bukit darah plc (buki.n0000) · bukit darah plc (buki.n0000) 1 a capital market development...

Sri Lanka | Oil palms EQUITY RESEARCH

Initiation of coverage 29 June 2015

Bukit Darah PLC (BUKI.N0000)

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A capital market development initiative by the Colombo Stock Exchange in association with Copal Amba

Beverages and oil palm plantations fuel

growth Bukit Darah PLC (BUKI) is an investment holding company with two significant

holdings in Carson Cumberbatch (one of Sri Lanka’s largest diversified

conglomerates with high exposure to oil palm plantations, oils and fats and beverages) and Goodhope Asia Holdings (the plantation division of Carson Cumberbatch). We expect BUKI to post a revenue CAGR of 11.8% over FY16E-FY18E, with a 258bps improvement in EBIT margin to 17.9% in FY18E. We believe group revenue to be driven mainly by the beverage segment with healthy growth in volumes backed by higher average selling prices (ASP). We expect the oil palm plantations and oils and fats segments to further boost top line through solid growth in volumes. We expect topline growth and cost savings in the plantations and beverage segments to result in a slight increase in the EBIT margin. Our DCF/SOTP valuation, along with our P/E-based relative valuation analysis, suggests a valuation range of LKR623-695, compared with the share price of LKR665 as of 26 June 2015.

Top-line to grow at an 11.8% CAGR over FY16E-FY18E driven by beverage. We

expect increased tourist arrivals, relatively inelastic demand for beer and a mix-shift towards soft liquor to drive strong volume growth in the beverage segment resulting in a 13.7% CAGR during FY16E-FY18E. Furthermore, we expect the oil palm plantations segment to post a revenue CAGR of 13.9% during FY16E-FY18E, with growing demand for edible and non-edible oils. In addition, the oils and fats segment should witness a revenue CAGR of 8.0% through FY16E-FY18E, as a result of moderate volume growth on the back of rising consumerism in India and China.

Revenue growth and better cost management to strengthen EBIT margins. We

believe the exemption of beer from the value added tax (VAT) and volatility in crude palm oil (CPO) prices to pressure margins in the near-term. However, we expect CPO prices to stabilize from 2016 onwards helped by higher demand and supply constraints which should in turn boost oils & fats segment EBIT margins to 3.0% in FY18E (versus -0.5% in FY15). Further, we expect oil palm plantations and beverage EBIT margins to improve to 37.0% and 11.0% by FY18E (34.1% and 9.1% in FY15) helped by revenue growth and operational efficiencies. In addition, we believe the portfolio and asset management segments will maintain its EBIT margin at 95.0%.

Increased gearing levels may cap any significant investments in the near-term.

Due to continuous investments in plantations, oils and fats and beverage segments, group net debt has increased to LKR66.8bn in FY15 (from LKR12.4bn in FY11) while gearing levels have increased significantly to 54.6% (versus 30.8% in FY11). We believe this could limit the group’s ability to make any significant investments in the near-term. However, the company has taken measures to refinance its debt in the current low-interest rate environment which should help improve gearing to 43.8% by FY18E. Furthermore, we expect FCF which has been somewhat volatile to return to positive levels in FY16E, once BUKI reaches the tail end of its major capex cycle.

We establish a valuation range of LKR623-695. Our DCF/SOTP analysis implies a

valuation range of LKR623-693, considering positive and negative factors that impact our base-case assumptions, as explained on pages 18 and 19. Our P/E valuation suggests that BUKI currently trades at a 12-month forward P/E multiple of 17.8x – a 0.5% premium to its normalized two-year historical forward P/E average. Applying a 5% discount and a 5% premium to this normalized two-year average, we arrive at a P/E valuation range of LKR629-695.

Key statistics CSE/Bloomberg tickers

Share price (26 June 2015)

No. of issued shares (m)

Market cap (USDm)

Enterprise value (USDm)

Free float (%)

52-week range (H/L)

Avg. daily vol. (shares,1yr)

Avg. daily turnover (USD

‘000)

BUKI.N0000/BUKI SL

LKR665

102

519

1,299

23%

LKR736/630

5,193

26

Source: CSE, Bloomberg Note: USD/LKR=131.2 (average for the one year ended 26 June 2015)

Share price movement

Source: CSE, Bloomberg

Share price performance

3m 6m 12m

BUKI -2.9% -8.1% 1.7%

S&P SL 20 -0.8% -4.5% 11.2%

All Share Price Index 1.3% -4.0% 10.9%


Summary financials

LKRm (year end 31 March) FY15 FY16E FY17E

Revenue 88,933 102,450 113,394

EBITDA 16,533 19,113 22,491

EBIT 13,650 15,668 18,694

Net profit 6,244 9,176 11,277

Recurrent EPS 24.80 37.40 45.98

ROE (%) 8.7% 12.7% 13.8%

P/E (x) 27.3 17.8 14.5

Source: BUKI , Copal Amba estimates

90%

100%

110%

120%

130%

BUKI ASPI S&P SL 20

Bukit Darah PLC

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Table of Contents

BUKI to post a 11.8% revenue CAGR during FY16E-FY18E .............................................................................................. 3

Beverage segment to witness strong demand ...................................................................................................................................... 3 Oil palm plantations to boost revenue growth at a 13.9% CAGR over FY16E-FY18E ......................................................................... 5 Oils and fats segment to underpin revenue growth at an 8.0% CAGR during FY16E-FY18E .............................................................. 7 Other segments to moderately support revenue growth ....................................................................................................................... 8 Upside potential to top-line growth ..................................................................................................................................................... 10 Downside risks to revenue expectations ............................................................................................................................................ 10

EBIT margin expansion of 258bps through FY18E............................................................................................................ 11

Oil palm plantations EBIT margin to revert to FY14 levels by FY18E ................................................................................................. 12 The beverage segment’s EBIT margin to improve modestly by 188bps to 11.0% in FY18E .............................................................. 12 The portfolio and asset management segment to post EBIT margins of 95.0% through FY18E ........................................................ 13 The oils and fats segment continues to drag on profits; should return to profits in the medium to long term ...................................... 14 Downside risks to margin expansion .................................................................................................................................................. 14

Higher leverage and relatively low FCF generation on the back of recent capex could limit near-term investment opportunities ....................................................................................................................................................................... 15

We establish a valuation range of LKR623-695 for BUKI’s shares ................................................................................... 18

DCF/SOTP analysis yields a valuation range of LKR623-693 per share ............................................................................................ 18 P/E analysis yields a valuation range of LKR629-695 per share ........................................................................................................ 19 Relative valuation data used as a measure of comparison ................................................................................................................ 20

Share price performance .................................................................................................................................................... 21

Earnings release focus areas ............................................................................................................................................. 22

Appendix 1: The Sri Lankan soft liquor industry ................................................................................................................ 23

Appendix 2: The global palm oil industry ........................................................................................................................... 28

Appendix 3: Company overview......................................................................................................................................... 36

Appendix 4: Key financial data ........................................................................................................................................... 41

Summary group financials (LKRm) ..................................................................................................................................................... 41 Key ratios............................................................................................................................................................................................ 42 Segmental summary ........................................................................................................................................................................... 43

Fact sheet ........................................................................................................................................................................... 45

Bukit Darah PLC

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BUKI to post a 11.8% revenue CAGR during FY16E-FY18E

We expect the group’s beverage segment to drive top-line growth with a 11.8% revenue CAGR over FY16E-FY18E (compared with a 10.4% CAGR over FY13-FY15). We believe sales growth to be further boosted by the oil palm plantations and oils and fats segments. We are projecting growth in the portfolio and asset management, real estate and leisure segments, however we expect the impact on topline to be more muted given that these segment’s collective contribution to group revenue is only about 3%.

Figure 1: BUKI’s revenue to grow at a 11.8% CAGR FY16E-FY18E, driven by the beverage segment

Source: BUKI, Copal Amba estimates

Beverage segment to witness strong demand

We expect the beverage segment to post a 13.7% CAGR over FY16E-FY18E (compared with a 21.3% CAGR over FY13-FY15), driven mainly by higher volumes on the back of rising consumerism, increased tourist arrivals, relatively inelastic demand for malt liquor (beer) and the mix-shift towards soft liquor. We believe these factors should support volume growth of 9.8% CAGR over FY16E-FY18E. We expect the recent acquisition of Millers Brewery Ltd (MBL) to augment the beverage segment’s volume growth. On the other hand, we believe ASPs will in tandem with the excise duty increases albeit in the case of beer where we expect the company to absorb any tax increases going forward. The beverage segment now accounts for 36.4% of the group’s revenue (as of FY15), and we expect it to increase by 200bps to around 38.4% by FY18E.

Figure 2: Strong volume growth due to rising consumerism to mainly drive brewery revenue

Source: Department of Excise of Sri Lanka (DESL), Ceylon Beverage Holdings PLC (BREW), Copal Amba estimates

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FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

YoY growth LKRbn

Oil palm plantations Oils & fats Beverage Portfolio & asset mgt. Other Revenue growth (RHS)

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LKRbn m Liters

Malt liquor production volume (LHS) Brewery revenue (RHS)

Beverage and oil palm segments to drive revenue growth

Beverage revenues to be driven by strong volume growth, coupled with ASP increase in-line with exercise duty increases

Bukit Darah PLC

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We believe higher per-capita income and rise in disposable income levels to fuel soft liquor volumes underpinned by significant lifestyle changes and urbanization. This is reflected in increased per-capita soft-liquor consumption, which grew from 2.64 liters in 2008 to 6.01 liters in 2013 (refer to Appendix 1, Figure 45). The growing number of tourist arrivals has also boosted the consumption of soft liquor and we expect this trend to continue given the rapid growth in the tourism sector.

Although malt liquor production grew at a 15.9% CAGR during 2009-2013, hard liquor production fell 0.7%. Malt liquor growth was driven mainly by strong beer (beverages with an alcohol percentage above 5.0%) with a 21.4% CAGR over 2009-2013 while mild beer (alcohol percentage below 5.0%) fell 5.2%. In our view, the increased prices of hard liquor have resulted in a mix shift towards soft liquor and illicit hard liquor during this period, with these alternatives providing consumers a higher ‘kick-per-buck’.

The group’s main malt liquor (beer) producing companies, Lion Brewery (Ceylon) PLC (LION) and the recently acquired MBL, dominate the domestic beer industry, with a cumulative 86.3% market share as of 2013.

Figure 3: LION and MBL lead the domestic beer industry, with a cumulative share of 86.3% (as of 2013)

Source: DESL

We believe LION and MBL are well-positioned to capitalize from the mix-shift towards soft liquor from hard liquor, helped by its market leadership, strong brand presence and LION’s leadership in the strong beer sub-segment. LION currently holds the popular brand names ‘Lion’ and ‘Carlsberg’.

