hhl initiation report.pdf
TRANSCRIPT
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Price Target : LKR78
SHARE PRICE CHART:
Hemas Holdings PLC
Well positioned to grab untapped market share in the private healthcare sector With its unique strategy of locating the hospitals in sub urban areas with high population density away from Colombo, Hemas will have a competitive advantage over other players who are located in the capital of Colombo. Increased confidence has been seen on He-mas hospitals throughout the past few years especially with high end surgeries succeed-ing at the Wattala hospital. This is further strengthened by the partnership with the Kerala Institute of Medical Sciences for staff training providing an unparalleled experience to customers resulting in improved profitability and revenue.
Strong demand for personal care products Despite heavy competition from similar products, Hemas FMCG revenue grew at a CAGR of 19.2% from FY2012-14. With rising per capita income, demand for personal care prod-ucts has been on the rise which saw considerable volume growth as well as price in-creases favoring the manufacturers. We expect this trend to continue in to the future and expect FMCG revenue to grow at a CAGR of 13.3% through FY2015E-17E.
Group revenue to grow at a CAGR of 13.9% through FY2015E-17E With the highest contribution to growth arising from the leisure segment. we expect lei-sure segment revenue to grow at a CAGR of 21.5% from FY2014-17E with the new 154 room luxury hotel to be opened in FY2016E. Further, with recent refurbishment carried out in two hotel properties, Club Hotel Dolphin and Hotel Sigiriya, we expect average occu-pancy to improve to 80% by FY2017E from current 75%. The acquisition of J. L. Morison Son and Jones (Ceylon) PLC (JLM) should also contribute to increased revenue.
EBITDA to grow at a CAGR of 15% through FY2015E-17E The acquisition of JLM should bring about efficiencies in the manufacturing plants and the distribution network to improve profitability. The divestment of the loss making power sector should also contribute to improved profitability.
Valuation We have used the SOTP method as the primary valuation method to arrive at a per share price of LKR78 which is further justified by our EV/EBITDA valuation which gives a per share price of LKR80 based on a EV/EBITDA multiple of 10.1x. Buy
Hemas Holdings PLC is a family run diversified conglomerate with business interests in FMCG, healthcare, transportation and leisure.
LKR '000 FY2012 FY2013 FY2014 FY2015E FY2016E FY2017E
Revenue 21,532,503 26,098,362 32,833,249 29,550,370 34,311,545 38,340,415
EBIT 1,783,950 2,436,994 3,378,598 3,256,852 3,829,979 4,331,622
EBIT Margin 8.3% 9.3% 10.3% 11.0% 11.2% 11.3%
Net Profit for equity 1,164,525 1,659,660 2,409,276 2,235,628 2,862,617 3,357,634
Net Profit Margin 5.9% 7.4% 7.8% 8.2% 9.3% 9.6%
EPS - LKR 2.45 3.76 4.97 4.72 6.17 7.16
Net Operating Cash Flow 1,507,983 1,863,616 2,895,800 3,872,027 3,511,183 4,246,482
Gearing 15.5% 16.7% 22.9% 16.6% 12.7% 9.8%
Price to earnings (P/E) 10.7x 7.2x 13.1x 13.8x 10.5x 9.1x
Price to book (P/B) 1.3x 1.1x 2.3x 2.1x 1.8x 1.5x
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LKR
DATE : 23rd October 2014
SHARE INFO:
Sector : Diversified Holdings
CSE Ticker : HHL.N0000
Price as at 23-Oct-2014 : LKR65
12 Month (High/Low) : LKR65.10/LK32.00
Price Chg (1m/ 1Q/1Y) : 10.2%, 33.7%, 101.2%
Market Cap. (LKR) : 32.9b
Market Cap. (USD) : 253.7mn
Free Float (%) : 28.25%
Avg. Daily Vol (1M). : 367,284
Issued Ordinary Shares : 515,290,620
MAIN SHARE HOLDERS:
A Z Holdings (Pvt) Ltd : 17.61%
Saraz Investments (Pvt) Ltd : 16.77%
Bluberry Investments (Pvt) Ltd : 16.65%
Amagroup (Pvt) Ltd : 16.65%
Employees Provident Fund : 5.29%
VALUATION SUMMARY:
TTM EPS : LKR4.91
TTM P/E (x) : 13.2x
Latest BVPS : LKR28.05
PBV (x) : 2.3x
Lead analyst: Nathasha Peiris | [email protected]| Mobile: +94779826558
Co analyst: Tharindu Kaduruwewa | [email protected] | Mobile: +94775924545 Source: Bloomberg, NLE
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Company Overview
Hemas Holdings PLC quoted in 2003, is a family run diversified conglomerate with LKR32.9bn (USD253.6mn) market capi-
talization and focuses on five key sectors i.e. FMCG, healthcare, transportation and leisure. The group was founded as a
pharmaceuticals and trading enterprise in 1948.
The status of Hemas as the largest private organization in the healthcare industry and the dominant distributor of pharma-
ceuticals, surgical & diagnostic products in Sri Lanka was further strengthened by the acquisition of J. L. Morison Son and
Jones (Ceylon) PLC (JLM) recently. Hemas hospitals focus on the middle income population in suburban areas gaining a
competitive advantage over other players centered in Colombo.
Hemas personal care product range offers trusted products to consumers contributing significantly to growth in group
revenue which are exported directly to 12 countries including Malaysia, New Zealand and Bangladesh.
Hemas is the leader in airline General Sales Agency (GSA) business in Sri Lanka for both passenger and cargo and also
has significant interest in Sri Lanka’s largest ship owning company (Mercantile Shipping Company PLC).
The group, under its leisure segment owns 4 hotels offering diversity to customers which will be further strengthened with
the investment in the luxury 5 star resort expected to commence operations in FY2016E.
The group recently announced the divestment of the power segment (Hemas Power PLC) with the aim of concentrating
on more profitable business ventures.
Figure 1: Business Interests
Source : HHL
Hemas Group
FMCG
Own Brands
International
Contract Manufacturing
Healthcare
Hospitals
Healthcare Distribution
Leisure
Hotels
Destination Management
Transportation
Aviation
Logistics
Maritime
Other
Vishwa BPO
N-Able
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SWOT Analysis
Strengths Weakness
Opportunities Threats
Position as Sri Lanka’s leading pharmaceutical im-
porter and distributor for over 6 years
Expanded chain of laboratories
Economies of scale from vertical integration
High end surgeries at Wattala hospital and increasing
confidence (increasing surgical patients)
Well trained staff (partnership with the Kerala Institute of Medical Sciences for staff training)
Focus on value-addition, expansion of existing ser
vices and specialization Strong distribution network for pharma Well known and trusted brand in baby care products Owns reputed international hotel brand ‘Avani’
Being located away from Colombo, attracting spe-
cialist doctors can be difficult
Increasing ageing population resulting in higher de-
mand for healthcare (rising longevity and low fertility
rates)
Increasing per capita income resulting in increased
demand
Increasing non communicable diseases
Increasing tourist arrivals and high demand for luxury
boutique type hotels
Govt expenditure on health as a % of GDP at lower
levels cf. region indicating potential demand for private
health care
Competition from other established brands for
FMCG products
Technological changes requiring frequent upgrades to infrastructure
Price regulation by the Consumer Affairs Authority
for pharmaceuticals
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Investment Highlights
Diversified into growing and profitable segments of the economy
HHL has been operating in key fast growing segments of the economy such as healthcare, pharmaceuticals and person-al care. The well experienced management team of the company regularly assesses profitability and growth aspects of the current segments as well as other rewarding segments of the economy and decides upon the strategies to capitalize on the opportunities available through divestment of unprofitable segments (e.g. Hemas Power PLC, Skynet Worldwide Express (Pvt) Ltd) and acquisition of profitable segments (e.g. J. L. Morison Son and Jones (Ceylon) PLC). This would as-sist Hemas in expanding their portfolio to remain profitable and to offer higher returns to investors.
