved for all 3 main crops (Tea, Rubber and Oil Palm) of the company.
• NAMU, one of the well diversified plantation company’s in Sri Lanka has a distinct advantage over its competitors in terms of balanced crop mix. NAMU which is renowned for its quality low grown type of tea, focuses heavily on maintaining the quality of end product consistently, which would enable them to grab high prices for their products.
• With Plantation worker wage revision due in April 2011 (current agreement will expire in March 2011), it’ll have a considerable impact on Profit margins in tea segment as a whole (tea is a highly labour intensive commodity). But since tea segment contributes only up to circa 20% of gross profit of NAMU, where Oil Palm and rubber which are less labour intensive crops constitute major portion of Profits, NAMU’s profit margins would have a lesser impact compared to its competitor firms which rely highly on tea.
• We believe NAMU has strong earnings growth potential on the back of, strong demand for low grown tea ( particularly from Middle East & Russia ) together with premium prices expected to boost earnings, recovery of crude oil prices leading the demand and prices of natural rubber to recover strongly and sustain at current attractive levels (global NR supply is expected to fall behind its consumption up to 2020), backed by enhanced contribution from Oil Palm segment (area cultivated under Oil Palm expected to go beyond 1,600hectares Within next 3 years). In line with this, we expect NAMU to record LKR460.7mn in FY11E (up by 214% YoY) and net earnings of LKR539.5mn in FY12E (17% YoY growth).
• NAMU (voting) currently trades at 6.6X forecasted FY11E net profit, 5.6X estimated FY12E net profit and 3.3X PBV, as opposed to a Plantation sector PE of circa 27.5X and a current trailing market P/E of 22X. Hence we see great value potential in the counter.

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Lanka Walltile (LWL) - The Wall-Tile Giant

The wall-tile giant encompasses Lanka Tiles PLC (54.5% ownership) and Uni-Dil Packaging (52.9%) whilst having a controlling interest in Horana Plantations PLC with a 27% effective holdings (Through Ceytea Plantations). Furthermore, LWL has an associate interest of 34.6% on Parquet (Ceylon) PLC, which changed its core business to production of Grout and Mortar.

LWL recorded a 14% incline to LKR6,444.3 mn in the top line for the cumulative 3QFY11 on the back of the increased demand by the local market. 60% of the top line was contributed by the tile segment followed by packaging materials which contributed circa 18% of the counter‟s turnover.

Going forward, with the construction sector boom together with strong investment inflow and higher activity levels in the country the „tile giant‟ pertains value as a potential growth stock.

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Kegalle Plantations (KGAL) – Towards a Promising future

Despite the impact from a 40% wage hike, Kegalle Plantations (KGAL.LKR204.80) managed to record an impressive net profit of LKR376.0mn in FY10 (83.4% YoY growth). Favorable market conditions for tea & rubber during the 2nd half of the year and changing the tea and rubber grade mix to suit market conditions contributed to this achievement.

At the same time company achieved an overall NSA (Net Sales Average) of LKR279.12 in FY10 for rubber (vs. an overall Sri Lankan average of LKR212.0) which is a 18% increase compared to last season in spite of the drop in rubber market during first half.

In FY10, KGAL invested LKR183 mn as Capital Expenditure, out of which LKR114mn was spent on field development including replanting and maintaining tea and rubber focusing on long term benefits. Replanting rubber will continue to have priority which will increase its production in the long term.

We believe KGAL has strong earnings growth potential on the back of, the rising world rubber prices, a full recovery from global recession; would place KGAL at a definite advantage as the largest rubber producer in Sri Lanka, and with KGAL’s ability to adjust tea grade mix to exploit market trends. Against this backdrop we expect KGAL to record LKR537.5mn in FY11E (up by 43% YoY) and net earnings of LKR796.1mn in FY12E (48% YoY growth).

KGAL (voting) currently trades at 9.5X forecasted FY11E net profit, 6.4X estimated FY12E net profit and 3.0X PBV, as opposed to a Plantation sector PE of circa 23.3X and a current trailing market P/E of 22X. We believe counter holds strong upside. Hence we rate KGAL a BUY.

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Vallibel One: the growing conglomerate with a Rs.1.2 billion net profit in 2010 and beyond

Vallibel One Limited is a diversified holding company incorporated on 09th June 2010. Prior to the proposed private placement and initial public offering 100% of the shares in issue are held by the business tycoon Dhammika Perera and companies controlled by him. Through its subsidiary companies Vallibel One has made strategic investments in financial services,manufacturing and leisure industry.

The company intends to raise SL Rs.4bn by way of a private placement with the option of increasing up to SL Rs.4.5bn in the event of over subscription and approximately a further SL Rs.1.43bn by way of an initial public offer. The capital structure of the company is given below.Objectives of the Issue The company intends to raise funds through this Issue to finance an equity investment of SLRs.3Bn in a new hotel project developed under its full owned subsidiary Greener Water Limited.The total estimated cost of the hotel project is SLRs.5.0 bn.

