major shareholders as at 30 fc research th sep 2016sri ... plastics and furniture low swot analysis...

Initiating Coverage

FC Research Analyst: Hansinee Beddage

SRI LANKA

RICHARD PEIRIS & COMPANY PLC STRONG BUY

CSE: RICH.N0000 Feb 2017

“A hot-deal discount”

Current Price: LKR 8.40 Fair Value: LKR 9.80

Richard Pieris & Company PLC (RICH) is a diversified holding with operations

in retail, plastics and furniture, rubber, tyre, financial services, plantations and

other services. The company operates the well-known Arpico hypermarkets

chain and is the market leader for several products such as retreaded tyres,

water tanks and natural rubber mattresses. We initiate coverage on RICH at a

time the share is trading at an attractive discount to its estimated fair value,

giving an annualized total return of 28% in FY18E. STRONG BUY

Retail segment to post strong growth: FC Research estimates RICH’s retail segment revenues to grow at a CAGR of 16% and the EBIT to grow at a CAGR of 17% supported by the volume growth driven by favorable macroeconomic dynamics. Thus the retail segment is expected to continue its position as the star contributor to profitability. The increasing per capita income and urbanization in Sri Lanka is set to benefit the retail hypermarkets space. The company expands and upgrades its store network which will boost its revenues and profitability as it enjoys economies of scale.

Plastics, rubber and other operations continue to strengthen profitability: Company’s plastics and furniture segment is expected record an operating profit growth of 7% between FY16-19E due to resurging housing and hotel constructions. The rubber export segment is expected to benefit from its realigned focus on China and LKR depreciation despite slow global growth. Tyre segment is expected to see improved margins due to availability of low-cost used tyres and increasing demand for heavy vehicle tyres. Plantation which has diversified into oil palm and other crops is estimated to record profits in the long term, despite rising wage and utility cots.

RICH to provide an annualized total return of 28% by FY18E: FC Research estimates RICH’s fair value to be LKR 9.80 based on a Sum-of-the-Parts valuation, providing a total return of 32% in FY18E (capital gain of 17% and dividend yield of 15%). The annualized total return for FY18E is 28%. The current share price is indicative of the announced interim dividend of LKR 0.60 (announced 08th Feb, XD – 20th Feb, payment – 01st Mar 2017).

Investment risks: Adverse geopolitical events, fluctuating commodity prices and fluctuating exchange rates are some of the risks RICH faces.

Figure 1: RICH share price performance

Source: CSE

Disclosure on Shareholding:

First Capital Group and its affiliates does not hold any shares in RICH. Neither First Capital Group nor its affiliates have traded in the shares of RICH in the three trading days prior to this document, and will not trade in the shares of RICH for three trading days following the issue of this document.

KEY DATA

Share Price (LKR)1

52w High/Low (LKR)

Average Daily Volume (Shares)

Average Daily Turnover (LKR)

2,035

Price Performance (%) 1 mth 3 mths12mths

RICH 5% 9% 6%

ASPI -1% -5% -4%

25.4%

15.6%

11.1%

8.6%

8.4%

HSBC -SSBT- Deutsche Bank

8.40

9.1/ 7.1

401,643

3,225,702

Issued Share Capital (Shares Mn)

Market Capitalisation (LKR mn) 17,094

Major Shareholders as at 30th

Sep 2016Skyworld Overseas Holdings Ltd

Camille Consulting Corp.

1. Cum Div price with LKR 0.6 dividend for FY17

Sezeka Limited

Employees Provident Fund

Estimated Free Float 42.5%

6.50

7.00

7.50

8.00

8.50

9.00

9.50

0

5

10

15

20

25

Feb-16 Jun-16 Oct-16 Feb-17

Mill

ion

s

Volume (LHS) RICH price (RHS)

P/E 31 March FY15 FY16 FY17E FY18E FY19ERevenue (LKR Mn) 37,802 43,019 47,148 52,513 57,097 YoY % Growth 9% 14% 10% 11% 9%Net Profit (LKR Mn)

11,652 2,148 2,697 3,028 3,313

EPS 0.82 1.05 1.33 1.49 1.63 YoY % Growth 14% 28% 26% 12% 9%ValuationsPER (x) 10.2 8.0 6.3 5.6 5.2 PBV (x) 1.7 1.6 1.1 1.0 0.9 Dividend yield (%)

23.0% 6.0% 7.1% 8.0% 8.7%

NAVPS 4.9 5.3 7.4 8.3 9.3 DPS 0.3 0.5 0.6 0.7 0.7 Payout ratio 30% 48% 45% 45% 45%1. Attributable to equity holders2. FY17 dividend of LKR0.6 declared; XD - 20 Feb 2017, Payment 01 Mar 2017

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Retail Platics and furniture