Healthcare sector to benefit from increasing demand for private healthcare services and lucrative synergies through the acquisition of JLM
With increasing demand for private healthcare in Sri Lanka and its unique strategy of locating the hospitals in sub urban areas with high population density away from Colombo, Hemas will have a competitive advantage over other players who are located in the capital of Colombo. The newly opened hospital in Thalawathugoda should also contribute to in-creased revenue and profitability. Hemas group integrated vertically during FY2014 with the acquisition of J. L. Morison Son and Jones (Ceylon) PLC (JLM) expanding the pharmaceuticals distribution network and the product portfolio. With this acquisition we expect efficiencies in the manufacturing plants and the distribution network to improve. With these improvements we expect healthcare sector revenue to grow at a CAGR of 11.0% over FY2015E-17E.
Strong demand for personal care products
Despite of heavy competition from other similar products Hemas FMCG revenue grew at a CAGR of 19.2% from FY2012-
14. Domestic retail trade grew at a CAGR of 13.3% over the same period suggesting HHL’s ability to outpace the market.
With rising per capita income, demand for personal care products has been on the rise which saw considerable volume
growth as well as price increases favoring the manufacturers. Further, direct exports to countries with capacity for further
demand growth should assist Hemas in expanding volume and revenue further. Hence, we expect FMCG revenue to
grow at a CAGR of 13.3% through FY2015E-17E.
Focus on more profitable segments – divestment of Hemas Power
The company recently entered into an agreement to sell its entire holding in the power generating sector, a healthy move
towards improving profitability of the group. The thermal power plant which contributed to c. 90.0% of the power segment
revenue will cease operations in FY2015E with the Power Purchase Agreement being expired which is unlikely to be re-
newed. The company has already started impairing the assets which resulted in a loss of LKR162mn in FY2014E. With the
divestment, even though there will be a negative impact on the top line, we expect group profitability to improve in the
succeeding years.
Internationally recognized brands to boost leisure sector performance
Hemas leisure sector offers a diverse experience to its customers ranging from luxury resorts to activity oriented. Hemas
portfolio currently consisting of 4 hotels will be widened with the investment in the luxury 5 star resort in the Southern
coast in partnership with the Thailand based renowned Minor hotel group. This will expand the group hotel room count to
550 from current 410 which is expected to commence operations in FY2016E. Further, we expect Club Hotel Dolphin and
Hotel Sigiriya to post improved results which were refurbished during the last year. We expect, leisure segment revenue
to grow at a CAGR of 26.4% from FY2015E-17E and contribution to EBIT to increase to 7.8% by FY2016E.
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Hemas Healthcare and Pharmaceuticals
Hemas is the largest private organization in the Sri Lankan healthcare industry with the largest distribution network of
pharmaceuticals, surgical & diagnostic products. In addition it operates three hospitals and a chain of diagnostic labora-
tories. The sector contributes to 37% of the group revenue and 42% of the group EBIT.
Hospitals
Hemas operates 3 multi-specialty family hospitals with full international accreditations at Wattala (Hemas Hospital, Watta-
la), Thalawathugoda (Hemas Hospital, Thalawathugoda) and Galle (Hemas Southern Hospital). In addition it operates 11
laboratory and channeling service branches.
Hemas Hospital - Wattala
Opened in 2008, the Wattala hospital is a 100-bed multi specialty general hospital and offers a wide array of services in-
cluding emergency care, ICU, laboratory, CT, MRI, surgery and maternity. Over 150 specialist consultants visit the hospital
and records around 15,000 out-patient visits and 900 in-patient visits per month.
Hemas Southern Hospital - Galle
Opened in 2009 the hospital consists of 50 bed hospital consists of operation theatres, labor rooms, an Endoscopy unit, an
ICU, a modern diagnostic laboratory and a radiology unit.
Hemas Hospital - Thalawathugoda
Openned in 2013 Hemas hospital Thalawathugoda has a 60 bed capacity with around 200 visiting consultants.
Figure 3: Health Sector Contribution
63%
37%
Group Healthcare
Healthcare vs Group Revenue 58%
42%
Group Healthcare
Healthcare vs Group
EBIT
Hem
as H
ealth
care
Hospitals
Wattala
Galle
Thalawathugoda
Medical Laboratories
Healthcare Distribution
Pharmaceuticals
Surgicals and Diagnostics
Wellness
Figure 2: Healthcare Segment
Healthcare Distribution
Through its fully owned subsidiaries Hemas Pharmaceuticals (Pvt) Ltd, Hemas Surgical & Diagnostics (Pvt) Ltd and J L
Morison Son & Jones (Ceylon) PLC, M. S. J. Industries (Ceylon) (Pvt) Ltd Hemas healthcare distribution segment holds a
market share of 21% and records over LKR9bn turnover. This segment is referred to as Sri Lanka’s leading pharmaceutical
importer and distributor representing more than 25 international and regional pharmaceuticals manufacturers.
Source : HHL Source : HHL
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The public sector dominates the Sri Lankan healthcare in-
dustry with a wide spread network of infrastructure and es-
tablishments. The private sector on the other hand is still
relatively insignificant, yet exhibits strong demand growth
despite higher cost due to a multitude of factors such as
overcrowding, long waiting times service quality disparities
and the limited availability of medicines in government hos-
pitals.
The private healthcare sector caters largely to high and mid
income earners and individuals with access to medical in-
surance. Accordingly demand for private healthcare stems
from urban areas especially with a significant contribution
from Colombo where disposable incomes are high.
The industry experiences a shortage of skilled work force
and substantial brain drain. Therefore private hospitals are
heavily dependent on visiting specialists to attract patients,
thus has lead to a doctor-centric system rather than institu-
tion-centric. Hence demand is mainly dependent on the
number and quality of the consultants visiting a hospital.
Supply of private healthcare in Colombo largely lies with few
large players such as Asiri, Lanka Hospitals, Nawaloka and
Durdans Hospitals. The private sector’s presence is seen
largely in out-patient care. The industry is relatively capital
intensive, given the high costs of medical equipment, infra-
structure and technology.
Key factors driving competition apart from the number and
quality of resident and visiting doctors include quality of ser-
vices offered, hospital charges and room rates. In this con-
text private hospitals attempt to offer innovative products in
order to differentiate themselves from other players. Moreo-
ver some operators seems to specialize in a particular area
of medicine. Further operators appear to strengthen their
competitive position through consistent capacity expansions
and geographical expansions. Providing appropriate quality
and care to preserve brand name in the private hospital
business is of paramount importance.
The capital intensive nature of the business, brand name
and high startup costs precludes new entrants to a certain
extent and at the same time provides cushion for existing
operators.
Sri Lankan Healthcare Industry
Figure 4: Revenue Shares of Leading Hospitals
Source: Annual Reports
35%
19%
20%
18%
8%
Asiri Durdans Nawaloka Lanka Hemas
2014
0 75 150 225 300 375 450
Nawaloka
Durdans
Asiri Hospital
Asiri Surgical
The Central
Lanka Hospitals
Hemas
Bed capacity
Figure 5: Bed Capacity in Leading Hospitals
Source: Annual Reports, NLE
30,000
32,000
34,000
36,000
38,000
-
300
600
900
1,200
1,500
2009 2010 2011 2012 2013Patients per doctor (LHS)Patients per bed (LHS)Patients per hospital (RHS)
Figure 6: Health Sector Indicators
Source: CBSL
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Pharmaceuticals Industry
The pharmaceutical market in Sri Lanka is worth approxi-
mately LKR50bn. Around 70% of the market share is held by
the private sector while the remaining market share is held
by public sector institutions. (SLCPI). The local manufactur-
ing accounts for cf. 15% with over 200 products in 2013.