LION recently acquired MBL from Cargills (Ceylon) PLC (CARG) for a purchase consideration of LKR5.15bn which provided them the ownership of ‘Three Coins’, ‘Sando’ and ‘Sando Power’ trademarks. In mid-2014, LION set up Pearl Springs (Pvt) Ltd for the purpose of acquiring MBL and its trademarks.

The segment holding company, Ceylon Beverage Holdings PLC (BREW), has controlling interests in four other subsidiaries involved in importing, selling and distributing alcohol. Retail Spaces (Pvt) Ltd operates eight retail outlets, while Pubs N’ Places (Pvt) Ltd operates three popular restaurant brands; ‘Machang’, ‘O!’ and ‘8.8’. Under Luxury Brands (Pvt) Ltd, the group imports ‘Diageo’ and ‘Moët Hennessy’ branded liquor.

83% 83% 84% 80% 75% 75%

2% 3% 1% 3% 9% 11%

15% 14% 15% 17% 15% 14%

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100%

2008 2009 2010 2011 2012 2013

%

Lion Brewery Millers Brewery Asia Pacific Brewery

Increasing consumerism, increasing tourist arrivals and mix-shift away from hard liquor has resulted in higher soft liquor sales volume

Market leadership and strong brand presence enable LION and MBL to capitalize on industry growth

Bukit Darah PLC

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Oil palm plantations to boost revenue growth at a 13.9% CAGR over

FY16E-FY18E

We expect the group’s upstream operations in oil palm plantations to post a revenue CAGR of 13.9% over FY16E-FY18E, driven by modest volume growth. We expect recovery in demand for both edible and non-edible oils to result in CPO volume growth of 11.8% CAGR over FY16E-FY18E. In our view, fluctuating weather patterns that could result in supply constraints coupled with healthy demand from end markets would support a recovery in CPO prices. In addition, we believe that sales of palm kernel (PK) and fresh fruit bunches (FFBs) will positively contribute to the segment’s topline growth, in line with an expansion in the company’s CPO production.

Figure 4: Demand for end consumer markets and supply constraints to drive modest volume growth


We expect secular growth drivers such as rising per-capita income levels and global population growth to spur demand for edible oils and fats, with a significant uptick in India accounting for most of the volume growth (India is the largest palm oil importer in the world). Further, robust demand for biodiesel could also strengthen demand for non-edible oils and fats. In January 2015, the Malaysian government started selling B7 palm oil biodiesel in East Malaysia and the Malaysian Palm Oil Board (MPOB) is currently checking the compatibility of B10 palm oil biodiesel, which has a palm oil content of 10%. In addition, the Indonesian government plans to raise the biodiesel subsidy from IDR1,500 to IDR4,000 per liter in a protectionist measure aimed at safeguarding the domestic players amid the current low crude oil prices

We believe BUKI is well positioned to capture the demand for palm oil, given the increase in its mature acreage. Over the next three years, management expects over 15,000 hectares (Ha) of its young acreage to mature. We believe this could boost production of FFBs and CPO.

BUKI’s oil palm plantations are relatively young (Figure 5) and BUKI has a substantial land bank at its disposal for future development compared with its peers in the region (Figure 6). Currently, only 34% of its planted area is at peak (7-12 years of age) production levels while 24% is young (4-6 years of age) and at an early stage of production. However, we expect these to reach peak production levels in the next three years.

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LKRbn '000 MT

CPO production (LHS) Oil palm plantation revenue (RHS)

Moderate volume growth to drive revenue growth, while CPO prices remain a wildcard

Demand for edible and non-edible oils and fats to drive volume growth

Improving mature acreage enables BUKI to capture industry growth

Bukit Darah PLC

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Figure 5: BUKI’s oil palm plantations are relatively young compared with its regional peers

Figure 6: BUKI has more land available for future development compared with its regional peers

Source: BUKI, Company reports, Copal Amba estimates

Note: Data as of latest available financials.

Immature (0-3 years), Young (4-6,7 years), Peak (7,8-17 years), Old (more than 18 years).

Astra Agro Lestari Tbk PT (AALI IJ), Indofood Agri Resources Ltd (IFAR SP), First Resources Ltd (FR SP), Bumitama Agri Ltd (BAL SP), London Sumatra Indonesia Tbk PT (LSIP IJ), Eagle High Plantations Tbk PT (BWPT IJ), Kencana Agri Ltd (KAGR SP)



At peak production levels, fresh fruit production per bunch and oil extraction rate per FFB tends to increase. Therefore, we expect BUKI’s yields in both FFB and CPO production to recover to FY13 levels during our forecast period, resulting in high CPO production.

Figure 7: BUKI’s yields are relatively better, however, low CPO extraction rate compared with its regional peers

Figure 8: Production is relatively low compared with its regional peers


Note: Data are for full year ended 31 December 2013 except for BUKI.


Note: Data are for full year ended 31 December 2013 except for BUKI.

12% 24% 30%

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17% 37%

46%

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9%

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BAL SP BWPT IJ KAGR SP BUKI

% of land bank

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('000 Ha)

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CPO production ('000 MT)

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Bukit Darah PLC

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Figure 9: Yields and CPO extraction rate to improve with young acreage reaching peak levels….

Figure 10: ….resulting in higher production

Source: BUKI, Copal Amba estimates Source: BUKI, Copal Amba estimates

We believe the uptick in demand for edible and non-edible oils and fats will offset the impact of downward pressure on CPO prices by late-2015, and in turn support CPO prices to stabilize by 2016. In addition, we expect El Niño weather conditions, high tree stress and mature acreage in Malaysia and Indonesia to impact supply levels which could result in low FFB yields and lower CPO production

CPO prices have been on a downward trend largely owing to a supply glut of global oilseed and edible oil. However, we remain cautious over any upside to CPO prices in the short term as the recent bout of severe flooding in Malaysia since mid-December 2014, has resulted in lower production and a decline in end inventory and declining global crude oil prices, which could adversely impact the attractiveness of CPO as biodiesel (refer to Appendix 2).

Oils and fats segment to underpin revenue growth at an 8.0% CAGR

during FY16E-FY18E

We expect the oils and fats segment (downstream operations) to achieve a revenue CAGR of 8.0% through FY16E-FY18E helped by modest volume growth. BUKI made a strategic entry into downstream operations in FY12. BUKI’s oils and fats segment operates under the Premium group, with three subsidiaries in Malaysia and one subsidiary in India (three operating subsidiaries and one management company). It produces mainly edible oils and fats such as confectionary fats, ice cream fats, dairy fat substitutes, bakery fats and frying fats. Its product range also comprises animal feed and non-edible hard fats.

We forecast the oils and fats segment volumes to post a 5.0% CAGR during FY16E-FY18E as a result of increasing demand for end products. We believe rising consumerism, especially in India and China, will stimulate demand for products such as chocolates and confectionary, ice cream, bakery and biscuits. BUKI enjoys a significant market share in Russia and CIS, the Middle East, ANZ, China and India and operates in more than 50 countries. The group caters to well-known consumer brands and leading companies in those regions.

With the aim of capturing the growing demand for oils and fats, BUKI expanded capacity in its Malaysian plant in 4QFY14. Consequently, the segment’s total operating capacity grew to 321,404 metric tonnes (MT), a 9.8% YoY increase.

We believe BUKI’s downstream operations will benefit from an increase in ASPs at a 2.8% CAGR over FY16E-FY18E. We also expect downstream operations to absorb any fluctuations in CPO prices. In our view, downstream operations are much more stable in comparison to upstream operations, which can be attributed to the nature of demand for end-products. We expect BUKI’s

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Improving demand and limited supply to recover CPO prices

Moderate volume growth to drive revenue growth

Rising consumerism in India and China to drive the demand for end products

Bukit Darah PLC

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ongoing efforts to develop its product mix towards more value-added products through innovation to further support ASP growth.

Figure 11: Oils and fats production increased over FY12-FY15…

Figure 12: …while BUKI improved operating capacity in FY14 to meet increased demand

Source: BUKI Source: BUKI

Other segments to moderately support revenue growth

Ceylon Guardian Investment Trust PLC (GUAR), BUKI’s portfolio and asset management segment, focuses on CSE-listed equity, private equity, and third-party (client) funds – including managing unit trust operations through a joint venture company. We project revenue from this segment to grow at an 6.6% CAGR over FY16E-FY18E although this is mostly dependent on the performance of the Sri Lankan capital market. Sri Lanka’s main equity index, the All Share Price Index (ASPI), improved 4.1% in FY14, with a turnover of LKR229bn, and the segment reported revenue growth of 9.3% YoY. We believe the current prevailing low-interest-rate environment should attract more investors and funds to the local stock market, which, in turn, should improve the index’s performance and the segment’s fund-management activities.

Figure 13: GUAR's portfolio outperformed the ASPI Figure 14: GUAR’s revenue grew in line with fund performance

Source: Ceylon Guardian Investment Trust PLC (GUAR), Copal Amba estimates

Note: Discretionary portfolio excludes investment in Bukit Darah PLC (BUKI).

Source: GUAR, Copal Amba estimates

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Operating capacity

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Capital market performance to determine fund performance and revenue growth

Bukit Darah PLC

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Figure 15: GUAR's AUM stands at LKR34bn Figure 16: Real estate segment’s rentable space rose in FY14

Source: GUAR

Note: Data as of 31 December 2014

Source: BUKI

We expect the real estate segment to support the group’s top line, with a revenue CAGR of 6.6% during FY16E-FY18E on the back of improved revenue per square feet (sq ft). Currently, the entire rentable space, located in Colombo, is lent for commercial purposes and we believe this could help increase revenue per sq ft given rising rent prices in Colombo. The group increased its total rentable space to 192,000 sq ft from 148,000 sq ft in FY14 by renovating a previously vacant property. As a result of the favorable outlook for Sri Lanka’s property sector with several ongoing infrastructure developments, we expect overall occupancy to remain over 90.0% during our explicit forecast period.

The group’s leisure sector comprises Pegasus Reef Hotel (PEG) and Giritale Hotel, which are located 10km and 220km from Colombo, respectively. We forecast the leisure segment’s revenue to grow at a 13.3% CAGR over FY16E-FY18E as a result of higher average revenue per available room (RevPAR) and improved occupancy of 50-60% during our forecast period. We believe this growth to be underpinned by increasing tourist arrivals and a favorable environment for the tourism industry. Tourist arrivals beat the 1.5m mark in 2014, while tourism industry earnings reached USD2.2bn. Further, we expect food, beverage and other (MICE: meetings, incentives, conferencing, and exhibitions) revenue to improve at a favorable pace, as PEG underwent major refurbishment and banquet-hall renovation in FY14.