Rubber Tyre

Financial services Other services

Plantations

1.0 Introduction and industry overview

1.1 Introduction to RICH

Market leaderships: RICH, established in 1932, is a market leader in several products it offers including retreaded tyres, water tanks and natural rubber mattresses. The Group’s revenues and profits are dominated by its Arpico Hypermarkets chain which is one of the largest retailers in the country. Plastics and furniture, rubber and tyre segments are respectively the next largest contributors to profitability. The Group’s rubber export activities are carried out primarily through Richard Pieris Exports PLC (REXP.N). The Group also engages in plantations through Namunukula (NAMU.N), Kegalle (KGAL.N) and Maskeliya (MASK.N) Plantations and provides financial services through Arpico Insurance (AINS.N), Chillaw Finance (CFL.N) and Arpico Ataraxia Asset Management (Pvt) Ltd (See Annex VII for full Group Structure). Consumer staples and discretionary driven diversification: RICH’s retail hypermarkets, plastics and furniture, tyre, rubber and plantations are falling into the consumer discretionary and consumer staples industries (See definition – Annex VI). This indicates a related diversification strategy. Further RICH has successfully integrated forward through its own retail and distribution network while having backward integrated by sourcing raw material through its plantations. Retail is a “Star” while plastics, rubber and tyre are “Cash Cows”: Retail currently operates in a high growth market due to the rising per capita income and has the highest cash generation, making it a “Star” (See BCG matrix – Annex VI). Plastics, rubber and tyre operates in mature markets but generate high returns. Financial Services, palm oil and rubber plantations are in high growth markets but relatively yields lower returns currently. Once properly nurtured they can grow into a star or a cash cow. Tea plantations are currently loss making while the long term growth is low.

Question marks Financial Services Palm oil and rubber plantations

Star Retail

Dog Tea plantations

Cash Cow Rubber Tyre Plastics and furniture

SWOT analysis

Strengths Related diversification

Forward/ backward integration

Brand/market leaderships

Opportunities Growing per capita income Booming construction sector Expansion of palm oil

Weaknesses Exposure to global economy Plantations making losses

Threats Adverse geopolitical events Currency fluctuation Competition

Figure 2: RICH segmental breakdown

Mar

ket

gro

wth

Hig

h

Low

Market share/ Cash generation Low High

Revenue

Operating profit

Figure 3: BCG Growth-share matrix for RICH

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1.2 Share price performance Share price movement in line with ASPI: RICH’s share price has moved in line with ASPI. The price has recently declined along with the ASPI and is slowly picking up, posing an attractive opportunity to buy.

6.50

7.00

7.50

8.00

8.50

9.00

9.50

5,600.00

5,800.00

6,000.00

6,200.00

6,400.00

6,600.00

6,800.00

Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17

ASPI (LHS) RICH price (RHS)

Figure 4: ASPI Vs RICH price performance

Source: CSE

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1.3 Industry overview – retail hypermarkets

RICH is engaged in several industries, however, predominantly it operates in the retail hypermarkets industry. Oligopolistic market space with high rivalry: Hypermarkets are retail stores that combines a department store and a grocery supermarket offering shoppers a one-stop shopping experience (Investopedia). Arpico, in this definition, is the only hypermarket chain that operates in the country. However there are close options such as Supermarket chains operated by Keels and Cargills focusing on grocery shopping as well as and Department stores operated by Softlogic, Abans and Singer focusing on electronic items and home appliances. Accordingly retail hypermarket space can be identified as an oligopolistic market with a few dominant players and many smaller scale players that include numerous lesser-known shops which gives a competition for the big players. Analysis of competitive forces (See Porter’s five forces – Annex V)

Buyer power: LOW as there’s a large buyer base each purchasing an individually insignificant amount. The buyers are not organized and does not have the capacity to backward integrate.

Supplier power: MODERATE. Since there are many suppliers offering

the same products supplier power is low. However suppliers can threaten to forward integrate through their own online sales channels.

Threat of new entrants: MODERATE as the startup capital is relatively high for a showroom and the existing players have well-networked with the suppliers and distributors.

Threat of substitutes: HIGH as there are many unbranded and small scale retail shops that provides competition for the large supermarkets and hyper markets. Further, buyer’s switching cost among these substitutes are low.

Rivalry: HIGH as the dominant players are roughly equal in size and follows similar promotional strategies for marketing their products.

Major players: RICH is trading at the lowest PER compared to its peers, making it the most attractive in the sector.

Figure 5: Porter’s five forces

Source: Company reports, CSE

Company name CSE

Ticker

MCAP

(Bn)1

Revenues

(Mn)2

PER3 PBV3 Net

margin2

GP

margin2

Ceylon Cold Stores CCS.N 69.28 39,110 19.66 5.25 9.0% 16.8%Cargills CARG.N 42.99 79,013 19.76 2.91 2.8% 11.9%Richard Peiris RICH.N 16.48 43,866 6.86 1.34 5.5% 25.1%Singer SINS.N 15.79 44,707 8.03 2.16 4.4% 30.1%Softlogic SHL.N 9.74 60,031 13.59 1.05 1.2% 32.2%

Currency unit: LKR1. As of Feb 20172. Tra i l ing 12 months upto Sep 20163. Based on prices as of Feb 2017 and earnings and NAVPS upto Sep 2016

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2.0 Retail segment to post strong growth

2.1 Macroeconomic conditions to support retail growth

Increasing per capita income: Sri Lanka is on its way to enter the upper middle income club, expecting to reach USD 4,704 of per capita income by 2018E from its current level of USD 3,900 (2015). The increasing per capita income fuels the purchasing power for luxury and semi luxury goods, which represent most of RICH’s product offerings under its Arpico wing. Inflation is expected to stabilize, adding to the consumer confidence.

Credit enhancement for retailers and consumers: Commercial banks loans and advances to wholesale and retail traders grew at a CAGR of 15% 2011-2015 indicating sound growth in retail trade activities. Personal loans and advances for consumer durables grew at a CAGR of 21% period indicating strengthening purchasing power for luxury goods. Credit card lending grew at a CAGR of 16% during the same time fuelling the capacity for online trading. In addition, IMF forecasts private sector credit growth to continue at a level of approximately 14%-15% between 2017E-2020E.

