Odel PLC (ODEL), one of the nation's largest fashion, apparel and cosmetics retailers has exhibited strong performance in 1QFY11, upon being listed in the Colombo bourse during the same quarter. ODEL stores offer a broad selection of merchandise and feature products from both local and exclusive international brand sources. The Company operates 12 stores where the flagship store being located in the heart of Colombo and the rest spanning within the three districts of the Western Province and plans to open three more stores during the year 2010 (possibly in Wattala, Battaramulla and Kandy).
ODEL's revenue has grown by an impressive 62% YoY to LKR691.9 mn in 1QFY11. The expansion of branch net work, increase in tourist arrivals and better macro economic situation have served as the catalysts in driving up the revenue. However the Revenue per Sq. Ft has reduced by circa 5% to LKR5.4 K per Sq.Ft on the back of incremental revenue per Sq.Ft has been relatively lower at LKR5 K per Sq.Ft.
The overall COS per Sq.Ft has reduced 10% YoY to LKR3.4 K in 1QFY11 owing to the lower COS per Sq. Ft in new outlets which stands at LKR2.8 K per Sq.Ft. Subsequently the Gross profit has surged 77% YoY to LKR264.1 mn in 1QFY11 on the back of the faster dip in COS Sq. Ft vs. the Revenue per Sq.Ft. Further the gross profit margin has improved from 35% in 1QFY10 to 38% in 1QFY11.
Subsequent to the 77%YoY increase in Gross Profit the EBITDA has increased by 85% YoY in 1QFY11 due to the relatively slower increase in operating costs, which has recorded an increase of circa 61% YoY in 1QFY11. The increases in operating costs are attributable to the expansion of the branch network and increase in operations. With the expansion move the employee and rental costs have increased by circa 15% YoY and the Sales commissions and advertising costs have increased by circa 10% YoY.
Following the impressive 95% YoY increase in EBIT and the 17% YoY dip in finance costs the Profit before tax has soared 272% YoY to LKR60.2 mn in 1QFY11. However the fivefold YoY increase in the tax bill has diluted the profits of the company resulting in a 199% YoY increase in Net profit of LKR37 mn.
The increased tourist influx following the three decade old war would have a positive impact on ODEL as the company is renowned as favourite Shopping Mall of tourists in Sri Lanka”. Recovery in the economy brought about higher consumer sentiment driven by confidence in the market along with the reduction in unemployment. Thus with the disposable income on the rise local consumers tend to have a higher demand towards premium quality products.
ODEL’s market positioning as a premium department store is a competitive advantage with a lower substitutability and a few number of competitors. With the expansions which are currently carried out, ODEL expands its reach and would have access to a bigger market without dilution. The company’s own brand which yields a higher margin is mainly sold via the outlets in the Colombo suburbs. With the store expansion taking place the contribution from the own brands (at present the contribution is circa 20-30% of the top line) is expected to increase.
Against the backdrop and the 1QFY11 results being in line with our forecasts we maintain our FY11E earnings at LKR189.6 mn (UP 34% YoY) and FY12E earnings at LKR235.5 mn(up 24% YoY).
In terms of earnings based valuations the share is fairly valued on 21.4X forecast FY11E net profit and 17.2X forecast FY12E earnings. The share saw +100% increase in the share price on the first day of trading itself and currently trades at circa 85% premium to the issue price. Going forward we expect the counter to perform on par with the broad market and the downside risk is fairly limited, thus we rate ODEL a HOLD
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