Figure 17: Occupancy in the leisure segment to recover during FY16E-FY18E

Figure 18: Tourist arrivals on an uptrend

Source: BUKI Source: Sri Lanka Tourism Development Authority (SLTDA), Central Bank of Sri Lanka (CBSL)

Discretionary

portfolio 41%

Strategic portfolio

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Clients 11%

Unit trusts 6%

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Real estate revenue to grow with improving rent per sq ft and high occupancy

Increasing tourist arrivals to boost occupancy levels and leisure revenues

Bukit Darah PLC

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Upside potential to top-line growth

Adverse weather conditions for oil palm plantations. An increase in the probability of an El

Niño weather pattern could hamper global palm oil production and put upward pressure on CPO prices.

Speedier implementation of palm oil biodiesel mandate in Indonesia and Malaysia. The

proper implementation of biodiesel mandates in Indonesia and Malaysia could increase demand. Commencing from January 2015, East Malaysia has implemented its B7 biodiesel mandate and is evaluating the compatibility of B10 biodiesel with a palm oil content of 10%.

Capacity enhancements. Capacity enhancements in the oils and fats and beverage

segments should allow the company to capture potential growth in demand.

Downside risks to revenue expectations

Slowdown in end markets and excess supply of palm oil. A potential slowdown in end

markets in India, China and the European Union could hamper demand, while excess production and higher closing stocks could drag down CPO prices.

Further decline in crude oil prices. Falling crude oil prices could limit the attractiveness of

using palm oil for biodiesel production.

Tax hikes. In an attempt to increase tax revenues, the GoSL regularly increases the excise

duty on alcohol consumption (often by way of an overnight gazette). With beer sales being exempt from VAT and NBT, beer manufactures can no longer claim input VAT and increase ASPs beyond excise duty increases.

Bukit Darah PLC

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EBIT margin expansion of 258bps through FY18E

We forecast BUKI’s EBIT margin to expand by 258bps to 17.9% in FY18E from FY15 levels, led by the oil palm plantations, beverage and portfolio and asset management segments. However, given the high cost of procuring raw materials on the back of volatile CPO prices we are cautious on the outlook for the group’s oils and fats segment margins.

Figure 19: Oil palm plantations the biggest contributor to group EBIT


Before the group entered into downstream operations, BUKI had maintained relatively high EBIT margins of 30-35% until FY12. Following the entry to downstream operations, its oils and fats segment has been a drag on the group’s profitability with margins declining to roughly 20% levels due to the high cost of raw materials. In comparison to upstream operations, downstream operations are a relatively low-margin business. To date, BUKI has not realized synergistic benefits from having a vertically integrated operation in the palm oil value chain. This is due to the oils and fats segment sourcing its palm oil requirements through external buyers (on account of geographical constraints). BUKI’s upstream operations are located in Indonesia while its downstream operations are in Malaysia and India. Nevertheless, we expect an improvement in the group’s downstream operations through FY18E, which should aid the group’s bottom line.

Our discussions with management revealed that making the oils and fats segment profitable over the coming years is a priority for BUKI.

Figure 20: Profit-margin analysis for BUKI


Note: We have removed all fair-value gains and losses from EBIT and included in EBT as other income (expenses).

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60%

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120%

(5)

0

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YoY growth LKRbn

Oil palm plantations Oils & fats Beverage Portfolio & asset mgt. Other EBIT growth (RHS)

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FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

%

GP margin EBIT margin EBT margin Net income margin

Oil palm plantations, beverage and portfolio and asset management segments to contribute to EBIT growth

Oils and fats segment has weighed down group’s profitability

Bukit Darah PLC

12


Oil palm plantations EBIT margin to revert to FY14 levels by FY18E

Following its 293 bps decline YoY in FY15 due to higher raw material prices, we expect the oil palm plantations segment’s EBIT margin to expand by 287bps and recover to 37.0% in FY18E. BUKI carried out stringent cost-management activities in FY14, reducing operating expenses per MT of CPO produced to USD472 in FY14 from USD515 in FY13 (as per our calculations). Although this increased again slightly in FY15 to USD483 per MT, we expect BUKI to further reduce per-MT operating expenses over the next one to three years, through cost efficiencies relating to operations and logistics resulting from the maturing of 15,000 Ha of immature plantations. We expect lower planting-related costs during this period.

Figure 21: Harvesting and upkeep now accounts for 34% of costs

Figure 22: EBIT margin to expand with declining operating costs (see line 435 on charts tab)

Source: BUKI, Copal Amba estimates Source: BUKI, Copal Amba estimates

Despite the improved cost management in oil palm plantations segment, we believe upside to our margin forecasts could be limited due to laws regarding minimum-wages and tax policies in the plantation industry in Indonesia and Malaysia. For instance, planters in Malaysia were adversely impacted by the implementation of the Minimum Wages Order 2012 which called for a 20% increase in minimum wages to MYR800-900, or USD227-256. Malaysia typically meets around 80-90% of its labour requirement from Indonesia. Planters usually have to incur higher production expenses owing to the high foreign-worker recruitment fees, higher fuel costs and electricity and water costs. Moreover, planters face labour shortages, as most young people are unwilling to be employed in the plantation industry due to social issue which has seen a 5-10% per annum drop in production.

The beverage segment’s EBIT margin to improve modestly by

188bps to 11.0% in FY18E

Following the acquisition of MBL, we expect volume growth to enhance economies of scale in the beverage segment (given its market leadership in the local beer market), thereby reducing fixed-cost utilization. However, in our view any significant margin upside could be offset by the cost inflation arising from the exemption of beer sales from VAT and NBT.

At present, LION has sufficient brewing capacity to meet increasing industry volumes (1.2m hectoliters per annum), while BUKI has the ability to improve its capacity to 2m hectoliters per annum over next three years, given any further increase in demand.

The halting of importing canned beer in 3QFY14 has had a positive impact on margins – as imported canned beer was relatively more expensive in contrast to locally-manufactured beer and was sold at a price below the imported cost. The company previously resorted to importing canned beer in order to meet market requirements, as it lacked capacity. However, following the capacity expansion in FY14, BUKI has been able to cut back on importing canned beer. Thus, the segment’s gross profit margin expanded 80bps to 23.2% in FY14.

0.00

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FY12 FY13 FY14 FY15

LKRbn

Harvesting and upkeep Processing costs Other operating costs

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EBIT margin (RHS)

EBIT margin to improve on the back of revenue growth and better cost management

Economies of scale due to rising volumes to drive EBIT growth

Bukit Darah PLC

13


Malt liquor manufacturers have historically enjoyed superior margins by raising beers prices over and above the excise duty price increases. However, according to 2015 government budget proposals, beer sales are no longer subject to VAT and NBT, and excise duties have been increased considerably in order to bridge the deficit in government tax revenue. As such, companies will no longer be able to claim input VAT, leading to a sharp cost increase. Management expects the increase in annual costs from this exemption to reach around LKR600m (around 3% of total operating costs, as per our calculations) during our forecast period

Although we are not expecting margins to return to pre- FY12 levels, we expect margins to improve modestly to 11.0% from the current 9.1% owing to operational efficiencies.

Figure 23: EBIT margin expansion through operating efficiencies


The portfolio and asset management segment to post EBIT margins

of 95.0% through FY18E

We expect the portfolio and asset management segment to maintain its EBIT margin at a conservative 95.0% through FY18E (in line with historical levels) on the back of improving revenue, spurred by the CSE’s performance. We expect administrative and other operating expenses to remain at 5.0% as a percentage of revenue through FY18E.

Figure 24: Conservative 95% EBIT margin through FY18E


0.0%

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Average selling price Average operating cost EBIT margin (RHS)

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FY12 FY13 FY14 FY15 FY16E FY17E FY18E

EBIT margin LKRbn

EBIT (LHS) EBIT margin (RHS)

Expansion in EBIT margins in line with revenue growth

Bukit Darah PLC

14


The oils and fats segment continues to drag on profits; should return

to profits in the medium to long term

We expect the oils and fats segment to return to profitability in 2HFY16E on account of higher sales volumes during the peak season. The segment has incurred losses since its inception in FY12, and it first recorded a profit in FY14. However, owing to sluggish sales volumes, it returned to loss-making territory in FY15.

We expect the oils and fats segment to achieve an EBIT margin of 3.0% in FY18E (up by 352bps from current level) helped by improved cost-management initiatives coupled with value-adding products driven through its new innovation center. FY15 saw a decline in segment margins into negative territory, however we believe a positive shift towards higher-priced products should enable BUKI to achieve a recovery and earn better margins in the segment

Currently, the Malaysia-based downstream business purchases its feedstock requirements (raw material, which accounts for 80-90% of its total operating expenses) from local suppliers and the company’s India unit imports its feedstock requirements (rather than from BUKI’s upstream business in Indonesia). This is primarily due to geographical constraints and the relatively low CPO requirement for its oils and fats business. Indonesia is in the process of developing its refining capacity to meet potential global demand for oils and fats. We believe integrating upstream and downstream businesses would enable BUKI to improve margins in the oils and fats segment in the long term. Therefore, we expect BUKI to explore opportunities in Indonesia to set up or acquire refining capacity for oils and fats.

Downside risks to margin expansion

Increase in harvesting, upkeep and other operating costs in oil palm plantations. An

increase in operating costs could affect profitability severely amid declining CPO prices.

Increase in feedstock cost in oils and fats segment. An increase in input costs in the oils

and fats segment could impact demand and, as a result, could significantly hamper the group’s profitability.

Drop in beverage volumes. Demand for illicit hard liquor from cost-conscious consumers is

rising owing to increasing taxes and ASPs in the liquor industry.

Shift towards value added products and better cost management should bring EBIT to positive territory

Bukit Darah PLC

15


Higher leverage and relatively low FCF generation on the

back of recent capex could limit near-term investment

opportunities

BUKI’s current debt levels remain higher than its regional peers (a gearing level of 55% for BUKI as of FY15 compared with 27-58% for its regional peers for the same period a gearing level of 55% for BUKI as of FY15 compared with 27-58% for its regional peers for the same period); this coupled with its volatile FCF generation limits near-term investment opportunities, in our view. Higher-than-peer debt levels have led to high finance costs and high FX losses on loan revaluation, weighing on the group’s bottom line (BUKI’s finance expenses increased to LKR3.2bn in FY15 from LKR833m in FY08).