2,500

2,700

2,900

3,100

3,300

3,500

3,700

3,900

4,100

4,300

4,500

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

2013 2014 2015 2016E 2017E 2018E

GDP per capita (RHS) GDP growth (LHS)

0

50,000

100,000

150,000

200,000

250,000

300,000

Wholesale and RetailTrade

Consumer Durables Credit CardsCre

dit

by

com

mer

cial

ban

ks (

LKR

Mn

)

2011 2012 2013 2014 2015

Figure 6: Inflation expected to stabilize

Figure 8: Private credit growth to continue

Figure 7: GDP growth and per capita income expected to uptick

Source: Central Bank of Sri Lanka, IMF

Note: The effects of re-basing the index to year 2013

has been ignored

Source: IMF

Figure 9: Credit enhancement by commercial banks has favoured retail segment

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

2013 2014 2015 2016E 2017E 2018E

Annual average inflation Core inflation

Source: Central Bank of Sri Lanka, IMF

Source: Central Bank of Sri Lanka

8.8%

25.1%

10.0%

14.3%15.5% 14.5% 15.20%

2014 2015 2016E 2017E 2018E 2019E 2020E

CAGR

15%

CAGR

21%

CAGR

16%

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2.2 Store expansion and urbanization to bring volume growth

Store expansion catering both urban and rural population: RICH’s market share is mature in Western Province with over 50 outlets. The company caters upper middle income category through Super stores with ample parking space while reaching the average consumers and rural population with its Arpico Daily outlets. This careful segmentation of outlets has enabled RICH to record the second highest revenue per outlet among its peers.

Urbanization and technology penetration: RICH is successfully reaching out beyond Western Province. These efforts are expected to be fruitful as Sri Lanka’s urban population has increased to 18% in 2015, while this figure remains 11% outside Colombo district. Neighboring lower-middle income countries such as India and Bangladesh has an urban population of 30%-32% and Sri Lanka can expect to reach there as per capita income increases. Increasing urbanization creates preference for Hypermarkets and lifestyle goods. There’s strong potential for online shopping and social media based advertising, both of which Arpico has already started. The internet penetration is 29.3% of total population which is expected to reach 35% over the next few years.

122,129

188,132

371,644

442,911

284

297

59

50

Revenue per outlet (LKR)No of outlets

Figure 11: RICH has the second highest revenue per outlet among peers

Note 1: Revenue per outlet = Retail segment’s revenue/ total no of outlets as of Mar 2016

Note 2: Softlogic’s revenues per outlet include retail and IT segment

Source: Company reports, FC Research Estimates

Figure 12: Increasing technology penetration suggests strong potential for Arpico’s online shopping site and Social media advertising

Source: Budde.com, Internet World Stats, Digitalmarketer, TRCSL, Techinasia

Mobile internet growth (‘000)

Social media users Local sites among popular top 10

17,359

25,870

2010 2016

Mobile subscriber growth (‘000)

294

3,711

2010 2016

4.2Mn users

5.3Mn users

CAGR

7%

CAGR

53%

7

1

2

5

9

8

Figure 10: Broad-basing the Arpico footprint

Source: Company website

Super stores

Showrooms

Arpico Daily

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2.3 Strong revenue and EBIT growth expected for retail segment Revenue growth fuelled by volume growth: FC research estimates retail segment’s revenues to grow at a CAGR of 16% between FY16-19E. This is higher than the historical revenue CAGR of 11% between FY13-FY16. The revenue growth will primarily be driven by the volume growth boosted by broad-basing the store network and increased consumer spending following rising per capita income. The total revenue growth CAGR for RICH is estimated to be 10% between FY16-19E, remaining higher than historical 3 year CAGR of 7% between FY13-FY16.

Strong EBIT due to economies of scale: FC Research estimates the EBIT growth of the retail segment to be at a CAGR of 17% between FY16-19E. The EBIT is supported by the economies of scale enjoyed by RICH due its widespread hypermarkets chain. RICH also has maintained consistent working capital policies which reflects their ability to manage relationships with customers and suppliers, hence further supporting the EBIT growth.

-

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

FY14 FY15 FY16 FY17E FY18E FY19E

Retail revenue Other segments

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000


Retail EBIT Other segments

Figure 13: Retail revenue to increase at a CAGR of 16% between FY16-19E

CAGR

16%

Source: Company reports, FC Research estimates


Figure 14: Retail EBIT to increase at a CAGR of 17% between FY16-19E

CAGR

17%

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3.0 Plastics, rubber and other operations continue to strengthen profitability

3.1 Economies of scale through related diversification

Average margins to remain strong: The related diversification brings several

benefits to RICH as a Group. Its backward integration into raw material in the

form of plantation and as well as forward integration into retail and

distribution in the form of hypermarkets chain enables it large scale cost

efficiencies. This helps RICH to sustain their average net margin at 5.8%

between FY17-18E compared to an average of 4.5% between FY14-16.

3.2 Plastics and furniture continues to benefit from booming housing constructions and tourism activities

Water tanks, mattresses and Rigifoam to bring more volumes: RICH is a market leader in water tanks and the rising housing constructions are expected to boost the revenue from the segment. The mattresses mainly cater the hotels segment which is expected to boost as rising tourist arrivals would call for more hotel rooms to be added. RICH primarily caters the fishery industry with its rigifoams. The removal of the ban on fisheries by EU is expected to boost the fishery segment. The plastics and furniture segment’s operating profit is estimated to grow at a CAGR of 7% between FY16-19E.