(SLPMA). The Cosmetics, Devices and Drugs Authority
(CDDA) regulates all pharmaceuticals, surgical products,
diagnostic products and health supplements both locally
manufactured and imported.
Since the public sector dominates the healthcare sector, the
main focus of local pharmaceutical manufacturers and im-
porters have been the public healthcare sector. Therefore
competition for government tenders have become fierce.
In addition the popularity in outpatient care of the private
sector and the tendency of people to buy drugs from phar-
macies due to the shortage of drugs in the public hospitals
and service quality disparities, supply of pharmaceuticals to
the private sector also demonstrates growth. In this context
suppliers enjoy relatively more pricing flexibility and bargain-
ing power.
Despite the large number of operators, competitors attempt
to specialize or gain monopolies in particular products. In
addition established operators seems to promote their prod-
ucts through medical practitioners in the industry.
We believe demographic changes such as increasing age-
ing population, rising of chronic diseases, increasing health
awareness will drive demand for healthcare and pharma-
ceuticals. This is further reinforced by the increasing dispos-
able income, overcrowding and inadequate capacity of gov-
ernment hospitals. Further we expect competition in the pri-
vate healthcare sector to rise in the medium term with ca-
pacity expansions especially in urban areas resulting in
downward pressure on prices.
The pharmaceuticals industry would experience modest
growth in volumes due to aforementioned facts and also
face stringent regulations in the medium term.
We expect the doctor centric nature of the industry to contin-
ue supported by powerful unionization.
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
2009 2010 2011 2012 2013Capital expenditure on healthCurrent expenditure on healthImports of medical and pharmaceutical products (govt. & private)
LKRmn. LKRmn.
Figure 7: Health Sector Expenses
Source: CBSL
Figure 8: Non Communicable Diseases Growth
0
0.9
1.8
2.7
3.6
4.5
5.4
1990 1995 2000 2005 2007 2009NeoplasmsMental and behavioural disordersDiseases of the circulatory systemDiseases of the respiratory systemInjury, poisoning and other
Population mn.
Source: Ministry of Health
Figure 9: Aging Population in Sri Lanka
0% 20% 40% 60% 80% 100%
1963
1978
1986
1996
2001
2007
2013
0 - 14 Years 15 - 54 Years 55 Years and Over
Source: CBSL
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FMCG
Hemas FMCG sector includes a range of well-known and
established products for all age categories in hair care, skin
care, toiletries, fragrances, feminine hygiene, home care and
oral care.
The products are available in nearly 140,000 outlets island
wide ranging from small scale retail stores to large super-
markets. A selected number of Hemas brands are directly
exported to Maldives, Lebanon, Bangladesh, Belize, New
Zealand, Zambia, Malaysia, Pakistan, Australia and Middle
East as well as indirectly exported through Sri Lankan Export
Development Board (SLEDB) approved exporters.
Figure 10: FMCG Sector Contribution
71%
29%
Group FMCG
FMCG vs Group
Revenue67%
33%
Group FMCG
FMCG vs Group EBIT
Major Brands
Brand Description
Baby Cheramy The company’s flagship brand with over 50 years of trusted excellence continues to be market leader and has been the preferred choice of Sri Lankan mothers.
Clogard Re-launched successfully and has recorded significant growth, despite heavy competition and low over all market growth.
Kumarika Maintains position as the market leader in the branded hair oil segment in Sri Lanka which has seen significant demand from the Bangladesh market as well.
Velvet The brand was re-launched as an improved product with dual ingredients to make its proposi-tion more appealing to the consumers, supported by new attractive packaging.
Diva The company’s washing powder continues to provide strong value to the consumers. Diva was re-launched with improved perfume, enhanced washing functionalities and attractive packaging.
PRO Under this new brand name the company launched two variants of ‘Eau De Toilette Spray’ tapping into the premium male fragrances category. Pro hair gel is a well-known for its unique features.
Gold Male fragrance and grooming product range; re-launched to cater to evolving consumer needs.
The Cheramy Touch range This brand has been launched to exploit opportunities in the growing adult Skin Care catego-ry.
Paris, Goya and Capri Female fragrance product range catering to different market segments.
Source: HHL
Contract Manufacturing
Hemas acts as a contract manufacturing partner in the development and manufacture of FMCG products for several
leading companies. This segment has lucrative prospects especially with the trend of supermarket chains promoting own
branded goods.
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FMCG Industry in Sri Lanka
The LKR133bn Fast Moving Consumer Goods (FMCG) mar-
ket in Sri Lanka is highly competitive and fast changing. The
personal care and household care segment is largely domi-
nated by MNCs. The FMCG market growth is mainly driven
by higher disposable income, new channels and choices of
new products for consumers to choose from and important-
ly, price since consumers are very value conscious in this
segment.
The personal care industry growth exceeded food & bever-
age and household care driven mainly by price increases,
while the growth of household care was below the inflation
rate during the past 3 years. The food and beverages seg-
ment experienced a noticeable decline with the increase in
substitutes and changes in lifestyle.
The emerging lifestyle and personal care products, that ap-
peal to younger consumers demonstrates the highest poten-
tial growth. In a trend perspective, the lucrative target of mar-
keters have been the consumers born in the 1980s and
1990s; the reality TV show era since they represent a signifi-
cant 3.5mn of the population and are becoming increasingly
more influential. In addition to being a group with growing
spending power, Millennials tend to be more optimistic than
the average consumer and exhibits the highest consumer
confidence. They also tend to spend more on themselves
when it comes to discretionary purchases.
Further, package size is a primary consideration in the indus-
try. Retailers and companies have been offering products in
medium-sized packs to provide a price-conscious option
when consumers did not have the economic bandwidth to
spend for larger, higher-cost packages. However, in recent
times, consumers tend to use these options less. Moreover,
more and more consumers tend to gradually shift to either
larger or smaller sizes even when prices for smaller packs
increase. Furthermore the value added branding culture
seems to become more prominent with the influence by
social media networks.
We believe the increasing per capita income of the consum-
ers, increasing standards of living of the rural population,
expanding middle income segment in the economy, influ-
ence of social media and massive influx of tourists into the
country would drive the industry growth further.
Figure 11: FMCG Sector
22%
13%
63%
Personal care
Household care
Food and Beverages
OTC products
Source: HHL
Figure 12: FMCG Sector Growth
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
FMCG-All Food &Beverages
HouseholdCare
Personal Care
All Island All Island (R) All Island (U)
Source: HHL
-
50,000
100,000
150,000
200,000
250,000
2012 2013 2014 2015 2016 2017 2018 2019
Per Capita GDP-current prices (LKR)
LKR
Figure 13: Per Capita GDP Growth
Source: IMF
Pg | 10
Leisure Sector
The Serendib Leisure Group of Hotels and Diethelm Travels-
make up the Hemas Leisure Sector. The Serendib Leisure
group comprises of four hotels. i.e. Avani Bentota, Avani
Kalutara, Club Hotel Dolphin and Hotel Sigiriya and is locat-
ed on the south and west coast and within the heart of the
cultural triangle. Diethelm Travels is the local branch of a
international travel group. The sector accounts for 5% of the
group revenue and 11% of the group profit.