During FY11, BUKI made a strategic entry into downstream palm oil operations. As a result, in FY12, BUKI acquired three operating subsidiaries of Premium Nutrients Sdn Bhd, an oils and fats manufacturing company operating in Malaysia and India. BUKI used funded the investments in the plantation sector (upstream and downstream) through external debt sources. Further, capacity expansions in the beverage segment resulted in a further rise in debt levels in FY13 and FY14. During 9MFY15, the beverage segment acquired MBL for a purchase consideration of LKR5.15bn. BUKI incurred a cumulative capital expenditure (capex) of LKR73.6bn over FY11-FY15 owing to continuous investments in the oil palm plantations, oils and fats and beverage segments

Figure 25: BUKI incurred cumulative capex of LKR73.6bn over FY11-FY15

Source: BUKI

Accordingly, at group level, BUKI’s net debt rose to LKR66.8bn in FY15 from LKR6.5bn in FY08. The group’s gearing stands at 54.6% in FY15, compared with 28.5% in FY08.

Figure 26: BUKI’s net debt levels increased more than 10x during FY08-FY15

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As a % of revenue LKRbn

Operating cash flow Capex Incremental debt Capex as a % of revenue (RHS)

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Gearing LKRbn

Oil palm plantations Oils & fats Beverage

Portfolio & asset mgt. Investment holding Real estate

Leisure Management services Gearing (RHS)

BUKI’s continuous capex in the oil palm and beverage segments resulted in higher debt levels

Bukit Darah PLC

16



Note: Positive values indicate net cash positions and negative values indicate net debt positions of each segment. FY15 net debt is apportioned as per FY14 numbers.

Figure 27: Regional palm oil producers’ gearing ranges from 27% to 58%

Source: Bloomberg


BUKI’s external borrowings are exposed to foreign-exchange fluctuations, as 78.5% of its borrowings as of FY14 are denominated in foreign currencies. BUKI incurred LKR2.9bn of exchange losses on the revaluation of foreign-currency loans (translating foreign-currency loans to the reporting currency, which is LKR) in FY14, thereby eroding the oil palm plantations segment’s profits. However, these foreign-currency loans are mainly obtained for BUKI’s foreign operations (oil palm plantations and oils and fats segments) where earnings are generated in the same currency, which should provide a natural hedge. Around 40.0% of the group’s borrowings (primarily used to finance day-to-day operations on a revolving basis) are maturing within one year.

BUKI’s net finance cost also increased during this period, as a result of high net debt. The group’s net finance cost was LKR2.1bn in FY14 versus LKR833m in FY08. The continuous rise of finance expenses has impacted the group’s profitability over the past few years.

Figure 28: 79% of loans denominated in foreign currencies Figure 29: Debt maturity profile – FY14


0%

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Gearing USDm

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LKRbn

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Less than 1year

1-2 years 2-3 years 3-4 years 4-5 years

LKRbn

Increased debt levels has impacted the group’s profitability

Bukit Darah PLC

17


However, BUKI has taken steps to refinance its debt in the prevailing low-interest-rate environment. In 3QFY15, LION, BUKI’s brewing arm, raised LKR2bn at a 7.85% rate through listed unsecured redeemable debentures, with an intention to refinance short-term borrowings (obtained previously for capacity enhancements). LION raised LKR3bn in FY13 for the capacity enhancement programme at a higher average interest rate of 11.84%. We believe the repricing of debt will help BUKI to reduce its finance expenses and thereby improve its bottom line.

As a result, we expect this situation to improve over the next two-three years given BUKI’s intention to restructure its debt and refinance this with relatively less-expensive loans, thus reducing its gearing levels to 43.9% by FY18E and positively impacting its bottom line.

Figure 30: Decreasing finance expenses along with declining debt over next three years


Additionally, BUKI’s free-cash-flow generation has also been volatile, ranging from negative LKR2.2bn to positive LKR2.1bn during FY08-FY15, except in FY13 and FY15, where the group recorded negative FCF of LKR13.5bn and LKR9.7bn, respectively. In FY13, the group recorded a negative LKR13.5bn FCF as a result of low operating profit and high investment in capex. In FY15, negative FCF arose due to lower operating cash flows and high levels of capex (LKR15.5bn). With much of the capex cycle complete, we expect the three major segments to incur relatively lower capex, which should support FCF to recover back to positive territory during our explicit forecast period.

Figure 31: FCF to recover to positive territory during FY16E-FY18E


(4.0)

(3.0)

(2.0)

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1.0


LKRbn

Interest income Interest expense

(15)

(10)

(5)

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10


LKRbn

Free cash flow

Debt refinancing to limit high finance expenses and improve profitability

FCF to recover over the forecast period on the back of low capex and better operating profits

Bukit Darah PLC

18


We establish a valuation range of LKR623-695 for BUKI’s

shares

We establish a 12-month valuation range of LKR623-695 per share, based on our current earnings outlook for BUKI shares, compared with the current share price of LKR665 as of 26 June 2015. We arrive at our valuation range by applying scenario analysis to a DCF/SOTP valuation, and using a P/E-based relative valuation approach. For comparison, we also assess BUKI’s valuation levels relative to a group of peers.

Figure 32: Valuation range analysis provides a range of LKR623-695 per share (current share price: LKR665)

Source: BUKI, Bloomberg, Copal Amba estimates

DCF/SOTP analysis yields a valuation range of LKR623-693 per share

In valuing BUKI shares, we applied a combined DCF/SOTP approach. Key elements of this approach include the following:

We have valued the oil palm plantations, oils and fats, beverage, leisure and management services segments using a standard DCF approach, applying a risk-free rate of 8.0% and a market risk premium of 6.0%. BUKI’s current capital structure is 55% debt and 45% equity. We have assumed a 45/55 target capital structure, along with a terminal growth rate of 3.0%, and a 28% corporate tax rate. We have estimated FCF figures throughout the explicit and fade periods. Our terminal value for FY25E is calculated by applying the terminal growth rate to unleveraged FCF as of FY25E. Finally, we arrived at our segment equity value by discounting the unleveraged FCF values over the explicit and fade periods at the segmental WACC.

We have valued the investment holding and portfolio and asset management segments based on current market value.

We have valued the real state segment using the fair value of investment property as of 31 March 2015.

Based on the above assumptions, our bull-case scenario considers BUKI’s intrinsic value without a holding company discount.

Further, we arrive at our bear-case equity valuation after assigning a 10% holding company discount. We have assigned the holding company discount in order to account for BUKI’s investments in the oils and fats segment. We believe any potential loss arising from the segment could reduce the group’s valuation.

630

629

623

736

695

693

665

600 700

52-week range

P/E analysis

DCF-SOTP

Our base-case assumptions for the beverage segment include a risk-free rate of 8.0% and a market risk premium of 6.0%

Bukit Darah PLC

19


Figure 33: DCF/SOTP assumptions schedule

Segment Equity value (LKRm) LKR per share

Oil palm plantations 115,946 1,136.72

Oils & fats 4,710 46.17

Beverage 40,607 398.11

Investment holding and portfolio & asset management 6,539 64.11

Real estate 2,348 23.02

Leisure 2,136 20.94

Management services 247 2.42

Total enterprise value 172,533 1,691.50

Less: Net debt / Add: Net cash (66,835) (655.24)

Less: Minority interest (35,089) (344.01)

Add: Investment in associates 26 0.25

Equity value of BUKI (bull case) 70,635 692.50

Equity value of BUKI post 10% holding company discount (bear case) 63,572 623.25

Source: Copal Amba estimates

P/E analysis yields a valuation range of LKR629-695 per share

BUKI’s 12-month forward P/E has ranged from 6.0x to 30.0x since April 2010. The share’s normalized two-year average historical forward P/E multiple stands at 17.7x. The stock currently trades at a 12-month forward multiple of 17.8x (based on our forecasts) – a 0.5% premium to its normalized two-year historical average.

Figure 34: BUKI has traded at a P/E of between 6.0x and 30.0x over the past five years

Source: BUKI, Bloomberg

In determining a P/E valuation range, we apply two scenarios:

Optimistic scenario: Under this scenario, we assumed a better-than-expected recovery in CPO prices, an improvement in beverage volumes and higher margins in the oils and fats segment. Accordingly, we have applied a 5% premium to the normalized two-year historical P/E average and arrived at a forward multiple of 18.6x. Applied to our 12-month forward EPS estimate of LKR37.40, this leads to a share price of LKR695 per share.

Pessimistic scenario: Here, we assume a 5% discount to the normalized two-year historical average, implying that BUKI will trade at a forward multiple of 16.8x. This is driven mainly by a lower-than-expected recovery in CPO price, less demand for biodiesel, less volume growth in beverages, higher excise duty increases and continuing losses in the oils and fats segment. Applying this multiple to our 12-month forward EPS estimate, we arrive at a fair value of LKR629 per share.

0

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Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 May-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Jan-15 Jun-15

LKR

6.0x 12.0x 18.0x 24.0x 30.0x MPS

Scenario analysis driven by CPO prices, beverage volumes and the profitability of the oils and fats segment

Bukit Darah PLC

20


Relative valuation data used as a measure of comparison

Selecting an adequate peer group for a conglomerate is challenging, as no potential peer has an identical slate of business segments. Since oil palm operations account for over 60% of BUKI’s operations (based on revenue in FY14), we have selected other domestic conglomerates and regional oil palm operators (mainly Indonesian) to provide some measure of comparison with other local and regional players.

Figure 35: BUKI’s P/E relative to regional peers

Company name P/E EPS CAGR FCF yield

FY14 FY15 FY16E FY17E FY15E-FY17E FY14 FY15

Bukit Darah PLC 18.4x 27.3x 17.8x 14.5x nm -0.8% -14.0%

Local peers

Carson Cumberbatch PLC 18.9x 20.9x 15.4x 12.4x nm -0.5% -8.0%

Sunshine Holdings PLC 32.6x 38.1x 24.6x 22.3x nm 5.5% 4.9%

Distilleries Company of Sri Lanka PLC 10.0x 10.2x 10.4x 9.8x nm -0.8% 4.8%

Regional peers

Astra Agro Lestari Tbk PT 21.9x 15.3x 16.0x 13.9x nm 0.6% -1.7%

Indofood Agri Resources Ltd 23.3x 12.7x 12.0x 9.6x nm -0.5% 6.4%

First Resources Ltd 11.2x 12.9x 13.8x 11.6x nm 0.7% 0.8%

Bumitama Agri Ltd 18.6x 15.0x 12.4x 10.9x nm 1.4% 6.6%

London Sumatra Indonesia Tbk PT 17.1x 14.1x 12.9x 11.4x nm 1.2% 4.3%

Eagle High Plantations Tbk PT 30.0x 15.0x 33.7x 21.0x nm -16.9% -21.6%

Kencana Agri Ltd na 24.0x 17.0x 8.5x nm 2.7% -8.3%

Mean 20.6x 18.4x 17.0x 13.2x nm -0.7% -1.2%

Median 20.3x 15.0x 13.8x 11.4x nm 0.6% 2.5%

High 32.6x 38.1x 33.7x 22.3x nm 5.5% 6.6%

Low 10.0x 12.7x 10.4x 8.5x nm -16.9% -21.6%

Source: BUKI, CARS, Bloomberg, Copal Amba estimates

Bukit Darah PLC

21


Share price performance

BUKI shares closed at LKR665 on 26 June 2015, LKR17 higher than 12 months earlier, an increase of 1.7%, compared to an 11.2% increase in the S&P SL 20 and an 10.9% increase in the All Share Price Index (ASPI).