Operational Overview

Vallibel One’s presence in the financial services sector is through its 51% owned subsidiary LB Finance PLC and strategic investment in Sampath Bank PLC. The company marks its presences in the manufacturing sector through its 51% owned subsidiary Royal Ceramic PLC. Interest in the fast growing leisure industry is through its fully owned subsidiary Greener Water Limited.

L B Finance PLC (LFIN)

L B Finance is public listed company and is rated BBB+ by Ram Rating Sri Lanka. The company offers a range of financial services which includes hire purchase, leasing, mortgage loans, gold loans, fixed deposits, money transfer and Islamic finance products. Its wider distribution network of 31 branches and 84 pawning centers gives an edge over its competitors and the management intends to increase the number of branches to 90 and the pawning centers to 170 by 2015.

According to RAM Ratings LB Finance is the third largest Registered Finance Company (RFC) in Sri Lanka, accounting for nearly 10.47% of the industry assets as at September

2010.Decline in interest rates resulted in a phenomenal growth in credit demand which enabled LFIN to post a strong growth in net interest income during 2010. The recent import duty reduction on motor vehicles boosted the hire purchase and leasing business of LFIN. The reduction of Import duty on industrial machinery as proposed in the 2011 budget and reduction in Value Added Tax (VAT) on imports from 20% to 12% will further facilitate growth in leasing and hire purchase operations.

Sampath Bank PLC (SAMP)

Sampath Bank (SAMP) is the third largest local commercial bank in terms of its asset base of SL Rs.172bn. For FY09 SAMP reported the fourth largest profit in the banking sector. SAMP holds the vision of becoming a leading financial services provider and at present operates through 165 branches in all parts of the country with access to over 219 own Automated Teller Machines (ATM) and 730 other ATMs networked around the country with other bank networks. Currently SAMP holds six subsidiary companies under its umbrella providing a compendium of financial products and services.Banking industry in Sri Lanka remains a lucrative business due to the higher net interest spread and increasing demand for credit as the country has become one of the fastest growing economies in Asia after ending three decades of war which was a major obstacle for growth in many dimensions. As mentioned earlier the importation of motor vehicles to the country boosted with the recent reduction in import duty.

This not only enhanced the leasing business but also fees & commission income of the bank (by way of letter of credit).Amidst these conducive economic conditions, the 2011 budget fortified the banking & finance sector by way of reducing corporation tax from 35% to 28% and Value Added Tax on Financial Services from 20% to 12%.The tax savings arising from these proposals will be transferred to separate investment fund accounts maintained with the CBSL and will be utilized to provide long maturity low interest rate loans which would facilitate growth in loans and advances and interest income.

Royal Ceramic PLC (RCL)

Since its inception in 1990 Royal Ceramics focused its efforts on being a brand leader in its industry. The company made the transition from a private company to a public one in 1994. Today RCL is leading the market, having captured more than 55% of the Sri Lankan market while exporting to numerouscountries across the globe. The Company's marketing operations are supported by a strong distribution network comprising of 40 showrooms and 3 warehouses and 3 state of the art manufacturing facilities.

The construction industry is booming on the back of higher consumer spending amidst low interest rates. Thus consumer spending on housing is anticipated to increase in the ensuing years. Further, reconstruction of north and east, refurbishment and construction of new hotels and resorts are key contributors to this boom with RCL being a key beneficiary.

Greener Water Limited

Greener Water Ltd is the leisure sector investment arm of Vallibel One. The company has already invested SLRs.266.73mn in a 14 acre land located in Kochichikade, Negombo, Sri Lanka. The company intends to build a 382 room, luxurious five star hotel at an estimated cost of SL Rs.5bn of which SLRs.3bn will be financed through the private placement and IPO proceeds.The initial design concept for the hotel was carried out by WATG of Singapore, one of the world’s leading design consultants for the hospitality,leisure and entertainment industry. The first stage architectural designs have already been completed and detailed designing in terms of M&A designs & Landscape designs are currently in progress.

The construction of the hotel is estimated to take two years and commercial operations are planned to commence by end of 2013.

The hotel will be developed as a BOI approved investment which will qualify for 8 years tax holiday, and a concessionary tax rate of 15% thereafter.The hotel will target the high end of the tourist segment and will be positioned as a five star hotel. At commencement gross Average Room Rate will be USD 180 and will increase up to USD 220 by the 5th year of operation.

Valuation

Based on FY11/12 forecasted earnings the share is issued at a PE of 13.65x (FY12/13 at 10.26x) and at a PBV of 0.83x (FY11/12 at 0.73x). Vallibel One is likely to be listed under ‘Diversified Sector’ (DIV) or the ‘Investment Trust’ (INT). DIV sector is trading at a PE of 32.8x and at PBV of 3.6x, while the same for INT sector is 28.6x and 4.0x respectively. Thus Vallibel One shares are issued at a significant discount to its respective sectors.

Recommendation

In this report profits are forecasted using conservative assumptions. With the anticipated growth strategies the profitability of the company can improve further.

On a Forward Earnings based approach and on a forward PBV approach the share is issued at a discount to its intrinsic value. Hence investors can immediately expect capital gains on the counter and better prospects in the long term, thus we recommend a BUY.