Leisure structure
Serendib Hotels PLC and Dolphin Hotels PLC are subsidiar-
ies of Hemas Holdings PLC. Serendib Hotels PLC is the ma-
jor shareholder of Hotel Sigiriya PLC (Hotel Sigiriya in Dam-
bulla) and also holds a stake in Dolphin Hotels PLC (Club
Hotel Dolphin and Miami Cottages in Waikkal). It also has a
19.9% stake in Jada Resort & Spa (Pvt.) Ltd. (associate)
which owns Avani Kalutara Resort in Kalutara Serendib Ho-
tels’ fully owned subsidiary Serendib Leisure Management
Ltd. manages all of the above properties. Serendib Leisure is
in partnership with Minor International– A Thailand based
hotel group which owns the ‚Avani‛ and ‚Anantara‛ brands.
Hotel Sigiriya
Hotel Sigiriya has 79 rooms 1 restaurant and was last reno-
vated in 2013. It records an average occupancy of 70% in
2013.
Club Hotel Dolphin
Is located in Waikkal, Negombo and is positioned as an all inclusive club hotel that offers a range of sporting and recrea-
tional activities and also allows for time out and relaxation. It is equipped with 151 rooms which include 99 deluxe rooms
and 50 beach villas. In addition it as 2 restaurants and 5 bars. The hotel was renovated in 2013 with new additions such as
a night club and a karoke bar. The hotel achieved an average occupancy of 84% in 2013.
Avani Kalutara
Located in the southwest coast Avani Kalutara is equipped with 105 rooms and was last renovated in 2012.
Avani Bentota Resort & Spa
It is a beachfront accommodation with 75 rooms, 2 restaurants and 2 bars. It was last renovated in 2011. The hotel
achieved an average occupancy of 68% and posted revenue of LKR429mn.
95%
5%
Group Leisure
Leisure vs Group
Revenue
87%
13%
Group Leisure
Leisure vs Group
EBIT
Figure 14: Leisure Sector Contribution
Source: HHL
0100200300400500600700
Avani Bentota Dolphin hotels Hotel Sigiriya
Revenue Gross Profit Net Profit
LKR mn
Figure 15: Top Hotel Financials
Source: HHL
Pg | 11
Sri Lankan Tourism
Tourism is a fast-developing industry in Sri Lanka and one of
the main sources of foreign exchange earnings. The island
boasts beautiful natural surroundings and historical sites as
its key tourist attractions. It is continuously on the lookout for
ways and means to attract tourists by widening its portfolio
of offerings to include entertainment, recreation, sports,
ayurveda, wildlife, heritage culture and festivals, moving be-
yond the traditional beach and sand focus.
Commendable support from the government is noticeable
by way of infrastructure development and active promotion
of the country as a holiday location. Further, 45 tourism
zones have been introduced by SLTDA as a means of
streamlining the development of the industry and attracting
foreign direct investments.
Significant foreign interest is apparent in the leisure sector
with many international hotel brands entering the country
which will in turn uplift the industry standards and stimulate
healthy competition. Further, this signifies the importance for
existing operators of expertise and international brand pres-
ence in gaining competitive advantage.
Europeans have been the largest source market in the in-
dustry with substantial development from non traditional
markets such as India, China and Middle East which we
believe helps reduce the seasonality experienced in the in-
dustry.
Notably hotel operators attempt to improve online presence
and encourage online reservations. Also seems to enrich
their offerings to include more innovative activities such as
water sports, hot air ballooning and safaris, with the inten-
tion of increasing average stay of tourists.
At present the lack of international grade resorts and com-
paratively higher room rates discourage tourist to visit the
country to some extent and favor countries such as Malay-
sia, Indonesia and Thailand.
Further skilled labor in the industry experiences a shortage
and we expect this to further worsen in the future with inter-
national brands entering the Sri Lankan hotel industry.
Figure 16: Peer Country Tourist Arrivals
0%
5%
10%
15%
20%
25%
30%
0
5
10
15
20
25
30
Srila
nka
Thai
land
Viet
nam
Mal
dive
s
Mal
aysi
a
Indo
nesi
a
Cam
bodi
a
Mill
ion
s
2011 2012 Growth
Arrivals mn Growth YoY
Source: UNWTO
0
100
200
300
400
500
600
WesturnEurope
EasternEurope
NorthAmerica
Asia Australia Other
2012 2013
Arrivals '000
Figure 17: Arrivals by Market
Source: SLTDA
Figure 18: Average Occupancy
0%
20%
40%
60%
80%
100%
Club Hotel Dolphinavg. occupancy
Avani Bentota avg.occupancy
Hotel Sigiriya avg.occupancy
Ancient cities avg. occupancy
Greater Colombo avg. occupancy
Source: SLTDA, HHL
Pg | 12
The group’s transportation sector’s business portfolio in-
cludes aviation, maritime and logistics services. The sector
accounts for 5% of the group revenue and 18% of the group
EBIT.
Aviation Services
Aviation services include air line representation and out-
bound travel. It represents Emirates, Malaysia, Maldivian
airlines in both passenger and cargo services as well as
Ukraine international, Druke, Alithalia airlines in the passen-
ger only services segment.
In its outbound travel segment Hemas Travels operates trav-
el agencies. The corporate travel services is partnered with
Hogg Robinson Group, an international corporate services
organization headquartered in the UK.
The leisure arm offers both packaged and customized vaca-
tions. It also operates coach tours and is the local agent for
Globus and Cosmos worldwide tours. Further, it is also local
agent for Royal Caribbean Cruise Lines, & Gulliver's Travel
Associates
Passenger arrivals demonstrate a steady increase of 9.2%
CAGR during 2011-13 along with commendable capacity
improvement with several new airlines entering the country.
We expect the segment to grow especially through im-
proved GSA sales supported by increased corporate, incen-
tive and leisure travel. This is well supported by the boom in
the tourist industry, improved disposable income and the
efforts and focus of the government to position Sri Lanka as
an aviation hub through promotions and infrastructure de-
velopment.
Transportation Sector
Figure 19: Transportation Sector Contribution
95%
5%
Group Transportation
Transportation vs Group Revenue
82%
18%
Group Transportation
Transportation vs Group EBIT
Source: HHL
Figure 20: Airline Operations, Growth and Market Share
-60
-40
-20
0
20
40
60
80
- 500
1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500
SriL
anka
n
Emira
tes
Mih
in
Qat
ar
Fly
Dub
ai
Jet A
irway
s
Cath
ay P
acifi
c
Air A
rabi
a
Sing
apor
e
Mal
aysi
an
Oth
er
2012 2013 Growth YoY Market share (2013)
Passenger traffic '000 %
Source: AASL
Figure 21: Flight, Cargo and Passenger Movement
5,500
6,000
6,500
7,000
7,500
0
50
100
150
200
250
2010
2011
2012
2013
Tho
usa
nd
s
International flight movements nos.Cargo movement M.T.Passenger movement nos.
'000 '000
Source: AASL
Pg | 13
Logistics
The logistics business includes freight forwarding, courier
services, general carries and warehousing. The company
has exited the joint venture with Skynet Worldwide and is in
talks with Hellman Worldwide Logistics for a mutual parting.
We believe the segment is more liner now with ACX interna-
tional focusing on courier services and Hemas logistics fo-
cusing on general carries and warehousing.
Maritime
The sector acts as a shipping agent, provides maritime services and is involved in strategic investments. Far Shipping
Lanka (FSL) acts as the exclusive shipping agent for Far Shipping Lines (FSL) Singapore, a leading feeder service to the
Indian subcontinent. In addition it provides shipping agency services including crew changes, import and export (Sea/Air)
shipments of ship spares, CTM (Cash To Master), ship repairing (ashore and anchorage), periodic and annual inspection
and certification of life saving equipment on board amongst other services to vessels calling at ports at Colombo, Galle,
Hambantota and Trincomalee. Furthermore the group has a strategic investment in Mercantile Shipping PLC.