Figure 36: BUKI has underperformed the market over the past 12 months


As shown in Figure 37, BUKI has underperformed the CSE’s two main indices over the past three years.

Figure 37: BUKI vs. key indices

3m 6m 1 year 2 years 3 years

BUKI -2.9% -8.1% 1.7% -6.2% -15.8%

S&P SL 20 -0.8% -4.5% 11.2% 14.3% 36.8%

ASPI 1.3% -4.0% 10.9% 15.5% 40.6%


60%70%

80%90%

100%

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Jun-12 Oct-12 Jan-13 May-13 Sep-13 Dec-13 Apr-14 Jul-14 Nov-14 Mar-15 Jun-15

BUKI ASPI S&P SL 20

Bukit Darah PLC

22


Earnings release focus areas

Here is a checklist of items that investors should track in the next – and subsequent – quarterly earnings release. We will closely track BUKI’s performance across these key areas, and will revise our forecasts and update our valuation range in future earnings update notes.

1. Have there been any changes to supply and demand factors for palm oil?

2. Have there been any changes to CPO prices?

3. Have there been any revisions to the excise duty? Has LION and MBL been able to pass these on to consumers through higher ASPs?

4. Has the Department of Excise published the latest volume data?

5. How has the industry consumption mix-shift changed towards soft liquor?

6. Have there been any new retail brewery operators (distributors) that have entered the market?

7. Has the group carried out any major capital investments?

8. Has there been any change to the group’s capital structure?

9. Has the government issued guidelines on the implementation of the “Super Gains Tax”?

Bukit Darah PLC

23


Appendix 1: The Sri Lankan soft liquor industry

The country’s domestic soft liquor market mainly consists of malt liquor, commonly known as beer. Beer is an alcoholic beverage made from malted cereal grains, such as barley and wheat, through a brewing process. Beer is also flavored with hops to add bitterness, while certain herbs, fruits and caramels are used to add a variety of sweetened flavors.

Figure 38: Snapshot of the domestic soft liquor market

Soft liquor Growth drivers Key players

Malt liquor (beer) with alcohol % above 5%

High demand: Growth underpinned by shift to high-alcohol soft liquor from hard liquor due to increasing tax hikes

Lion Brewery, Asia Pacific Brewery

Malt liquor (beer) with alcohol % below 5%

Moderate demand: We believe the spillover effect from the shift in volumes to soft liquor benefits this category of producers as well

Lion Brewery, Millers Brewery

Source: Copal Amba

The domestic soft liquor market can be broken up based on its key product types, malt liquor with an alcohol percentage above 5.0% (strong beer) and malt liquor with an alcohol percentage below 5.0% (mild beer), as shown in Figure 39. Strong beer accounted for approximately 89% (up from 71% in 2008) of the country’s soft liquor market. In 2013, the total volume of malt liquor produced amounted to approximately 120m liters. Production of malt liquor grew at a 15.9% CAGR during 2009-2013, while production of hard liquor recorded a negative CAGR of 0.7% during the same period.

Figure 39: Strong beer continues to dominate the soft liquor market

Source: DESL

The domestic malt liquor market comprises three main players. LION is the market leader in both sub-segments, and is the overall market leader in the domestic soft liquor market, with a market share of approximately 75.1% as of 2013.

29% 23% 21% 16% 13% 11%

71% 77% 79%

84% 87% 89%

0

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2008 2009 2010 2011 2012 2013

Volume (m liters)

Mild beer Strong beer

Bukit Darah PLC

24


As of 2013, soft liquor dominated the domestic alcohol industry, with a 54% market share, while hard liquor has gradually lost its share to 46% (from around 62% in 2008) (Figure 42). We believe the recent trend toward soft liquor is owing to rising consumerism, increasing tourist arrivals and the mix-shift towards soft liquor from hard liquor due to the increasing prices of hard liquor as a result of excise tax increases.

Figure 42: Soft liquor continues gain share in the local liquor consumption market

Source: DESL

Government influence on the domestic alcohol industry

The main impact that the government has on the industry is by way of excise duty policies, with taxes being payable every 15 days on production volumes. The domestic alcohol industry has always been a major tax revenue source for the GoSL – generating LKR66.0bn in revenue in 2013. Tax revenue from liquor accounted for roughly 9% of total tax revenue earned on production and expenditure in 2013 – 7% from hard liquor and 2% from malt liquor.

38% 37% 41% 43% 53% 54%

62% 63% 59% 57% 47% 46%

0%

20%

40%

60%

80%

100%

2008 2009 2010 2011 2012 2013

%

Soft liqour Hard liqour

Figure 40: LION led the strong beer sub-segment in 2013…. Figure 41: ….as well as the mild beer sub-segment

Source: DESL Source: DESL

Lion Brewery

73%

Asia Pacific Brewery

15%

Millers Brewery

12%

Lion Brewery

89%

Millers Brewery

8%

Asia Pacific Brewery

3%

Bukit Darah PLC

25


Figure 43: Tax revenue from liquor increased to 9% of taxes earned on production and expenditure in 2013

Source: CBSL, DESL, Copal Amba estimates

We note that one impact of the tax increases in recent times has been the gradual mix-shift to soft liquor (such as beer), with malt liquor making up 54% of total consumption in 2013 (surpassing the 50% mark in 2012 after several years, when compared to the recent past) as reflected in Figure 42. Furthermore, according to industry experts, these constant upward tax revisions have also led to increased consumption of illicit (moonshine) and illegal (imitations produced by licensed manufacturers or those liters produced not declared for tax purposes) hard liquor products among consumers, who are looking for greater value for money, measured by the ‘kick-per-buck’. In addition, illicit and illegal brewers make up approximately 50% of the domestic alcohol industry in Sri Lanka, with around 200,000 illicit brew retailers, compared to approximately 3,300 licensed liquor stores, based on statistics from the Institute of Policy Studies of Sri Lanka.

Since these illicit players remain untaxed and unregulated, illicit alcoholic products are significantly less expensive (roughly 30-40% lower, according to industry experts), which makes them a suitable substitute to the price-sensitive consumer, despite the inferior quality and poor hygiene standards.

On 10 October 2014, taxes on mild beer and strong beer were raised by LKR10 and LKR15, respectively. Beer manufacturers were able to pass the cost increase to end consumers through price increases. Along with the 2015 budget proposal, the GoSL decided to exempt the sale of beer from the VAT and NBT. To recover the resulting loss in government revenue, on 25 October 2014, the GoSL increased taxes on mild beer and strong beer for the second time in the month by LKR30 and LKR40, respectively. As a result, the beer industry can no longer claim the VAT, resulting in a notable cost increase for the players.

Figure 44: Excise duty on malt liquor continued to increase

Source: Ministry of Finance and Planning

6.0% 5.9% 6.2%

8.4% 8.9% 9.2%

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6%

8%

10%

0

20,000

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60,000

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2008 2009 2010 2011 2012 2013

% LKRm

Taxes on malt liqour Taxes on hard liqour Taxes on liquor as a % of taxes on production and expenditure (RHS)

0

50

100

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25-O

ct-

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31-J

ul-13

10-O

ct-

14

25-O

ct-

14

LKR/Liter

Mild beer Strong beer

Bukit Darah PLC

26


Industry demand drivers for the soft liquor market

The fundamental growth drivers for the overall local soft liquor market in Sri Lanka continue to remain healthy, in our view. As shown below, soft liquor consumption trends in Sri Lanka have seen a steady increase since 2010, with an 18.2% CAGR during 2009-2013. We believe the favorable impact through rising consumerism, increasing tourist arrivals and the mix-shift towards soft liquor from hard liquor due to the increasing prices of hard liquor as a result of excise tax increases to be the main drivers.

Figure 45: Total consumption of soft liquor continues to grow with increasing income levels

Source: DESL

We believe this demand would be driven by rising consumerism in Sri Lanka spurred by a growing middle class with increasing per capita income, allowing for greater disposable income levels. Sri Lanka’s GDP per capita stood at USD3,280 in 2013, with the GoSL anticipating this to reach USD4,677 by 2016E at a 12.6% CAGR. As shown in Figure 46, the ‘dependence’ on alcoholic beverages has made demand for liquor increase along with per capita income growth. Therefore, we believe the industry will benefit from stable volumes, despite increasing selling prices.

The product’s inelastic nature of demand means that volumes should continue their upward trajectories, despite price increases (primarily due to higher excise duties) each year. For example, 2012-2014 saw excise duty revisions (upwards) on five occasions; this was in addition to the two increases during 2011. However, based on data provided by the Department of Excise of Sri Lanka (DESL) and our calculations, we estimate 2013 per capita beer consumption to have grown to 6.01 liters versus 2.57 liters in 2009, at a 17.8% CAGR, clearly indicating the price inelasticity of alcohol.

Figure 46: Per capita beer consumption improved with increased per capita income

Source: CBSL, DESL, Copal Amba estimates

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In addition, we expect increasing tourist arrivals into Sri Lanka to also drive demand growth. Tourism is a burgeoning industry in Sri Lanka, and it has taken off post war (since May 2009). Tourist arrivals grew 27.8% per annum from 2009 to reach 1.53m in 2014. The GoSL expects tourist arrivals to increase to 2.5m by 2016E and 4.5m by 2020E, and we believe this would contribute to growth in soft liquor consumption (see Figure 47).

Figure 47: Rising tourist arrivals should increase the demand potential for beer

Source: SLTDA, DESL

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Appendix 2: The global palm oil industry

Overview

Palm oil is widely used as an edible oil around the world. It is also utilized in an extensive range of non-edible products. CPO is derived from the reddish pulp, known as the mesocarp, of the fruit of oil palm trees, while palm kernel oil (PKO) is derived from the seed inside the palm fruit.

Oil palm trees grow in tropical environments, mostly 10 degrees within the equator. Typically, lands are developed for cultivation within 1.5-2 years, which could vary depending on the nature of the terrain and environmental and social constraints. The development cost is usually capitalized as part of biological assets. In general, an oil palm tree has an economic lifetime of 20-25 years, and the first 2-3 years are considered as immature. Oil palm trees produce 8-12 average FFBs annually, each containing 1,500-2,000 fruits weighing 20-30kg. The weight of a FFB increases as the oil palm tree reaches its maturity, resulting in high amounts of oil extraction. CPO and PK are extracted from FFBs through a mechanical process in mills located inside plantations. A processing mill commonly handles 2-10 MT of FFBs per hour, depending on its production scale. PKO is extracted in separate kernel-crushing plants, where some are integrated with CPO processing mills.