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%


Gross margin Operating margin Net margin

12,184

12,69512,257

13,477

15,026

2011 2012 2013 2014 2015

Figure 16: Growing hotel room stock

Figure 15: Average net and gross margins to remain higher than historical

Figure 17: Rising building approvals creates demand for furniture and plastics

33,426

45,000

75,000

2015 2018E 2020E



Source: Research Intelligence Unit

CAGR

18% CAGR

7%

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3.3 Exploring new markets to bring growth in the rubber segment Focus on China and increased production efficiency: RICH’s realigned focus on the growing Chinese economy coupled with expectation for global commodity prices to stabilize will fuel the growth in the export segment. Company’s newly installed latex sheeting plant is expected to provide operational efficiencies going forward. Rubber exports also enjoys Economies of scope as they produce a range of items which reduces the average cost per each category. The backward integration to plantations also boost the operational efficiency. RICH currently exports latex and hard rubber based products including floor mats, jar seals, mattresses, pillows, shoe soles, primarily to Europe. Global latex mattress market is expected to grow at 15% between 2014-2018E while the rubber mats market is expected to grow at a CAGR of 5% up to 2021. Despite the slowdown in the global economy, the depreciation of Sri Lankan rupee is expected to work in favor of the exports segment.

3.4 Tyre segment margins may further improve despite challenges Backed by 6.3 million vehicle population: The tyre segment is expected to benefit from the large vehicle population of 6.3Mn of which ~19% is dual purpose and heavy vehicles that primarily uses retreaded tyres. Resurging construction activities is estimated to boost the demand for heavy vehicle tyres. RICH’s introduction of the entire range of Nexen tyres will also enable the segment to achieve higher revenues. This segment may also show growth as increased duty has discouraged the new registration of vehicles, enhancing the second hand vehicle market. Further, with the large availability, the purchasing cost of used tyres is expected to come down and hence the margins of the segment is estimated to further improve.

3.5 Plantation to turn profitable in the long run despite tough times NAMU earnings boosted by palm oils: Company’s 65% owned subsidiary, Namunukula Plantations (CSE: NAMU.N000) has already moved to oil palm and will bring profits in the plantation segment over the long run. 30% of NAMU’s cultivated land reflects palm oil. Global palm oil prices saw an increase of 34% between Jan-Dec 2016 and is expected to further rise in close correlation to the crude oil prices that has started to incline. MASK and KGAL to strive amidst challenges: Company’s 83% owned subsidiary Maskeliya Plantations (CSE: MASK.N0000) is expected to be benefitted by the escalating tea auction prices which saw an increase of ~42% between Oct 2015- Nov 2016. Amidst the supply cuts expected after droughts forested by Met Department, the tea prices will stabilize at the current high level. Kegalle Plantataions (CSE: KGAL.N0000) may struggle from fluctuating rubber prices. However any losses from the rubber plantations are getting a natural hedge due to RICH’s rubber exports, where demand pull from rubber exports helps overcoming the losses in plantations. Further, local demand also can be expected to improve for rubber. KGAL also plans to diversify into palm oil which kindles hopes for its profitability. Plantation segment will be adversely affected form the increasing labor and utility costs that erode profit margins in the short run.

Figure 18: Vehicle population by category

Source: Department of Motor Traffic

72%

19%

9%

Motorbikes and trishaws

Dual purpose and heavy vehicles

Cars

Figure 19: Natural rubber prices

1.00

1.50

2.00

2.50

3.00

2013 2014 2015 2016 2017E 2018E 2019E

Ru

bb

er p

rice

s $

/mt

Rubber prices to pick

up but remain lower

than 2013 levels

Source: World Bank

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4.0 RICH to provide an annualized return of 28%

RICH earnings CAGR of c.16% FY16-19E: FC Research estimates RICH’s

earnings to grow to LKR 3.3Bn by FY19E from current level of LKR 2.1Bn.

During 1HFY17 RICH recorded earnings (attributable to equity holders) of LKR

1.4Bn. FC Research estimates RICH’s revenues to grow at a CAGR of 10%

between FY16-19E to LKR 57Bn from current level of LKR 43Bn.

4.1 Total annualized return of 28% in FY18E

Capital gain of 17% and a dividend yield of 15%: FC Research estimates

RICH’s fair value to be LKR 9.80 based on a Sum-of-the-Parts (SOTP) valuation.

RICH would yield a capital gain of 17% in FY18E and a dividend yield of 15%.

The company declared an interim dividend of LKR 0.60 per share on 08 Feb

2017 (XD 20th Feb 2017, Payment 01st Mar 2017) and is currently trading at a

Cum-Div price of LKR 8.40.

