Ceylon Tobacco's (CTC) is the monopoly market operator for manufacturing, marketing and importing cigarettes in Sri Lanka. The company segregates the market based on income levels and markets Dunhill and Bensons for high income category along with Gold leaf for the middle income category, followed by Four Aces, Three Roses and Capstan for the low income category and Pall Mall as a value for money product. The company's net profit has increased by a strong 45.1% YoY to LKR1,116 mn in 2Q2010 on the back of high margin brand mix and stabilizing volume levels resulting from improved economic conditions in the country coupled with aggressive cost management initiatives.
Net revenue has increased 16.8% YoY to LKR3,418 mn in 2Q2010. CTC’s gross revenue has increased by a moderate 11.3% YoY to LKR16,300 mn in 2Q2010, resulting in a cumulative figure of LKR30,772 mn for the first half of 2010. Further the top line has risen by 12.6% QoQ owing to the excised price revision which took place in May 2010 where prices of all CTC brands went up by LKR1.00 per stick.
Further the company’s continuous focus on improved sales mix coupled with the grabbing of market share from illegal distributors and improved economic conditions has limited the impact from declining volumes resulting from the ban on smoking in public areas coupled with change in smoking habits amongst the general public.
However, the government’s continuous efforts in curbing the presence of smuggled and counterfeit cigarettes provide some optimism for volume growth in future.
Government levies continued to be nearly 80% of gross revenue, which grew by 10% YoY to LKR12,882 mn during the quarter in concern. Consequently, net revenue has grown by a healthy 16.8% YoY to LKR3,418 mn in 2Q2010 and LKR6,499 mn for 1H2010 (up 15.8% YoY).
Total operating costs have dipped 11.9% YoY to LKR1,572 mn. CTC’s total operating costs have dipped 11.9% YoY to LKR1,572 mn in the quarter in concern whilst recording a dip of 5.3% YoY in 1H2010. This could be directly attributable to the sharp fall of 27.3% YoY in raw material costs and 4.2% YoY dip in operating costs during the quarter in concern. Fall in raw material costs is resulted by lower sourcing costs of tobacco leaves when compared with the corresponding period last year where the company had to import tobacco due to the production shortage in the country.
The company’s productivity improvements have resulted 4.2% YoY dip in operating costs in 2Q2010 and 12% YoY saving for the first half of the year.
Net profit has risen by a strong 45.1% YoY to LKR1,116 mn. Net interest income has fallen by 52.0% YoY to LKR61 mn in the quarter in concern owing to falling interest rates. Nevertheless backed by the strong performance coupled with cost rationalization techniques, the company has recorded a net profit of LKR1,116 mn for 2Q2010, up by a sharp 45.1% YoY and LKR1,754 mn for the first six months of 2010 (up 39% YoY).
Forecast 2010E net profit to reach LKR4,487 mn. We forecast CTC to post a conservative net profit of LKR4,487 mn in 2010E (up by 9.1% YoY) whilst projecting 2010E net profit up by 7.5% to LKR4,823 mn on the back of the company’s continued focus on improving its brand mix coupled with successful cost rationalization exercises.
Fairly valued on 13.2X forecast 2010E net profit. The share is fairly valued on 13.2X forecast 2010E net profit and 12.3X projected 2011E net earnings. Further given the historical dividend payout ratio of nearly 100% and LKR9.7 per share being already declared, we believe the share would continue to be a dividend play - Maintain BUY
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