A FFB usually extracts 20-25% of CPO depending on the quality of fresh fruits, number of loose fruits (contains only 40-48% of oil), delivery time to the mill from the after harvesting, quality of the processing machines, and the harvesting time. The extraction rate of PK from FFBs usually comes to about 4-6%. Palm oil is considered as the highest-yielding crop among vegetable oil crops, with a yield of 3.5-5 MT CPO per Ha – thus has the ability to meet increasing demand in the absence of adequate land for cultivation. However, higher yields are hardly achieved due to climatic conditions, where oil palm trees could suffer heavily from water-related stress, thus producing a low number of FFBs. Furthermore, management of costly inputs such as labour, fertilizer, pesticides and harvesting machinery could weaken the yield. The highest cost involved in the CPO production is harvesting and plantation maintenance costs (around 40% of the total operating costs), whereas processing/milling cost comes to about 5-6% of total operating costs.

Production has grown more than 4x during the past two decades

Indonesia is the world’s largest palm oil producer in the world, with a 50.9% market share, followed by Malaysia with 34.4% and Nigeria with 1.7% as of 2013.

Over the past two decades, palm oil production has grown significantly and is now the largest globally produced edible oil. From 1991 to 2013, the global production of palm oil grew from 11.9m MT to 55.8m MT, which is equivalent to an average annual growth rate of 7.1%.

Figure 48: World production of palm oil over 1991-2013

Source: Food and Agriculture Organisation of the United Nations (FAO)

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Currently, it is the most globally traded vegetable oil and is used as an input for a wide range of industries ranging from cosmetics to pharmaceuticals. Within the food industry, it caters to many segments in the value chain such as bakery, chocolates and confectionary. It is also considered to be the most productive crop in comparison to other oil seeds as it yields 6.3x (as of 2013) more than its closest competitor soybean (Figures 49 and 50). It is also characterized as having relatively low production costs as it uses less inputs and relatively less land. However, the production process is comparatively more labour intensive.

Figure 49: Palm fruit yield vs. others Figure 50: Palm oil yield vs. others

Source: FAO Source: FAO, Copal Amba estimates

Much of the palm oil production growth has come from Indonesia and Malaysia, with these two countries accounting for 90.0% of total exports in palm oil in 2013. Malaysia was at the forefront of the development of the palm oil industry with Indonesia following. They should continue to be the main producers, but we can expect production growth in Malaysia to stagnate in the future owing to limited land availability (Figure 51). As a result, many investors are now looking at West Africa to secure land.

Figure 51: Regional exports of palm oil during 1990-2014E

Source: United States Department of Agriculture (USDA)

While the boom in the palm oil industry has created widespread economic benefits for the countries involved, it has been widely criticized for the environmental impact. The effect of large-scale deforestation, which palm oil production is associated with, has resulted in increased greenhouse gas emissions and biodiversity losses, making palm oil among the products with the highest ecological damage. Therefore, much emphasis is currently given to sustainable palm oil production and increasingly, firms in the industry are expected to gain certification to uphold these initiatives (such as the Roundtable on Sustainable Palm Oil – RSPO, established in 2004 to develop best practices in the industry).

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Key drivers of demand for palm oil

Strong global demand for palm oil is expected to continue in the near to medium term, a view underpinned by (1) a rebound in economic growth from the largest import markets and reduced inventory stocks, (2) uptake from the biodiesel industry and (3) reduced support for the soybean sector and increased demand for genetically modified (GM) free and trans-fat free food. There has been a steady increase in the global palm oil per capita consumption level, increasing at an average growth rate of 5.5% per annum over the past decade. Currently, it stands at around 8.4kg and is expected to rise further in the years to come.

Figure 52: Global per capita consumption of palm oil

Source: USDA, United Nations Population Fund (UNFPA), Copal Amba estimates

The largest import markets for palm oil are India and China (Figure 53). As such, upbeat economic growth in these developing nations should be supportive of robust demand for palm oil. Furthermore, low domestic inventory stocks in China and India will result in re-stocking activities in the short run, which should further boost demand (Figure 54).

Figure 53: Palm oil imports by region (as of 2013) Figure 54: End stocks for palm oil

Source: USDA Source: USDA

In addition, much of the palm oil boom has been directed to the biodiesel surge that began in the West. Increasingly, other countries that are large producers of vegetable oils have joined in this biodiesel take off in an effort to cut gasoil imports and save on foreign exchange. This can have a significant impact on demand for palm oil in Malaysia and Indonesia, which are the largest exporters of palm oil, take policy moves to implement stronger biodiesel mandates. According to the Organisation for Economic Co-operation and Development (OECD)-FAO agricultural outlook

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2014-2023, demand for biodiesel will continue to increase steadily, growing at an average rate of 4.4% per annum during 2014E-2023E.

The introduction of the ambitious biodiesel mandate in Indonesia, which came into effect in August 2013, was aimed at boosting the country’s domestic demand for palm oil. The government has issued a directive that 10% of biodiesel must be blended into gasoil for the transportation sector, while power plants would be asked to use 20%. Meanwhile, Malaysia, the largest palm oil producer after Indonesia, which implemented a biodiesel mandate at the end of 2013, has set higher biodiesel blending rates nationwide beginning from July 2014.

Figure 55: Biodiesel production, growth and outlook

Source: OECD-FAO Agricultural Outlook 2014-2023

Given that biodiesel is a substitute for crude oil, a spike/decline in crude oil prices should have a notable impact on demand for biodiesel and hence palm oil.

Figure 56: Prices of crude oil vs. global biodiesel production

Source: OECD-FAO Agricultural Outlook 2014-2023, World Bank Global Economic Monitor Commodities (WBGEM)

In the past, palm oil was a major competitor for soybean oil, with the two directly competing for market share based on prices. However, over the past decade, there has been a greater shift toward palm oil, which is now dominating the markets (Figure 57). Industry experts believe one possible driver for this is reduced support given from both developed and developing nations for GM-free food. Initially, this resulted in a shift from GM soybean sources to GM-free soybean sources. However, the increasing adoption of GM soybeans lowered the availability of GM-free soybeans. Increasingly, this resulted in a shift toward palm oil as it was also a much cheaper alternative than soybean oil (Figure 58). Over the years, while both their prices have increased,

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palm oil has been trading at a much larger discount in recent years, which has also been a factor for increased global demand.

Figure 57: Palm oil imports vs. other vegetable oil imports Figure 58: Palm oil traded at a larger discount to soybean oil

Source: USDA Source: WBGEM

Slower production growth with uncertain supply responses

Growth in production of palm oil is expected to slow down driven by 1) adverse weather conditions such as the expectation of a potential El Niño; 2) tree stress (tree stress is mostly caused by low moisture leading to higher proportion of flowers becoming non-fruit producing male flowers and fewer flowers and ineffective pollination resulting in small FFBs, which could carry on for few production cycles) following higher crop performance during the previous years, which tends to even out the yield as most palm trees are reaching peak production cycles; and 3) mature hectarage in Malaysia and slowdown in growth of mature hectarage in Indonesia.

There is also an increasing risk of land restrictions and environmental restraints, which constrain production growth. In Indonesia, as of October 2013, a foreign company is only allowed to own a maximum of 100,000 Ha of land for new oil palm plantations. As the palm oil industry is highly labour intensive, it is crucial to attract and retain skilled labour. However, it’s been noted to be quite challenging to attract locals for this work, as there is an increasing shift in employment from plantations to manufacturing in both Malaysia and Indonesia. These labour shortages add pressure on wages and hence the cost of production.

CPO prices dropped during 2014

At present, CPO prices are experiencing a downward trend due mainly to an oversupply of global oilseed and edible oil output. The leading producers in the world, Indonesia and Malaysia, increased their plantation acreage aggressively during early 2014, increasing palm oil production. Higher commodity prices witnessed during 2013, which made oil palm plantations highly profitable, have encouraged producers to increase the planting land areas. This price decline in global vegetable oils was further supported by the estimated improvement in soybean supply owing to favorable weather conditions in the US. Furthermore, forecasts made during early 2014 for an El Niño weather pattern, which could affect supply, was reduced. In addition, demand from China weakened owing to tighter credit conditions faced by importers, and demand from India weakened following higher import tariffs on palm oil. This was clearly evident in increased inventory levels and reduced exports in Indonesia and Malaysia. In addition, slow progress in adopting biodiesel mandates in Indonesia and Malaysia and lower crude oil prices caused demand for CPO to reduce.

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Figure 59: CPO prices dropped during 2014 Figure 60: Exports declined while stocks built up in Malaysia

Source: WBGEM Source: Malaysian Palm Oil Board (MPOB)

Higher-than-expected global palm oil production witnessed until November 2014 resulted in higher palm oil inventory, which could possibly lead to a drop in prices in the short-term. Furthermore, demand could have a negative impact from its main markets in the northern hemisphere due to the winter season, where usage of tropical oils declines in low temperatures. To encourage global palm oil demand and prices, the Indonesian and Malaysian governments imposed zero export tariffs on palm oil exports during September-October 2014 and expect to maintain these until the first quarter of 2015.

During December 2014, India raised import duties on crude edible oils and refined edible oils by 5% to 7.5% and 15%, respectively, as a government initiative to protect local planters against increasing imports from Indonesia and Malaysia. This could negatively affect the price competitiveness of imported edible oils against locally produced edible oils. Currently, 60-70% of India’s vegetable oil requirement is met through palm oil imports from Indonesia and Malaysia. India is the largest vegetable oil importer and its annual edible oil demand accounts for 18-19m MT (around 11% of global vegetable oil consumption). This may have weakened demand from India and thus suggesting a negative for palm oil price outlook.

However, we believe this has been partly offset by weakened supplies in Malaysia owing to floods. Malaysia experienced the worst flooding in 30 years in the country’s east coast (states which accounted for 29.3% of 2013’s CPO output and 13.5% of 2013’s oil palm planted area) since mid-December 2014, affecting around 184,000 Ha (3.5% of total oil palm planted area in Malaysia) of its oil palm cultivating areas. CPO production dropped 15.0% MoM to 1.16m MT during January 2015, resulting in lower inventory levels of 1.77m MT. The Malaysian government expects inventory levels to drop further due to the implementation of its biodiesel mandate (blending 7% of palm biodiesel with 93% of petroleum diesel) from January 2015 onwards. However, the impact of this move on CPO prices now remains uncertain due to prevailing lower crude oil prices. With the sharp fall in crude oil prices, CPO prices are now trading at a significant premium, thus making it uneconomical for producers to convert CPO into biodiesel. However, the current premium is relatively low compared to the historical premium.