P/E 31 March FY15 FY16 FY17E FY18E FY19ERevenue (LKR Mn) 37,802 43,019 47,148 52,513 57,097 YoY % Growth 9% 14% 10% 11% 9%Net Profit (LKR Mn)

11,652 2,148 2,697 3,028 3,313

EPS 0.82 1.05 1.33 1.49 1.63 YoY % Growth 14% 28% 26% 12% 9%ValuationsPER (x) 10.2 8.0 6.3 5.6 5.2 PBV (x) 1.7 1.6 1.1 1.0 0.9 Dividend yield (%)

23.0% 6.0% 7.1% 8.0% 8.7%

NAVPS 4.9 5.3 7.4 8.3 9.3 DPS 0.3 0.5 0.6 0.7 0.7 Payout ratio 30% 48% 45% 45% 45%1. Attributable to equity holders2. FY17 dividend of LKR0.6 declared; XD - 20 Feb 2017, Payment 01 Mar 2017

Expected RICH price FY18E

Sum-of-the-Parts valuation 14.60

Net debt adjustment 4.80

Target price 9.80

Return FY18E

Target price 9.8

Current price (Cum Div) 8.4

Capital gain 1.4

Dividend FY171 0.6

Dividend FY18E 0.7

Capital gain % 17%

Dividend yield %2 15%

Total return 32%

Total return (annualised)3 28%1. Declared 08 Feb 2017; XD - 20 Feb 2017, Payment 01 Mar 2017

3. Annualised over 13.5 months

2. Includes declared dividend for FY17 and estimated dividend for FY18E

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4.2 Sum-of-the-Parts (SOTP) valuation

Since RICH is a diversified holding which operates businesses segments with

varying risk and growth profiles, an SOTP valuation was followed.

The breakdown of the total valuation is indicated below.

Figure 20: Retail, plastics and furniture and rubber segments are largely contributing to RICH’s value

Figure 21: PE band for RICH

5.40

3.20

2.001.50 0.60 0.20

1.70

-8.00

3.20 9.80

Retail Platics andfurniture

Rubber Tyre Financialservices

Plantations Other services Less: debt Add: cash Fair value

Valuation method

D/E CoE WACC Growth PBV PER Firm

value

Equity

Retail FCFF 40/ 60 20% 15% 3% 10,977 100% 5.40 37%

Platics and furniture FCFF 40/ 60 21% 16% 3% 6,513 100% 3.20 22%

Rubber FCFF 50/ 50 22% 19% 3% 4,102 80% 2.00 14%

Tyre FCFF 40/ 60 21% 16% 2% 3,016 100% 1.50 10%

Financial services Justified PBV 23% 3% 0.45 1,251 82% 0.60 4%

Plantations Justified Forward PER 23% 3% 2.41 371 76% 0.20 1%

Other services Justified PBV 22% 3% 0.71 3,406 100% 1.70 11%

Fair value before net debt 14.60 100%

Less: debt 8.00

Add: cash 3.20

Fair value 9.80Note: debt adjustment includes debt for segments with Firm value, i.e. excludes financial services, plantaion and other services

% of

total

Segment RICH's

holding

Value

per share

Value in LKR MnValuation assumptions

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

2011 2012 2013 2014 2015 2016 2017 2018 2019

3 5 7 9 11 Price

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5.0 Investment risks

5.1 Commodity price risk

Volatility in prices: The recent VAT hike has increased the prices of retail commodities, reducing the affordability for consumers. The inflation also adds to the risk of eroding consumer purchasing power. The increasing utility prices over the years have put pressure on margins by causing cost of production to escalate. The potential droughts forecasted by the Met Department may further increase commodity prices due to supply shortages. The volatility in rubber prices not only affect the revenues from plantation sector, but also affects the costs of sales of the rubber exports.

5.2 Adverse geopolitical events

Adverse regulations, economic cycles, US trade policies and slow global growth: Budget 2017 proposed to restrict land holding by regional plantation companies to a maximum of 5,000 acres on a standalone basis. Although there was a clarification by the Minister of Planation that there will be no forced land selling for plantation companies (Economynext, 08 Dec 2016) and subsequently no action has been taken to implement this proposal, it is still to be seen if this proposal would progress at all. Part of the retail business (consumer durables) is subject to cyclical business and the slowdown in domestic economic growth may directly affect the revenue growth in the segment. IMF has slowed down Sri Lanka’s GDP growth forecast to 3.9% from 4.8%. Due to any cyclical effect, the retail segment’s earnings may revert to its historical average levels. In addition, US trade policies affect the export revenues of RICH. It should also be noted that US announced anti-dumping tax on Sri Lanka’s tyre exports to US. It is not clear if RICH export tyres to US, however even if they do, less than ~2% of total revenue accounts for exports to USA. Further, Europe’s economic growth is forecasted to slow down by IMF to 1.6% in FY17-FY18E from 1.7% in 2016 due to political and economic uncertainty concerning the region. ~3% of RICH’s revenues are generated from Europe.

5.3 Currency risk

Fluctuation in exchange rate: Group imports some of the items traded under its retail arm and these are predominantly billed in USD, EUR or SGD. Sri Lanka being a net importer, tends to depreciate its currency, where LKR had depreciated 3.9% against the USD between Jan 2016-Jan 2017. Euro and SGD has respectively depreciated 1.0% and 2.1% against the rupee. The company has hedged its currency risk through forward contracts, swaps and potion contracts. 8% of Group’s revenues are arising from export revenue while 3% is attributable to exports to Europe which is possibly advantaged from the LKR depreciation.