Globally the maritime industry is yet being impacted by sluggish growth in trade volumes due to the economic situation in
the west and the prevalent over-capacity situation in the industry. However Sri Lankan container handling throughput
exhibits satisfactory development (2.8% in 2013) and we expect this to continue with the expected gradual recovery in the
western economy, government’s pursue towards making the country a maritime hub and Hemas maritime sector being
positioned with strong partnerships such as with Far Shipping Singapore.
Other
Hemas other business includes corporate services, property
development, Financial accounting BPO, information tech-
nology solutions, importing and distributing agro chemicals,
promotional activities and wharf clearing services.
Figure 22: Colombo Port Cargo Handling
58
60
62
64
66
68
2010 2011 2012 2013
0
1
2
3
4
5
Tho
usa
nd
s
Tho
usa
nd
s
Total container traffic (TEUs mn) (LHS)Transshipment containers (TEUs mn) (RHS)Total cargo handled (MT mn) (LHS)
Mn.Mn.
Source: CBSL
Figure 23: Other Sector Contribution
95%
5%
Group Others
Other vs Group
Revenue
5%
-3%
2013
2014Other vs
Group EBIT
Source: HHL
Power
The group divested its investment in Hemas Power PLC to a
consortium of buyers recently. The power segment of He-
mas contributed 20% of the group revenue in FY2014. How-
ever the contribution to EBIT fell to –3% in FY2014 cf. 13% in
FY2013. Changing weather patterns have resulted in long
periods of drought and has lead to the dependence on ther-
mal power in the industry.
Pg | 14
0%
20%
40%
60%
80%
100%
FY2013 FY2014 FY2015E FY2016E FY2017EHealthcare FMCG TransportationOther Leisure Power
Revenue
Group revenue increased 25.8% yoy in FY2014 to LKR32.8b cf. LKR26.1b in FY2013 crossing the LKR30b mark for the
first time. The acquisition of J. L. Morison Son and Jones (Ceylon) PLC (JLM) during FY2014 contributed significantly to
revenue growth with LKR2.7b.
Highest contributor to group revenue is the healthcare sector (36.7%) which increased 34.4% yoy to LKR12.1b in
FY2014. The growth was mainly attributable to the acquisition of JLM and new revenue from the hospital in Thalawa-
thugoda.
FMCG and Power sectors followed with 29.1% and 19.7% in FY2014 respectively.
The leisure sector revenue declined 4.9% yoy in FY2014 due to 2 hotel properties being closed for refurbishment.
At group level revenue increased at a CAGR of 23.5% with the highest contribution to growth from the transportation
segment.
We expect group revenue to decline 10.0% yoy to LKR29.5b in FY2015E with the divestment of Hemas Power PLC
(which contributed to 19.7% of total revenue in FY2014).
Consequently the revenue share from the healthcare segment should increase to 44.1% in FY2015E from 36.7% in
FY2014 with 8.0% growth yoy.
However, we expect group revenue to increase at a CAGR of 13.9% from FY2015E-17E with the highest contribution to
growth arising from the leisure segment.
We expect leisure segment revenue to grow at a CAGR of 21.5% from FY2014-17E with the new 154 room luxury hotel
to be opened in FY2016E. Further, with recent refurbishment carried out in two hotel properties, Club Hotel Dolphin
and Hotel Sigiriya, we expect average occupancy to improve to 80% by FY2017E from current 75%.
Financial Analysis
Figure 25: Group Revenue
Source: HHL, NLE
Figure 24: Sector Wise Contribution to Revenue
Source: HHL, NLE
-15%-10%-5%0%5%10%15%20%25%30%
0
10,000
20,000
30,000
40,000
50,000
FY2012 FY2013 FY2014 FY2015EFY2016EFY2017E
Revenue (LKRmn) (LHS) YoY Growth (RHS)
Pg | 15
0.0%
5.0%
10.0%
15.0%
20.0%
FY2012 FY2013 FY2014 FY2015E FY2016E FY2017E
ROE ( Equity holders) ROCE ROA
Profitability
EBIT excluding the gain from change in fair value of
investment property (LKR729mn) and share of profit of
associates (LKR12mn) increased 11.3% yoy to LKR2.6b
in FY2014 with the highest contribution coming from the
healthcare segment (41.6% yoy growth and 31.3% EBIT
margin).
The power sector made an operating loss of LKR75mn
with an impairment charge of LKR576mn upon the Pow-
er Purchase Agreement (PPA) of the thermal power
plant being ceased in December 2014, which is unlikely
to be renewed.
The closure of the 2 hotel properties also contributed to
reduced profitability with EBIT of the segment declining
32.6% yoy in FY2014.
Net profit increased 32.3% yoy to LKR2.6b in FY2014
(including one off items i.e. gain in change of fair value
of investment property of LKR729mn and impairment of
thermal assets of LKR576mn).
The gain in change of fair value of investment property
is attributable to the transfer of land to a joint venture to
commence construction of a hotel.
We expect EBIT to be at LKR3,256mn in FY2015E cf.
LKR3,378mn in FY2014. The reduction is on the back of
change in FV gain of LKR729mn recorded in FY2014.
The divestment of Hemas Power PLC will be beneficial
relating to its effect on profitability eliminating the losses
incurred by the power segment.
ROE and ROA increased to 18.2% and 8.0% in FY2014
respectively cf. 14.6% and 6.8% in FY2013 mainly at-
tributable to increased profitability and increased effi-
ciency of assets. With reduced profitability in FY2015E,
we expect ROE and ROA to decline to 14.8% and 6.5%
in FY2015E and improve thereafter.
0%
2%
4%
6%
8%
10%
12%
0
1,000
2,000
3,000
4,000
5,000
FY2012 FY2013 FY2014 FY2015E FY2016E FY2017E
EBIT (LKRmn) (LHS) EBIT Margin (RHS)
0%
2%
4%
6%
8%
10%
12%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
FY2012 FY2013 FY2014 FY2015E FY2016E FY2017E
Net Profits (LKRmn) (LHS) NP Margin (RHS)
Figure 26: ROE, ROA and ROCE
Figure 27: EBIT
Figure 28: Net Profit
Source: HHL, NLE
Source: HHL, NLE
Source: HHL, NLE
Pg | 16
Group Property, Plant and Equipment increased 20.2% yoy in FY2014 mainly attributable to the acquisition of JLM.
Net Assets of the group stood at LKR27.75 at the end of FY2014 and LKR28.05 at the end of Q1FY2015.
The gearing ratio stood at 22.9% (excluding overdraft) at the end of FY2014, cf. 16.7% in FY2013 with net additions
amounting to LKR2b during the year.
With the aim of restructuring the balance sheet the company issued 5 year LKR1b debentures at 11.3% (effective
rate). The proceeds will be utilized to pay off existing debt allowing the company to have both fixed and floating rate
borrowings.
The repayment of debt will result in reduced gearing which we expect to lower to 17.0% in FY2015E and improve fur-
ther in the subsequent years.