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Figure 61: CPO prices are now trading at a significant premium; relatively low to the historical premium

Source: WBGEM

Note: CPO price conversion to USD/bbl from USD/MT is 1 MT = 7.87 bbl according to US Energy Information Administration.

We expect CPO prices to remain at current low levels in the near term due mainly to supply constraints. There will be limited availability for palm oil exports due to slow production growth stemming from limited palm oil production in Malaysia as result of recent floods and overall limited production due to increased probability of El Niño weather patterns. However, we expect the positives to outweigh the current negatives from 2016 onwards and create an upward pressure on CPO prices. We believe rising domestic consumption in both Malaysia and Indonesia, due to the biodiesel mandate, and rising consumerism in India and China, along with improving per capita income would drive demand for CPO in the mid to long term.

Global vegetable oils and fats industry

Oils and fats are derived from processed vegetable oils. Oils and fats are used in both edible and non-edible forms globally, where palm oil accounts for approximately 30-35% of world consumption of major oils and fats. CPO is widely used in the food industry as cooking oils, confectionary fats, ice cream fats, dairy fat substitutes, frying fats, shortenings and as substitutes for animal fat. Also PKO is used in different forms of animal feed. Furthermore, palm oil is used in manufacturing soap, detergent, greases, lubricants, candles, bactericides, cosmetics, pharmaceuticals, water-treatment products and in the biofuel industry.

Palm oil’s unique properties of high resistance to oxidation and long shelf life make it more suitable for use in tropical environments.

According to the OECD-FAO Agricultural Outlook 2014-2023, the global consumption of major oils and fats grew significantly over the past two decades, at a 5.5% CAGR during 1995-2004 and 4.0% during 2010-2014. We believe the average annual increase of 5.5 MT per annum during 1995-2007 is due mainly to growth in the food industry. The higher growth of 6.0 MT per annum during 2008-2014 is mainly attributable to increasing demand for oils and fats from the biofuels industry. As per the United States Department of Agriculture (USDA), of this growth in the world consumption of major oils and fats, CPO and PKO increased its share from 26.7% in 1994 to 39.3% in 2014.

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Figure 62: Global consumption of vegetable oil grew nearly 4x over the past two decades

Source: OECD-FAO Agricultural Outlook 2014-2023, USDA

Per capita consumption of vegetable oils and fats improved to 23.8kg in 2014 from 10.4kg in 1994, while per capita consumption of CPO and PKO improved to 9.3kg in 2014 from 2.8kg in 1994, gradually improving its share in the end-consumers market. Per capita consumption of vegetable oils and fats in high-income-earning countries, such as the US and some countries in Europe, is generally higher than the low-income-earning countries, such as India and China. In 2014, the per capita consumption of vegetable oils and fats in the US, European Union, China, and India amounted to 45kg, 42kg, 24kg and 15kg, respectively. At higher income levels, elasticity of demand tends to be low and at lower income levels elasticity tends to be high. Therefore, we expect higher increases in consumption to be seen in low-income-earning countries, supported by increasing per capita income and population growth. Moreover, growth in consumption in developed countries would be relatively low. We believe that palm oil is well positioned in these emerging markets to capitalize on this growth, and palm oil has been strong in these developing countries over the years.

Figure 63: Per capita vegetable oil consumption

Source: OECD-FAO Agricultural Outlook 2014-2023, Copal Amba estimates

In general, consumption in each country tends towards locally produced oils and fats. Palm oil and coconut oil based products are mostly used in tropical countries, while in North America, Europe and Russia, soybean oil-based products are used. Currently, around 70.0% of CPO and 24.0% of PKO produced globally is used for food production and the remainder is used for industrial non-food applications and as feed waste.

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Appendix 3: Company overview

Bukit Darah PLC (BUKI) incorporated in Sri Lanka in 1916, has a current market capitalization of LKR68bn as of 25 June 2015. BUKI is primarily an investment holding company with two significant investments in Carson Cumberbatch PLC (45.68% stake) and Goodhope Asia Holdings (35.6% stake). Carson Cumberbatch is one of the largest diversified conglomerates in Sri Lanka while Goodhope Asia is the main palm oil arm of Carson Cumberbatch. Through these investments, BUKI is exposed to oil palm plantations, oil and fats, breweries, portfolio management, real estate and leisure sectors The group has operations in Sri Lanka, Malaysia, Indonesia, Singapore and India.

BUKI posted revenue of LKR88.9bn for FY15 contributed largely by beverage, oil and fats and oil palm plantation segments (36.4%, 32.8%, and 27.7%, respectively), while oil palm plantations and beverage segments contributed by 63.2% and 22.2% respectively to record LKR13.3bn in operating profit. BUKI’s PBT grew at a 28.8% CAGR to reach LKR11.1bn during FY10-FY14. FY15 saw a decline in operating profits of 20.8% YoY.

Figure 64: Oil palm plantations, the largest contributor, averaged 30% of BUKI’s revenue over the last three years, while the top line grew at a 32.0% CAGR during FY10-FY15

Figure 65: Oil palm plantations profits fell in FY15, due to higher raw material costs and operating expenses


BUKI’s business segments

BUKI’s core business activities are focused on oil palm plantations, production of oils and fats, beverage, and portfolio and asset management. BUKI also conducts operations in the leisure, real estate, management services and investment holding segments.

Plantations segment

The plantation segment’s operations are managed primarily through the sector holding company – Goodhope Asia Holdings Ltd. This division focuses on both upstream and downstream production of palm oil.

Oil palm plantations. This segment engages in the production and sale of CPO, PK, PKO,

palm kernel expeller (PKE) and FFBs to both local and international customers. It operates with more than 15 companies located in Malaysia and Indonesia and it holds 77,575 Ha of gross planted land (as of FY14). In addition, it has five CPO mills operating in Indonesia, with a committed capacity of 2,673,000 MT per annum and a kernel crushing plant, with a capacity of 108,000 MT per annum.

Oils and fats. This division’s downstream operations involve manufacturing and distributing

refined edible oils, specialty fats and cooking oil products to industries and end customers. The company entered the edible oils and fats market in 2011, after acquiring three operating

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subsidiaries in Malaysia and India. It currently has a combined refining and production capacity of 321,404 MT per annum.

Beverage segment

The beverage segment’s operations include manufacturing, marketing and exporting beers, and managing a chain of wine shops and pubs. Ceylon Beverage Holdings PLC and Lion Brewery (Ceylon) PLC are two of the major holdings in this segment.

Ceylon Beverage Holdings PLC (BREW). BREW owns a 52% stake in LION and operates a

chain of wine shops and pubs via its wholly owned subsidiaries, Pubs ‘N Places, Retail Spaces and Luxury Brands.

Lion Brewery (Ceylon) PLC (LION). LION currently has a production capacity of 1.2m

hectoliters per annum. LION brews and markets beers, including two of Sri Lanka’s leading beers, Lion and Carlsberg. The company exports Lion beers to several countries including the US, Canada, Australia, the UK, Japan, and the Maldives – which is the largest export market. In 2014, Pearl Spring (Pvt) Ltd was incorporated as a subsidiary of LION and has completed the acquisition of Miller Brewery Ltd, a subsidiary of Cargills (Ceylon) PLC.

Portfolio and asset management segment

This segment is involved in equity, asset, mutual funds and unit trust management. Ceylon Guardian Investment Trust PLC (GUAR), Ceylon Investments PLC (CINV), and Guardian Capital Partners PLC (WAPO) are some of the main holding companies reported under the segment.

Leisure segment

The leisure segment shows results of two star-class hotels owned and operated by BUKI – Peagus Reef Hotel, a modern four-star hotel with 140 rooms, and Giritale Hotel, a three-star hotel with 40 rooms.

Real estate segment

This segment owns and manages four office premises and a warehouse in Colombo city, representing a total area of approximately 195,000 sq ft.

Investment holdings segment

This segment reflects BUKI’s strategic investments in sector holding companies of the group, which, in turn, hold ownership of sector-level subsidiaries. A sector holding company usually controls one to twenty nine subsidiary companies under its portfolio.

Management services segment

This segment serves internal customers of the group based on their geographical set-up. It provides services such as corporate finance, company secretarial, legal, tax, IT, HR and group internal audits.

Shareholding structure

Institutional investors hold 94.0% of BUKI’s ordinary shares, while domestic investors accounted for 79% of the company’s ownership. Rubber Investment Trust Ltd is the largest shareholder in BUKI, accounting for a 20% ownership interest. CARS’ holds roughly a 6% stake in BUKI as an investment holding. Rubber Investment Trust Ltd is a subsidiary of CARS. The 20 major shareholders represent 95.7% of total shareholding. Only 23% of BUKI’s shares are available as the free float.

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Figure 66: Local investors own 79% of BUKI’s shares Figure 67: Institutional investors account for 94% of BUKI’s

shareholder base

Source: BUKI

Source: BUKI

The top five shareholders as of 31 March 2015 are listed below.

Name of shareholder Stake

Rubber Investment Trust Ltd A/C No.03 20.04%

Portelet Ltd 9.23%

Skan Investments (Pvt) Ltd 8.19%

Goodhope Holdings (Pvt) Ltd 7.99%

Newgreens Ltd 7.75%

Source: BUKI

International 21%

Domestic 79%

Institutions 94%

Individual 6%

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Board of directors

As of March 2015, BUKI’s board comprised seven directors. Their details are provided below.

Name of Director Description

Mr. Hari Selvanathan Chairman/executive director (ED). He is also the deputy chairman of CARS and Goodhope Asia Holding Ltd. Currently, he serves as a director of several subsidiary companies in the group and he possess over 20 years of experience in commodity trading in international markets.

Mr. Mano Selvanathan ED. He holds directorship in several companies under the BUKI Group, and also serves as the chairman of Sri Krishna Corporation (Pvt) Ltd, Ceylon Finance & Securities (Pvt) Ltd and Selinsing PLC.

Mr. Israel Paulraj Independent non-executive director (INED). He currently serves as the chairman of Ceylon Guardian Investment Trust PLC, Ceylon Investment PLC, Guardian Capital Partners PLC and Rubber Investment Trust Ltd. In addition, he is on the board of several subsidiaries of Carson Cumberbatch PLC.

Mr. Chandima Gunawardena Non-Executive Director. He serves as a director of CARS and an advisor to the group’s strategic planning and management forums in Sri Lanka. He was appointed to the group director board in 1990 and has over 40 years of experience in various fields of business.

Mr. Chandana Tissera ED. He is the CEO for the group’s plantations, oils and fats sectors. He also serves as a director at CARS and several companies in the group.