Courtesy - Capital Trust Research

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ODEL seeking for incessant market expansion in Apparels, growing 26% YOY in 3Q in 2010

Background

Odel which was established as a private limited company in 1990 by Otara Guawardene has today evolved as a foremost group of companies in Sri Lanka. It recently obtained the listing on Colombo Stock exchange, whilst being the first fashion retailer to go public in Sri Lanka.

The IPO was successfully oversubscribed by 63.8 times.

Company’s success is underpinned by its correct strategic view on market expansion and diversification. The group is seeking for incessant market expansion especially in concern to the apparel sector where company has expanded up to possessing 13 outlets with 136 square feet of high quality shopping.

The flagship store at the Alexandra Place is witnessed as an enthralling tourist destination.

Today Odel is highlighted amongst the leading apparel giants in Sri Lanka.

Financial Highlights for the 3Q ended 31st December 2010

The top line of Odel Group grew by 15% QoQ while YoY growth amounted to 26%.

Group seems to have imposed control over the cost structure to improve the gross profit margin to 39%.

Other income has declined by 72% to Rs.24 million YoY while QoQ there’s a marginal decline of 9%.

Distribution expenses saw an YoY decline of 18% while administration expenses saw only a marginal increase of 1%, thus operating profit margin improved from 12% to 14.6%.

During the 3Q Bottom line of ODEL reached SLRs.76mn up by 35% YoY, and 19% QoQ.

The remarkable QoQ top and bottom line growth rates posted during the 3Q of the current

financial year are backed by the increased demand and sales that occurred during the Christmas and New Year festive season and the increase in tourist arrivals.

Glance at first 9 months FY 10/11 results of the group

During the period top line grew by a staggering 42% YoY to reach 2.5bn.

Gross profit grew by 53% YoY to SLRs.967mn, with gross profit margin improving to 39%.

Group as a whole expressed a gratifying performance as the profitability of the group shows a strong upward movement with profit before tax increasing by 61% YoY to reach 287mn. Profit After tax for the same period amounted to SLRs.176mn up by 43% YoY however net profit margin remained at 7%.

Future Outlook

With the milestones of success that Odel has marked in its expedition, the group could shunt ahead exposing a significant competition to the existing market players and creating a strapping barrier to the new entrants whilst enhancing and strengthening its brand image impressively. The

key success of the Odel group lies on the apparel sector as Odel outlets are leading as sought after destinations amongst other shopping outlets of the country, reasoning being that its flagship store is becoming comparable to international department stores in any fashion capital.

As the next walk in their massive expansion stratagem, Odel which is acknowledged as the country’s definitive and life style brand, has announced its plan to expand to Kiribathgoda and Wattala regions which are situated in the highest populated Gampaha District, whilst increasing its retail space further by 22,000 square feet and number of outlets to 15. However important consideration is raised on the other hand that such aggressive expansion strategies would lead to the dilution of their “Exclusive” brand value.

During the year Odel alsohas built up several important strategic links with corporate giants. A noteworthy one is the ODEL‐HNB co branded credit card which is a gold card that comes under VISA international brand that offers attractive benefits for the customers shop at Odel. This would strengthen the group’s sales to a greater extent.

Further the sophisticated and award winning Odel website also put in a remarkable contribution for heightening up sales, offering a comprehensive shopping experience through enhanced e‐commerce facilities.

Odel so far has carried out firm differentiation strategy offering a wider product change in their shopping outlets.

It’s products range from ladies ware, gents ware, kids ware, home ware, Sri Lankan souvenirs, food, backstage, embark collection, R&R whilst differentiating its outlets to that of other fashion retailers that Odel is hardly imitable.

An optimistic panorama is put forward specifically for Odel which is a leader in the market, by the augment in the tourism industry which is expected to grow by 40% to 850,000 in 2011 and reach 2.5million tourist arrivals by 2016 as per the Sri Lanka’s tourism authority in which case, Odel shopping outlets would play a key role in providing exceptional quality shopping facilities for the foreigners. This would grant a extraordinary backup for the boost of future demand for Odel apparel.

On 19th of November it was announced that the Odel acquired a prime land 250.4 perches in Thalangama for Rs.257.9 milion through its fully owned subsidiary Odel Lanka (Pvt) Limited witch is incorporated to plan the preliminary activities required to construct a high rise shopping mall complex. This provides an insight of a large scale strategic investment that the Odel is expecting to initiate with its hands on experience and victorious voyage whilst enjoying economies of scale and economies of scope advantages. Ability of the group as a whole for tapping superior profitability in a very healthy context in the upcoming years is thus evident.

The budget proposed on 22nd on November for year 2011 has projected many concessions favorable concessions. It proposed to reduce custom duties on selected goods and raw materials and also with the aim of promoting Sri Lanka as an attractive destination for international shopping for branded items, internationally branded items were exempted from VAT and import duty. Further the economic service charges on BOI enterprises were revised down to 0.1%. These policies would definitely have a positive impact on the Odel group creating a promising future to enhance the business.

Recommendation

Looking at the current performance together with the future outlook of the group the counter looks attractive in the medium to long term. Thus we recommend a BUY.

Courtesy-Capital Trust Research

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