0%
20%
40%
60%
80%
100%
120%
FY2012 FY2013 FY2014 FY2015E FY2016E FY2017E
Short term Debt % Long term Debt %
Figure 30: Net Assets Figure 29: Debt Composition
Source: HHL, NLE Source: HHL, NLE
Figure 32: Liquidity
0.00
0.50
1.00
1.50
2.00
FY2012 FY2013 FY2014 FY2015E FY2016E FY2017E
Current Ratio Liquidity Ratio
Source: HHL, NLE
Figure 31: Total Debt to Equity
0%
5%
10%
15%
20%
25%
0
10,000
20,000
30,000
FY2012 FY2013 FY2014 FY2015EFY2016EFY2017ETotal Equity (LKRmn) (LHS)Total Debt (LKRmn) (LHS)Total Debt to Capital % (RHS)
Source: HHL, NLE
0.00
10.00
20.00
30.00
40.00
50.00
FY2012 FY2013 FY2014 FY2015E FY2016E FY2017ENet Asset Value per share (LKR)
Financial Position
Pg | 17
LKR ‘000 FY2012 FY2013 FY2014 FY2015E FY2016E FY2017E Statement of Comprehensive Income Revenue 21,532,503 26,098,362 32,833,249 29,550,370 34,311,545 38,340,415 Gross profits 6,574,778 8,023,271 10,219,439 9,160,615 10,636,579 11,885,529 EBIT 1,783,950 2,436,994 3,378,598 3,256,852 3,829,979 4,331,622 Profit Before Tax 1,521,080 2,409,541 3,047,239 2,891,511 3,607,391 4,174,626 Net Profit 1,261,308 1,935,843 2,560,905 2,430,031 3,180,686 3,689,708 Net Profit for equity holders 1,164,525 1,659,660 2,409,276 2,235,628 2,862,617 3,357,634 EPS - LKR 2.45 3.76 4.97 4.72 6.17 7.16 Statement of Financial Position Total Non-Current Assets 11,853,344 13,059,937 17,630,397 15,483,049 16,925,885 18,521,129 Total Current Assets 10,802,342 12,947,721 16,748,492 17,210,444 19,021,108 21,189,612 Total Equity (with Minority Interest) 12,640,944 14,412,379 17,629,635 18,367,073 21,064,337 24,270,623 Total Non-Current Liabilities 1,938,996 2,803,970 4,327,089 3,410,370 2,994,859 2,704,001 Total Current Liabilities 8,075,746 8,791,309 12,422,165 10,916,050 11,887,798 12,736,117 NAV Per share - LKR 20.67 23.58 27.75 31.59 36.35 42.06 Statement of Cash Flow Net Operating Cash Flow 1,507,983 1,863,616 2,895,800 3,872,027 3,511,183 4,246,482 Net Investing Cash Flow (1,608,823) (1,361,483) (4,662,937) (387,716) (2,401,808) (2,683,829) Net Financing Cash Flow (437,744) 131,349 1,140,803 (1,603,128) (1,077,008) (898,932) Net Change in Cash (538,584) 633,482 (626,334) 1,881,183 32,366 663,721 Growth ratios (%) Revenue YoY 19.2% 21.2% 25.8% (10.0%) 16.1% 11.7% Gross profit YoY 12.6% 22.0% 27.4% (10.4%) 16.1% 11.7% Operating profit YoY 2.5% 36.6% 38.6% (3.6%) 17.6% 13.1% Profit Before Tax YoY (3.1%) 58.4% 26.5% (5.1%) 24.8% 15.7% Net profit YoY (6.9%) 53.5% 32.3% (5.1%) 30.9% 16.0% Net profit- parent YoY -3.8% 42.5% 45.2% (7.2%) 28.0% 17.3% Margins (%) Gross profit 30.5% 30.7% 31.1% 31.0% 31.0% 31.0% EBITDA 11.2% 12.0% 13.0% 13.9% 14.0% 14.1% Operating profit 8.3% 9.3% 10.3% 11.0% 11.2% 11.3% Profit before tax 7.1% 9.2% 9.3% 9.8% 10.5% 10.9% Net profit 5.9% 7.4% 7.8% 8.2% 9.3% 9.6% Turnover ratios (x) Inventory turnover 8.1x 8.2x 7.1x 5.8x 7.2x 7.0x Receivable turnover 4.2x 4.0x 4.2x 3.6x 4.0x 3.9x Payable turnover 3.2x 3.3x 3.3x 2.7x 3.1x 3.0x Other ratios (%) ROE (to equity holders) 11.9% 14.6% 18.2% 14.6% 16.4% 16.6% ROA 5.6% 6.8% 8.0% 6.7% 8.3% 8.9% ROCE 13.1% 15.3% 17.2% 14.9% 16.7% 17.0% Dividend Payout 20.4% 14.6% 15.1% 12.7% 13.0% 11.2% Gearing ( Total Debt to Capital) 15.5% 16.7% 22.9% 16.6% 12.7% 9.8% Current ratio (x) 1.3x 1.5x 1.3x 1.6x 1.6x 1.7x Liquidity ratio (x) 1.1x 1.2x 1.0x 1.3x 1.3x 1.4x
Financial Snapshot
Pg | 18
LKR ‘000 FY2012 FY2013 FY2014 FY2015E FY2016E FY2017E
Revenue 21,532,503 26,098,362 32,833,249 29,550,370 34,311,545 38,340,415 Cost of Sales (14,957,725) (18,075,091) (22,613,810) (20,389,756) (23,674,966) (26,454,887) Gross Profit 6,574,778 8,023,271 10,219,439 9,160,615 10,636,579 11,885,529 EBITDA 2,413,372 3,144,587 4,284,570 4,099,830 4,788,951 5,420,207 Depreciation 629,422 707,593 905,972 842,979 958,972 1,088,585 Operating Profit 1,783,950 2,436,994 3,378,598 3,256,852 3,829,979 4,331,622 Finance Cost (465,269) (370,103) (657,076) (691,058) (548,304) (482,713) Finance Income 202,399 342,650 325,717 325,717 325,717 325,717 Profit Before Tax 1,521,080 2,409,541 3,047,239 2,891,511 3,607,391 4,174,626 Income Tax Expenses (259,772) (473,698) (486,334) (461,480) (426,706) (484,918) Profit for the Year 1,261,308 1,935,843 2,560,905 2,430,031 3,180,686 3,689,708 Equity Holders of the Parent 1,164,525 1,659,660 2,409,276 2,235,628 2,862,617 3,357,634 Non-Controlling Interests 96,783 276,183 151,629 194,402 318,069 332,074
LKR ‘000 FY2012 FY2013 FY2014 FY2015E FY2016E FY2017E
Profit Before Taxation 1,521,080 2,409,541 3,047,239 2,891,511 3,607,391 4,174,626 Net Cash flows from Operations 1,507,983 1,863,616 2,895,800 3,872,027 3,511,183 4,246,482 Net Cash flow from Investments (1,608,823) (1,361,483) (4,662,937) (387,716) (2,401,808) (2,683,829) Net Cash flows from Financing (437,744) 131,349 1,140,803 (1,603,128) (1,077,008) (898,932) Net Increase/(Decrease) (538,584) 633,482 (626,334) 1,881,183 32,366 663,721 Beginning Cash/ Cash Equivalents 1,101,008 561,533 1,194,936 570,587 2,451,770 2,484,136 Ending Cash/ Cash Equivalents 561,533 1,194,936 570,587 2,451,770 2,484,136 3,147,857
Income Statement
Cash Flow Highlights
Pg | 19
LKR ‘000 FY2012 FY2013 FY2014 FY2015E FY2016E FY2017E
ASSETS
Non Current Assets
Property, Plant and Equipment 10,283,616 11,293,957 13,571,854 11,424,506 12,867,342 14,462,586 Investment Properties 474,685 578,453 1,683,130 1,683,130 1,683,130 1,683,130 Leasehold Right 94,455 90,592 145,847 145,847 145,847 145,847 Intangible Assets 461,499 436,701 1,333,247 1,333,247 1,333,247 1,333,247 Investment in Associates 179,399 221,325 380,303 380,303 380,303 380,303 Other Non Current Financial Assets 324,069 399,147 457,435 457,435 457,435 457,435 Deferred Tax Assets 35,621 39,762 58,581 58,581 58,581 58,581 11,853,344 13,059,937 17,630,397 15,483,049 16,925,885 18,521,129 Current Assets