Figure 22: Foreign currency movement

130.0

135.0

140.0

145.0

150.0

155.0

160.0

165.0

170.0

90.0

95.0

100.0

105.0

110.0

115.0

Jan-15 Jul-15 Jan-16 Jul-16 Jan-17

SGD (LHS) USD (RHS) EUR (RHS)


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Appendix I: Income Statement

LKR (Mn) FY15 FY16 FY17E FY18E FY19E

Continuing operations

Revenue 37,802 43,019 47,148 52,513 57,097

Cost of sales (29,125) (32,428) (35,125) (39,385) (42,823)

Gross profit 8,677 10,591 12,023 13,128 14,274

Other operating income 819 981 936 988 1,028

Selling and distribution expenses (2,031) (2,649) (2,829) (3,151) (3,426)

Administrative expenses (4,298) (4,929) (5,240) (5,533) (6,056)

Other operating expenses (63) (38) (42) (47) (51)

Operating profit 3,104 3,955 4,848 5,386 5,770

Finance cost (811) (826) (994) (1,174) (1,189)

Finance income 244 234 294 392 451

Share of profit from associate 42 36 43 52 62

Profit before income tax 2,579 3,399 4,192 4,656 5,094

Income tax expense (747) (1,137) (1,257) (1,397) (1,528)

Profit for the year (continuing) 1,832 2,261 2,934 3,259 3,566

Profit/(loss) from discontinued operations (3) (4) (3) (3) (3)

Profit for the year 1,828 2,258 2,931 3,255 3,562

Equityholders 1,652 2,148 2,697 3,028 3,313

NCI 176 110 234 228 249

Segmental revenue

Rubber 3,044 3,629 4,361 5,146 5,660

Tyre 4,311 4,368 4,276 4,319 4,448

Platics and furniture 6,540 7,830 7,788 8,333 9,166

Retail 18,687 21,927 26,799 31,623 34,153

Financial services 1,175 1,764 2,778 3,611 4,695

Other services 2,275 2,791 61 63 63

Plantations 8,175 7,644 8,130 7,968 8,207

Inter segmental adjustments (6,405) (6,935) (7,045) (8,549) (9,295)

Total 37,802 43,019 47,148 52,513 57,097

Segmental operating profits

Rubber 472 648 931 1,111 1,236

Tyre 527 608 775 794 829

Platics and furniture 875 1,368 1,444 1,525 1,654

Retail 1,173 1,540 1,977 2,349 2,451

Financial services 139 227 377 490 626

Other services 899 1,206 660 673 680

Plantations 163 (186) 163 239 246

Inter segmental adjustments (1,144) (1,458) (1,479) (1,795) (1,952)

Total 3,104 3,955 4,848 5,386 5,770

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Appendix II: Balance Sheet

LKR (Mn) FY15 FY16 FY17E FY18E FY19EAssetsNon-Current AssetsProperty, plant and equipment 15,277 15,945 17,300 18,857 20,743 Leasehold property 542 547 520 493 467 Investment properties 165 165 165 165 165 Intangible assets 1,158 1,147 1,113 1,080 1,047 Biological assets 794 825 840 850 860 Investments in subsidiaries - - - - - Investment in associates 89 241 284 336 398 Other non-current financial assets 607 1,112 1,112 1,112 1,112 Deferred tax assets - - - - - Total non current assets 18,633 19,982 21,334 22,893 24,791

Current AssetsInventories 4,432 4,643 4,912 5,397 5,756 Trade and other Receivables 4,755 4,981 5,425 6,043 6,570 Loans and advances 5,422 8,760 10,260 11,760 13,260 Tax receivables 156 164 164 164 164 Amounts due from subsidiaries - - - - - Other current financial assets 604 840 840 840 840 Cash and cash equivalents 4,081 4,206 5,604 6,438 7,725 Total current assets 19,450 23,593 27,204 30,640 34,314

Total Assets 38,083 43,575 48,538 53,533 59,106

Equity and LiabilitiesCapital and ReservesStated Capital 1,973 1,973 1,973 1,973 1,973 Retained Earnings 7,861 8,787 10,262 11,927 13,750 Reserves 78 113 113 113 113 Equity attributable to equity holders of parent9,912 10,873 12,348 14,013 15,836 Non-controlling interests 2,431 2,413 2,647 2,875 3,124 Total Equity 12,344 13,285 14,995 16,888 18,960

Non-current LiabilitiesInterest-bearing loans and borrowings6,224 6,272 6,140 6,067 6,011 Net liability to the lessor 607 595 585 574 564 Insurance provision 307 502 502 502 502 Provisions 104 105 105 105 105 Government grants 562 551 556 561 566 Deferred tax liabilities 238 277 277 277 277 Employee benefit liabilities 2,621 2,441 2,441 2,441 2,441 Total non-current liabilities 10,664 10,743 10,606 10,527 10,465

Current LiabilitiesTrade and other payables 5,913 8,008 8,252 9,253 10,060 Public deposits 2,661 3,723 4,829 6,266 8,134 Current portion of borrowings 2,527 2,499 2,632 2,600 2,576 Current portion of lease 11 11 11 11 11 Amounts due to subsidiaries - - - - - Income tax payable 237 427 427 427 427 Short term borrowings 3,727 4,878 6,786 7,560 8,471 Total current liabilties 15,075 19,546 22,937 26,118 29,680

Total Liabilities 25,739 30,290 33,543 36,645 40,146

Total Equity and Liabilities 38,083 43,575 48,538 53,533 59,106

NAVPS 4.9 5.3 7.4 8.3 9.3

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Appendix III: Cash Flow Statement

