JKSB Corporate Update_Tokyo Cement Company PLC (TKYO)_August 2016
Investment Considerations
Strong Outlook: Cement market to grow with the recovery of the construction sector
The Sri Lankan per capita cement consumption is estimated to be ~300kg which is significantly below the estimated world average of ~550 kg and we believe that the Sri Lankan cement market will experience strong growth over the next 5 years. Despite the healthy growth seen in the construction sector in 2014, the construction sector growth rate reduced in 2015 as a result of the delays seen in large scale infrastructure projects due to political uncertainty. However, we expect the construction sector to recover in FY17 and FY18 with the resumption of road construction projects, the surge in commercial & residential property development and the re-launch of the Colombo Port City Project. We also expect TKYO to maintain its grip over its market share in the Sri Lankan cement industry and achieve strong sales growth.
Healthy Top Line Growth: Capacity Expansion & Increase in Selling Prices
TKYO’s new grinding capacity (+1 Million MT/year) is expected to commence its pilot run in December 2016 and this will take the group's maximum grinding capacity to 2.8 Million MT/year. During the last 3 years, TKYO was operating at maximum capacity and as a result, TKYO's revenue CAGR was limited to 3.3%. The addition of the new capacity will not only enable TKYO to achieve healthy volume growth but will also have a positive impact on TKYO's profitability by increasing the proportion of locally manufactured cement (vs. imported & bagged cement) in TKYO's sales mix. Furthermore, the top line growth is also expected to be augmented by the increase in the retail selling price of bagged cement from Rs.870 to Rs.930 per bag (50kg) in June 2016.
Attractive Valuations: Significant discount to the market’s PE Ratio (>20%)
Our earnings projections translate to a FY17E PER of 8.4x for the voting share and 7.0x for the non-voting share at the current trading prices. Compared to our projected market PER of 10.8x in FY17E, the current market prices translate to a discount of 22% for the voting share and a discount of 35% for the non-voting share. In addition to this, the PER at which Holcim (Lanka) Limited was acquired by Thailand's Siam City Cement PLC translates to a discount of 65% and 71% for the voting and non-voting shares respectively. Although comparisons of such guideline transactions require an adjustment for control premiums, considering the growth potential of TKYO, we believe that the current discounts are significantly large and unwarranted. BUY
•JKSB is one of 15 founding members of the Colombo Stock Exchange with roots in share trading dating back to 1896, and is a subsidiary of John Keells Holdings PLC (JKH), the largest listed entity on the Colombo Stock Exchange with a market capitalization of US$ 1.3bn.
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•The JKSB Universe constitutes 67% of total market cap and approximately 80% of turnover at the CSE.
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