Inventories 2,004,989 2,425,137 3,932,906 3,058,463 3,551,245 3,968,233 Trade and Other Receivables 5,854,420 7,047,695 8,523,389 7,978,600 9,264,117 10,351,912 Tax Recoverable 134,306 78,590 126,716 126,716 126,716 126,716 Other Current Financial Assets 361,515 172,919 1,032,714 1,032,714 1,032,714 1,032,714 Cash and Short Term Deposits 2,447,112 3,223,380 3,132,767 5,013,950 5,046,316 5,710,037 10,802,342 12,947,721 16,748,492 17,210,444 19,021,108 21,189,612 TOTAL ASSETS 22,655,686 26,007,658 34,378,889 32,693,493 35,946,994 39,710,742
EQUITY AND LIABILITIES
Equity
Stated Capital 1,600,603 1,600,603 1,600,603 1,600,603 1,600,603 1,600,603 Other Capital Reserves 440,601 409,751 400,289 400,289 400,289 400,289 Other Components of Equity 1,161,253 1,314,477 922,551 922,551 922,551 922,551 Retained Earnings 7,447,822 8,828,511 11,377,081 13,354,824 15,805,209 18,750,611 Equity Attributable to Equity Holders 10,650,279 12,153,342 14,300,524 16,278,267 18,728,652 21,674,054 Non-Controlling Interests 1,990,665 2,259,037 3,329,111 2,088,805 2,335,685 2,596,570 Total Equity 12,640,944 14,412,379 17,629,635 18,367,073 21,064,337 24,270,623 Non Current Liabilities Interest Bearing Loans and Borrow. 1,384,827 2,182,887 3,468,422 2,551,703 2,136,192 1,845,334 Other Non Current Financial Liability 144,518 140,343 158,010 158,010 158,010 158,010 Deferred Tax Liabilities 161,309 193,313 273,418 273,418 273,418 273,418 Employee Benefit Liability 248,342 287,427 427,239 427,239 427,239 427,239 1,938,996 2,803,970 4,327,089 3,410,370 2,994,859 2,704,001 Current Liabilities Trade and Other Payables 5,189,966 5,906,044 7,956,628 7,136,414 8,286,238 9,259,210 Income Tax Payable 63,743 141,591 123,869 123,869 123,869 123,869 Interest Bearing Loans and Borrow. 936,458 715,230 1,779,488 1,093,587 915,511 790,858 Bank Overdrafts 1,885,579 2,028,444 2,562,180 2,562,180 2,562,180 2,562,180 8,075,746 8,791,309 12,422,165 10,916,050 11,887,798 12,736,117 TOTAL LIABILITIES 10,014,742 11,595,279 16,749,254 14,326,420 14,882,657 15,440,118 TOTAL EQUITY AND LIABILITIES 22,655,686 26,007,658 34,378,889 32,693,493 35,946,994 39,710,742
Balance Sheet
Pg | 20
Du Pont Analysis FY2012 FY2013 FY2014 Sustainable Growth Rate 9.5% 12.4% 15.5% ROE 11.9% 14.6% 18.2%
Financial Leverage 2.14x 2.13x 2.28x ROA 5.6% 6.8% 8.0%
Asset Turnover 1.03x 1.07x 1.09x Profit Margin 5.4% 6.4% 7.3%
Interest Burden 0.85x 0.99x 0.90x Tax Burden 0.83x 0.80x 0.84x Minority 0.92x 0.86x 0.94x
Net profit margin increased to 7.3% in FY2014 from 6.4% in FY2013 as a result of EBIT margin increasing from 9.3% to 10.3%, effective taxation decreasing from 19.7% to 16.0% and the share attributable to minority declining from 14.3% to 5.9% over the same period which counteracted the effect of increasing finance expenses.
Efficiency of assets increased from 1.07x to 1.09x resulting in an increased ROA of 8.0% in FY2014 cf. 6.8% in FY2013. With increased debt utilized to finance the purchase of assets financial leverage increased from 2.13 to 2.28 resulting in a higher ROE of 18.2% in FY2014 cf. 14.6% in FY2013.
Pg | 21
Valuation
Primary Valuation
We have used the SOTP method as the primary valuation to arrive at a per share price of LKR78. FMCG, healthcare, lei-sure and transportation segments have been valued using the P/E multiples applicable to each segment. FMCG sector is valued using a multiple of 21.1x (discounted average multiple of CARG and NEST), healthcare sector valued at 9.7x (discounted sector P/E), leisure sector valued using a multiple of 12.4x (average of CONN, STAF and PEG), transportation sector valued at 15.7x (discounted P/E multiple of DOCK) and the other segment is valued at the fair value of net assets to arrive at a total equity value of LKR40b.
Sector Valuation method Multiple (x) Equity value (LKRmn) Per share (LKR)
FMCG P/E 21.7 16,921 33 Healthcare P/E 9.7 6,255 12 Leisure P/E 12.0 778 2 Transportation P/E 15.7 6,316 12 Other Net Assets 10,013 19
40,283 78
Secondary Valuation
The derived target price of LKR78 is further justified by our EV/EBITDA valu-ation which gives a per share price of LKR80 based on a EV/EBITDA multi-ple of 10.1x. HHL will trade at a EV/EBITDA multiple of 8.5x in FY2015E cf. the peer average of 11.0x which we believe is not warranted given the growth prospects of the company. HHL revenue is expected to grow at a CAGR of 13.9% from FY2015E-17E fuelled by the expected growth in the healthcare segment. The strength-ened distribution channel and variety of products offered with the acquisi-tion of JLM should boost company revenue and profitability. The leisure segment should also contribute to growth of the company with the new luxury hotel to commence operations in FY2016E. The divestment of He-mas Power PLC, even though there will be an impact to the top line, with the elimination of losses in the power segment we expect EBIT margin to improve to 11.0% in FY2015E and net profit margin to improve to 8.2% from 10.3% and 7.8% respectively. HHL has been able to generate superior returns well above its peers with ROE and ROA standing at 18.2% and 8.0% in FY2014 cf. the peer averages of 10.3% and 5.0% respectively. Hence, we believe HHL should be assigned with a higher multiple of 10.1x to be trading at a price target of LKR80.