(LKR Mn) FY15 FY16 FY17E FY18E FY19EProfit/Loss before tax (after disc. Operations) 2,575 3,395 4,189 4,652 5,090 Adjustments for: - - - - - Depreciation 763 834 957 1,038 1,131 Amortisation of lease 25 31 27 27 27 Amortisation of intangible assets 29 11 34 33 32 (Gain)/loss on disposal of PPE (10) (6) - - - Gain on sale of biological assets (19) (20) - - - Change in fair value (FVTPL) (1) 2 - - - Fair value adjustment on bio assets (74) (25) - - - Finance income (244) (234) (294) (392) (451) Finance cost 811 826 994 1,174 1,189 Share of profit of an associate (34) (31) (43) (52) (62) Provision for bad debts 70 49 - - - Provision for slow moving stocks 133 113 - - - Provision for defined benefit plan 434 415 - - - Provision for receivables/Impairment of investments - 7 - - - Provision/ (Reversal) on warranties (30) 0 - - - Provision for unrealised profit 2 2 - - - Grants amortized (24) (35) (25) (25) (25) Impairment of loans and advances 65 189 - - - Exchange differences on translation of foreign currency (3) 33 - - -

Changes in working capital - - - - - (Increase)/ decrease in Receivable (701) (283) (444) (617) (527) (Increase)/ decrease in inventories (633) (326) (269) (485) (359) Increase/ (decrease) Trade and Other Payables 870 1,201 244 1,001 808 Changes in operating assets (2,475) (3,527) (1,500) (1,500) (1,500) Changes in operating liabilities 1,399 1,062 1,106 1,437 1,868 Increase in insurance provision 114 195 - - - Cash generated from operations 3,042 3,877 4,975 6,291 7,222 Interest paid (674) (944) (994) (1,174) (1,189) Gratuity paid (219) (223) - - - Interest received 244 234 294 392 451 Tax paid (651) (1,496) (1,257) (1,397) (1,528) Net Cash from operating actvities 1,742 1,448 3,018 4,112 4,955

Cash Flow from Investing Activities - - - - - Proceeds from sale of property, plant and equipment 12 13 - - - Purchase of property, plant and equipment (1,980) (1,511) (2,312) (2,595) (3,017) Increase in biological assets due to new planting (12) (11) (15) (10) (10) Purchase of financial instruments (524) (754) - - - Acquisition of a subsidiary, net of cash acquired (463) - - - - Proceeds from share buy back 33 - - - - Dividend received 45 23 - - - Increase in holding in a subsidiary (59) (29) - - - Receipt of government grants 21 24 30 30 30 Proceeds from sales of other investments - - - - - Proceeds from sale of biological assets 28 26 - - - Net cash used in investing activities (2,899) (2,218) (2,297) (2,575) (2,997)

Cash Flow from Financing ActivitiesProceeds from exercise of share options 158 - - - - Proceeds from NCI on IPO 80 - - - - Payment of finance lease liabilities (10) (11) (11) (11) (11) Proceeds from borrowings 4,709 2,815 3,907 2,775 2,911 Debenture issue cost (20) - - - - Repayment of borrowings (3,052) (2,522) (1,999) (2,105) (2,080) Dividends paid to equity holders (906) - (1,221) (1,362) (1,491) Net drawdown on Financial Instruments - - - - - Dividends paid to non-controlling interests (47) (239) - - - Net Cash Flow from Financing Activities 911 43 677 (704) (670)

Increase/ decrease in cash and cash equivalents (246) (726) 1,398 834 1,287

Movement in Cash and Cash EquivalentsAt the beginning of the year 800 554 (172) 1,226 2,059 Increase/ decrease in cash and cash equivalents (246) (726) 1,398 834 1,287 Cash and cash equivalents at the end of the Year 554 (172) 1,226 2,059 3,347

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Appendix IV: Recommendation criteria

Categorization Company Category Strong

Buy Buy Hold Sell

Grade A S&P SL20 Companies T.Bill + 10% & Above

T.Bill + 5% & Above

T.Bill + 1% & Above

Below T.Bill + 1%

Grade B Rest of the Companies

T.Bill + 13% & Above

T.Bill + 8% & Above

T.Bill + 3% & Above

Below T.Bill + 3%

Grade C Companies less than LKR 1Bn Market Cap



T.Bill + 6% & Above

Below T.Bill + 6%

*1 year T-bill rate as at 09-02-2017 – 10.42%

Appendix V: Key ratios

Appendix VI: Conceptual frameworks used for analysis

Sector definitions according to Global Industry Classification Standard (GICS)

Consumer Staples Sector: The Consumer Staples Sector comprises companies whose businesses are less sensitive to economic cycles. It includes manufacturers and distributors of food, beverages and tobacco and producers of non-durable household goods and personal products. It also includes food & drug retailing companies as well as hypermarkets and consumer super centers. RICH is engaged in hypermarkets, non-durable rubber products and plantations which fall into this category. Consumer Discretionary Sector: The Consumer Discretionary Sector encompasses those businesses that tend to be the most sensitive to economic cycles. Its manufacturing segment includes automotive, household durable goods, leisure equipment and textiles & apparel. The services segment includes hotels, restaurants and other leisure facilities, media production and services, and consumer retailing and services. RICH is engaged in plastics and furniture and tyre which falls into this category.

