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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