LKRmn
Enterprise Value (current) 34,708 EBITDA 2015E 4,100 EV/EBITDA (x) 2015E 8.5 Target multiple (x) 10.1 Target EV 34,708 Market cap. Intrinsic value 41,266 No of shares (mn) 515 Value per share (LKR) 80
EV/EBITDA ROE FY2014 ROA FY2014
HHL 8.47x 18.2% 8.0% JKH 17.62x 11.0% 6.5% SPEN 7.43x 12.2% 6.3% CTHR 10.45x 7.5% 2.3% Average 11.83x 10.2% 5.0%
Pg | 22
Appendix 1: HHL Share Price Movement Vs. ASPI
0
50
100
150
200
250
300
1/4/2010 1/4/2011 1/4/2012 1/4/2013 1/4/2014ASPI HHL
LKR
Source: Bloomberg, NLE
-
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14
LKR
14.2x
12.4x
10.5x
8.7x
6.9x
5.0x
Source: Bloomberg, NLE
Appendix 2: P/E Band Chart
Pg | 23
Appendix 3: Subsidiaries, Associates and Joint-Ventures
FMCG Eff. holding Voting Principal activities
Hemas Manufacturing (Pvt) Ltd 100% 100% Manufacture of FMCG Products
Hemas Marketing (Pvt) Ltd 100% 100% Trading & Distribution of FMCG Products
Hemas Trading (Pvt) Ltd 100% 100% Import and sale of Food Products
Hemas Consumer Brands (Pvt) Ltd 100% 100% Trading of FMCG Products
Unicorn Investment (Pvt) Ltd 100% 100% Reserch and Development Services
J L Morison Son & Jones (Ceylon) PLC 89% 89% Importing and distribution of consumer products
Healthcare Eff. holding Voting Principal activities
Hemas Pharmaceuticals (Pvt) Ltd 100% 100% Distribution of Pharmaceutical Products
Hemas Surgical & Diagnostics (Pvt) Ltd 100% 100% Distribution of Healthcare Products
Hemas Hospitals (Pvt) Ltd 83% 83% Hospital Services
Hemas Southern Hospitals (Pvt) Ltd 83% 83% Hospital Services
Hemas Capital Hospital (Pvt) Ltd 83% 83% Hospital Services
Hemas South Colombo Hosipitals (Pvt) Ltd 83% 83% Hospital Services
Hemas Clinical Research Services (Pvt) Ltd 100% 100% Support Services of Clinical Trials
J L Morison Son & Jones (Ceylon) PLC 89% 89% Importing and distribution of Pharmaceuticals and medical aid
M. S. J. Industries (Ceylon) (Pvt) Ltd 89% 89% Manufacturing and Trading Pharmaceuticals
Leisure Eff. holding Voting Principal activities
Leisure Asia Investments Ltd 100% 100% Investment Holding Company
Serendib Hotels PLC 51% 51% Operating a Tourist Hotel and Investment 'Holding Company
Hotel Sigiriya PLC 32% 51% Operating a Tourist Hotel
Dolphin Hotels PLC 39% 51% Operating a Tourist Hotel
Miami Beach Hotel Ltd 33% 51% Operating a Tourist Hotel
Serendib Leisure Management Ltd 51% 51% Operating a Tourist Hotel
Jada Resorts & Spa (Pvt) Ltd 20% 20% Operating a Tourist Hotel
Diethelm Travel Lanka (Pvt) Ltd 60% 60% Destination Management Services
Diethelm Travel The Maldives (Pvt) Ltd 49% 49% Destination Management Services
Hemtours (Pvt) Ltd 100% 100% Destination Management Services
Conventions Asia (Pvt) Ltd 100% 100% Event Management
Mowbray Hotels Ltd 89% 89% Hotel Property
PH Resort & Spa (Pvt) Ltd 50% 50% Hotel Property
Pg | 24
Appendix 3: Subsidiaries, Associates and Joint-Ventures
Transportation Eff. holding Voting Principal activities
Forbes Air Services (Pvt) Ltd 100% 100% GSA Emirates Airline
Hemas Air Services (Pvt) Ltd 100% 100% GSA Malaysian Airline
Hemas Travels (Pvt) Ltd 100% 100% Travel Agent
Hemas Aviation (Pvt) Ltd 100% 100% Airline Representation
Exchange & Finance Investment (Pvt) Ltd 100% 100% Airline Representation
Discover the World Marketing (Pvt) Ltd 100% 100% Airline Representation
Far Shipping Lanka (Pvt) Ltd 100% 100% Shipping Agents
Hemas Transportation (Pvt) Ltd 100% 100% Shipping Agents
HIF Logistics (Pvt) Ltd 49% 49% Freight Forwarders
ACX International (Pvt) Ltd 49% 49% Courier Services
H & M Shipping (Pvt) Ltd 50% 50% Crew Boat Servicing
Hemas Maritime (Pvt) Ltd 100% 100% Break Bulk Casual Callers & Cargo Handling
Hemas Logistics (Pvt) Ltd 57% 57% General Carries & Warehousing
Hemas Integrated Logistics (Pvt) Ltd 57% 57% General Carries & Warehousing
Other Eff. holding Voting Principal activities
Hemas Corporate Services (Pvt) Ltd 100% 100% Corporate Secretaries
Hemas Developments (Pvt) Ltd 100% 100% Property Development
Vishwa BPO (Pvt) Ltd 100% 100% Financial & Accounting BPO
Peace Haven Resorts Ltd 100% 100% Hotel Property
N-able (Pvt) Ltd 100% 100% Enabling Information & Technology Solutions
J L Morison Son & Jones (Ceylon) PLC 89% 89% Importing and distribution of Agro Chemicals
M. S. J. Promotional Services 89% 89% Promotional Activities
M. S. J. Cargos (Ceylon) (Pvt) Ltd 89% 89% Wharf Clearing Activities
M. S. J. Hotels (Ceylon) (Pvt) Ltd 89% 89% Hotel Industry
M. S. J. Foods (Ceylon) (Pvt) Ltd 89% 89% Food and Beverage
M. S. J. Tours (Ceylon) (Pvt) Ltd 89% 89% Transport Services
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Appendix 4: Board of Directors
Board Member Mr. H N Esufally Non-Executive Chairman He assumed responsibility as CEO in January 2001, and
was appointed Chairman in November 2013.
Mr. Steven Enderby Executive Director / CEO He joined Hemas to head up the group efforts in mergers and acquisitions and strategy. He was appointed to the board of management of Hemas Holdings PLC in May 2013. Steven took up the office of Deputy CEO and Director of Hemas Holdings PLC in November 2013 and was ele-vated to the status of Group CEO on 1st April 2014.
Mr. A N Esufally Non-Executive Director He serves as Chairman of Serendib Hotels PLC and Dol-phin Hotels PLC.
Mr. I A H Esufally Non-Executive Director He is the Chairman of the transportation sector and on the board of Mercantile Shipping PLC. He was elected as Chairman of Hemas Power PLC in April 2012 and also serves as a member of the audit committee.
Mr. M E Wickremesinghe Chairman - Audit Committee Mr. M A H Esufally Executive Director Chairman of Hemas Hospitals (Pvt) Ltd and Hemas Phar-
maceuticals (Pvt) Ltd. Mr. P K Mohapatra Chairman Remuneration Commit-
tee He sits on the Board of 15 publicly quoted as well as pri-vate companies in India, South Asia, USA and Europe.
Mr. R Gopalakrishnan Chairman Nominations and Gov-ernance Committee
He currently serves as Director of Tata Sons Ltd and also serves as the Chairman of four Tata companies.
Mr. Dinesh Weerakkody Independent Director He currently serves as Chairman of Commercial Bank of Ceylon.
Dr Anura Ekanayake Independent Directo Mr. Malinga Arsakularatne Executive Director/ Chief Financial
Officer
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Appendix 5: Shareholder Information
Top 20 Shareholders Holding
A Z Holdings (Private) Limited 17.61%
Saraz Investments (Private) Limited 16.77%
Blueberry Investments (Private) Limited 16.65%
Amagroup (Private) Limited 16.65%
Employees Provident Fund 5.29%
Hsbc Inttl Nom Ltd-Ssbt-National Westminster Bank PLC 1.89%
Hsbc Inttl Nom Ltd-Ssbt-National Westminster Bank PLC 1.22%
Murtazaali Abidhussen Hassanaly Esufally 1.15%
Husein Nuruddin Esufally 1.13%
Jacey Trust Services (Private) Limited-Account No-2 1.12% Hsbc Inttl Nominees Ltd-Jpmcb-Scottish ORL SML TR GTI 6018 1.00%
Lexinton Holdings (Private) Limited 0.96%
Sri Lanka Insurance Corporation Ltd-Life Fund 0.92%
Jacey Trust Services (Private) Limited 0.89%
Employees Trust Fund Board 0.86%
Imtiaz Abidhusein Hassanally Esufally 0.86%
Anverally And Sons (Private) Ltd - A/C No.1 0.82%
Hsbc Inttl Nom Ltd-Jpmcb-Pacific Assets Trust PLC 0.59%
Cocoshell Activated Carbon Company Limited 0.58%
J B Cocoshell (Pvt) Ltd 0.58%
93%
7%
Resident
Non Resident
91%
9%
Institutional
Individual
Figure 35: Shareholding Figure 36: Shareholding
67.7%
28.2%
3.6%
Controlling Interest Public Holding
Directors Shareholding Close Family Members
Source: HHL
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