The full definition and the structure of GICS can be accessed at: https://www.msci.com/gics

FY15 FY16 FY17E FY18E FY19E

Revenue 9% 14% 10% 11% 9%

Cost of Sales 9% 11% 8% 12% 9%

Gross Profit 8% 22% 14% 9% 9%

Net Profit (equityholders) 17% 30% 26% 12% 9%

GP Margin 23% 25% 26% 25% 25%

Operating Profit Margin 8% 9% 10% 10% 10%

NP Margin (Equityholders) 4% 5% 6% 6% 6%Mar

gin

s

P/e 31st Mar

Gro

wth

https://www.msci.com/gics

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BCG Growth-Share matrix

The Boston Consulting Group (BGC) growth share matrix is a planning tool that uses graphical

representations of a company’s products and services in an effort to help the company decide what

it should keep, sell or invest more in. The BCG growth share matrix plots a company’s offerings in a

four square matrix, with the y-axis representing rate of market growth and the x-axis representing

market share. It was developed by BCG in 1970.

The BCG growth share matrix breaks down products into four categories: dogs, cash cows, stars and

“question marks.” If a company’s product has low market share and is in a low rate of growth

market, it is considered a “dog” and should be sold. Products that are in low growth areas but which

the company has a large market share are considered “cash cows,” meaning that the company

should milk the cash cow for as long as it can. Products that are both in high growth markets and

make up a sizable portion of that market are considered “stars” and should be invested in more.

“Questionable opportunities” are those in high growth rate markets but in which the company

doesn’t maintain a large market share. Products in this quadrant are to be analyzed more

(Investopedia).

Porter’s five forces:

Porter's Five Forces is a model of analysis that helps to explain why different industries are able to sustain different levels of profitability. This model was originally published in Porter's book, "Competitive Strategy: Techniques for Analyzing Industries and Competitors" in 1980. Porter identified five undeniable forces that play a part in shaping every market and industry in the world. The forces are frequently used to measure competition intensity, attractiveness and profitability of an industry or market.

Competition in the Industry: The importance of this force is the number of competitors and their ability to threaten a company. The larger the number of competitors, along with the number of equivalent products and services they offer, dictates the power of a company. Suppliers and buyers seek out a company's competition if they are unable to receive a suitable deal.

Potential of New Entrants Into an Industry: A company's power is also affected by the force of new entrants into its market. The less money and time it costs for a competitor to enter a company's market and be an effective competitor, the more a company's position may be significantly weakened.

Power of Suppliers: This force addresses how easily suppliers can drive up the price of goods and services. It is affected by the number of suppliers of key aspects of a good or service, how unique these aspects are and how much it would cost a company to switch from one supplier to another. The fewer number of suppliers, and the more a company depends upon a supplier, the more power a supplier holds.

Power of Customers: This specifically deals with the ability customers have to drive prices down. It is affected by how many buyers, or customers, a company has, how significant each customer is and how much it would cost a customer to switch from one company to another. The smaller and more powerful a client base, the more power it holds.

Threat of Substitutes: Competitor substitutions that can be used in place of a company's products or services pose a threat. For example, if customers rely on a company to provide a tool or service that can be substituted with another tool or service or by performing the task manually, and this substitution is fairly easy and of low cost, a company's power can be weakened (Investopedia).

http://www.investopedia.com/terms/c/client-base.asp

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Appendix VII: RICH Group structure

Company OwnershipRubber SectorRichard Pieris Exports PLC (REXP.N) 80%Arpitalian Compact Soles (Private) Limited 57%Richard Pieris Natural Foams Limited 84%Micro Minerals (Private) Limited 55%

Tyre SectorRichard Pieris Tyre Company Limited 100%Arpidag International (Private) Limited 51%Richard Pieris Rubber Compounds Limited 100%

Plastics SectorPlastishells Limited 98%Arpico Plastics Limited 100%Arpitech (Private) Limited 100%R P C Polymers (Private) Limited 100%Richard Pieris Rubber Products Limited 100%Arpico Durables (Private) Limited 100%Arpico Furniture Distributors (Private) Limited 100%

Retail SectorRichard Pieris Distributors Limited 100%Arpico Interiors (Private) Limited 100%Arpimalls Development Company (Private) Limited 100%RPC Real Estate Development Company (Private) Limited 100%RPC Retail Development Company (Private) Limited 100%

Plantation SectorRichard Pieris Plantations (Private) Limited 100%RPC Management Services (Private) Limited 100%Maskeliya Plantations PLC (MASK.N) 83%Kegalle Plantations PLC (KGAL.N) 79%Exotic Horticulture (Private) Limited 100%Namunukula Plantations PLC (NAMU.N) 65%RPC Plantations Management Services (Private) Limited 100%Maskeliya Tea Gardens (Ceylon ) Limited 100%

Services SectorRichard Pieris Group Services (Private) Limited 100%Arpico Indus Trial Development Company (Private) Limited 100%RPC Logistics Limited 100%Arpico Exotica Asiana (Private) Limited 100%Arpico Construction (Private) Limited 100%Arpico Hotel Services (Private) Limited 100%Markray Systems (Pvt) Ltd 100%Richard Pieris Securities (Private) Limited 100%Richard Pieris Financial Services (Private) Limited 100%Arpico Insurance PLC (AINS.N) 82%Arpico Ataraxia Asset Management (Private) Limited 51%Richard Pieris Finance Limited 98%Arpico Infosys (Private) Limited 100%Arpico Pharmaceuticals (Private) Limited 100%Arpico Developments (Private) Limited 100%Arpico Capital Limited 100%Arpico Hyde Park Towers (Private) Limited 100%Chilaw Finance PLC (CFL.N) 88%Richard Pieris Trading Co. Pte Limited 100%

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Disclaimer:This Review is prepared and issued by First Capital Equities (Pvt) Ltd. and is based on information available in the public domain, internally developed and other sources

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