Mr. Suresh Shah ED. He is the CEO of BREW and LION. He also serves on the board of CARS and the Sri Lanka Business Development Centre.

Mr. Leslie Ralph De Lanerolle

INED. He has over 46 years of work experience in various senior management positions, especially in project finance and management.

Mr. K. Selvanathan Alternate director for Mr. M. Selvanathan.

Source: BUKI

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Figure 68: Corporate holding structure

Source: BUKI

Note: * denotes listed companies on CSE. Percentages indicate respective controlling interests in each company by BUKI either directly or through subsidiary companies.

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Appendix 4: Key financial data

Summary group financials (LKRm)

INCOME STATEMENT 2013 2014 2015 2016E 2017E 2018E

(For the year ended 31 March)

Revenue 76,160 76,543 88,933 102,450 113,394 124,202

EBITDA 13,532 15,635 16,533 19,113 22,491 26,429

EBIT 10,977 12,787 13,650 15,668 18,694 22,261

Interest expense (1,496) (2,074) (2,476) (2,935) (3,050) (2,969)

Associate/JV income/(expense) (8) (1) (0) 12 18 28

Earnings before Tax (EBT) 13,627 11,133 8,822 12,744 15,663 19,320

Net profit 9,645 7,874 6,244 9,176 11,277 13,910

Net income 4,235 3,275 2,529 3,815 4,690 5,787

BALANCE SHEET 2013 2014 2015 2016E 2017E 2018E

(As at 31 March)

Current assets

Cash and cash equivalents 7,934 16,936 9,143 6,984 8,508 10,721

Short term investments - - - - - -

Accounts receivable 10,377 9,848 11,229 13,707 13,756 14,827

Inventories 7,260 7,941 7,661 9,236 9,567 9,858

Total current assets 26,629 36,028 31,468 33,360 35,265 38,840

Non-current assets

Property, plant and equipment 51,042 54,759 58,207 64,637 71,402 78,780

Biological assets 42,787 46,817 47,034 52,451 58,445 65,011

Intangible assets 7,115 7,231 11,458 11,769 12,140 12,570

Investments in associates/JVs 25 26 26 40 61 93

Total non-current assets 112,681 121,957 132,951 145,121 158,274 172,681

Total assets 139,310 157,985 164,419 178,482 193,539 211,521

Current liabilities

Short term debt 24,789 25,855 24,899 24,899 24,899 24,899

Accounts payable 10,818 16,398 13,379 15,722 16,328 16,436

Total current liabilities 35,608 42,381 38,497 43,588 47,573 51,848

Non-current liabilities

Long term debt 27,445 38,733 51,079 51,079 51,079 51,079

Post-retirement benefit obligation 1,241 1,038 1,255 1,255 1,255 1,255

Total non-current liabilities 36,839 49,146 62,678 62,678 62,678 62,678

Equity

Common share capital 372 372 372 372 372 372

Retained profit 29,450 27,677 25,539 29,150 33,635 39,218

Minority interest 34,831 36,179 35,089 40,451 47,038 55,161

Total equity 66,863 66,458 63,243 72,215 83,288 96,995

Total liabilities and equity 139,310 157,985 164,419 178,482 193,539 211,521

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CASH FLOW STATEMENT 2013 2014 2015 2016E 2017E 2018E

(For the year ended 31 March)

Operating activities

Net cash flow from operating activities 7,293 17,279 5,846 16,584 21,709 23,934

Investing activities

Purchase of PPE and intangible assets (20,901) (17,788) (15,540) (15,602) (16,929) (18,542)

Net cash flow from investing activities (19,257) (15,199) (22,765) (15,120) (16,562) (18,097)

Financing activities

Debt issuance/(repayment) 3,400 13,905 12,300 - - -

Common share issuance/(repurchase) - - - - - -

Interest paid* (1,496) (2,074) (2,476) (2,935) (3,050) (2,969)

Dividends paid to common shareholders (2,716) (3,767) (3,767) (3,419) (3,419) (3,419)

Dividends paid to minority interests - - - - - -

Net cash flow from financing activities (275) 9,155 10,018 (3,623) (3,623) (3,623)

Net increase/(decrease) in cash and cash equivalents (12,238) 11,236 (6,901) (2,160) 1,524 2,214

Note: *In this case, interest paid in the cash flow statement is equal to the interest expense on the income statement.

Key ratios

KEY RATIOS 2013 2014 2015 2016E 2017E 2018E

Growth

Revenue growth (%) 15.3% 0.5% 16.2% 15.2% 10.7% 9.5%

EBITDA growth (%) -21.4% 15.5% 5.7% 15.6% 17.7% 17.5%

EBT growth (%) -25.9% 16.5% 6.7% 14.8% 19.3% 19.1%

Net profit growth (%) -18.4% -18.4% -20.7% 47.0% 22.9% 23.4%

Recurrent diluted EPS growth (%) -17.6% -22.7% -22.8% 50.8% 22.9% 23.4%

Margins

EBITDA margin (%) 17.8% 20.4% 18.6% 18.7% 19.8% 21.3%

EBIT margin (%) 14.4% 16.7% 15.3% 15.3% 16.5% 17.9%

EBT margin (%) 17.9% 14.5% 9.9% 12.4% 13.8% 15.6%

Net profit margin (%) 12.7% 10.3% 7.0% 9.0% 9.9% 11.2%

ROE (%) 13.7% 10.5% 8.7% 12.7% 13.8% 14.8%

Liquidity and Efficiency

Current Ratio (x) 0.7 0.9 0.8 0.8 0.7 0.7

Total Asset Turnover (x) 0.5 0.5 0.5 0.6 0.6 0.6

Gearing and Cash Flow

Debt/Capital (%) 43.9% 49.3% 54.6% 51.3% 47.7% 43.9%

Interest Cover (x) 7.3 6.2 5.5 5.3 6.1 7.5

Free cash flow (FCF) yield (%) -18.9% -0.8% -14.0% 1.4% 7.0% 7.9%

Net debt/FCF (x) (3.3) (93.8) (6.9) 70.3 14.1 12.1

Valuation

P/E (x) 17.0 18.4 27.3 17.8 14.5 11.7

P/BV (x) 2.2 2.0 2.5 2.1 1.9 1.6

EV/Sales (x) 2.0 1.9 1.9 1.7 1.5 1.4

EV/EBITDA (x) 11.2 9.2 10.3 8.9 7.5 6.4

EV/EBIT (x) 13.8 11.3 12.5 10.8 9.1 7.6

EV/FCF (x) (11.1) (283.7) (17.6) 173.0 35.5 31.5

Dividend yield (%) 0.4% 0.5% 0.0% 0.3% 0.3% 0.3%

Dividend cover (x) 31.5 25.7 na 45.0 55.3 68.2

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PER SHARE DATA (LKR) 2013 2014 2015 2016E 2017E 2018E

Reported basic EPS 41.5 32.1 22.4 37.4 46.0 56.7

Recurrent diluted EPS 41.5 32.1 24.8 37.4 46.0 56.7

Common dividend per share 3.0 3.0 - 2.0 2.0 2.0

Book value per share (BVPS) 314.0 296.8 276.0 311.4 355.4 410.1

Net operating cash flow per share 71.5 169.4 57.3 162.6 212.8 234.6

Net cash flow per share (120.0) 110.2 (67.7) (21.2) 14.9 21.7

Segmental summary

Oil palm plantations 2013 2014 2015 2016E 2017E 2018E

Revenue 25,797 22,347 24,629 27,030 32,116 36,390

EBIT 8,604 8,282 8,407 9,461 11,562 13,464

YoY growth

Revenue -0.3% -13.4% 10.2% 9.8% 18.8% 13.3%

EBIT -19.4% -3.7% 1.5% 12.5% 22.2% 16.5%

Margins

EBIT 33.4% 37.1% 34.1% 35.0% 36.0% 37.0%

Oils & fats 2013 2014 2015 2016E 2017E 2018E

Revenue 25,059 25,893 29,185 32,016 34,289 36,723

EBIT (889) 370 (153) 160 514 1,102

YoY growth

Revenue 29.1% 3.3% 12.7% 9.7% 7.1% 7.1%

EBIT 188.3% -141.6% -141.3% -204.7% 221.3% 114.2%

Margins

EBIT -3.5% 1.4% -0.5% 0.5% 1.5% 3.0%

Beverage 2013 2014 2015 2016E 2017E 2018E

Revenue 23,002 25,846 32,396 40,385 43,771 47,660

EBIT 1,600 2,397 2,954 3,837 4,290 5,243

YoY growth

Revenue 26.8% 12.4% 25.3% 24.7% 8.4% 8.9%

EBIT -33.3% 49.8% 23.2% 29.9% 11.8% 22.2%

Margins

EBIT 7.0% 9.3% 9.1% 9.5% 9.8% 11.0%

Portfolio & asset management 2013 2014 2015 2016E 2017E 2018E

Revenue 1,661 1,815 2,005 2,205 2,316 2,432

EBIT 1,543 1,663 2,108 2,095 2,200 2,310

YoY growth

Revenue -20.2% 9.3% 10.4% 10.0% 5.0% 5.0%

EBIT -22.2% 7.8% 26.7% -0.6% 5.0% 5.0%

Margins

EBIT 92.9% 91.6% 105.1% 95.0% 95.0% 95.0%

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Other 2013 2014 2015 2016E 2017E 2018E

Revenue 640 641 719 814 903 996

EBIT 120 74 (6) 115 129 143

YoY growth

Revenue 12.1% 0.1% 12.1% 13.2% 10.9% 10.3%

EBIT 56.0% -37.8% -107.6% -2141.5% 11.5% 10.8%

Margins

EBIT 18.7% 11.6% -0.8% 14.2% 14.3% 14.3%

Source: BUKI , Copal Amba estimates

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Fact sheet

Sri Lanka investment environment overview

Sri Lanka’s economy has been on an upward trajectory since the end of the three-decade civil war in May 2009. Sri Lanka currently boasts South Asia’s highest GDP growth, conducive fiscal and monetary policy, and favorable socio-economic conditions, which together create an attractive investment destination.

Figure 69: Sri Lanka's GDP projected to increase to 8% by 2016E

Figure 70: GDP per capita to increase 29% by 2016E

Source: CBSL, Department of Census and Statistics Source: Road Map 2014 - CBSL

Figure 71: Annual core inflation post-war has averaged 5.5%, government targeting low to mid-single digit levels in the medium term

Figure 72: CBSL expects the rupee to stabilize in the medium term

Source: Department of Census and Statistics, CBSL Source: Bloomberg

Figure 73: Fiscal deficit reached 6.0% in 2014 Figure 74: Debt-to-GDP to fall to 67% by 2016E

Source: CBSL Source: CBSL

6.8 6.0

3.5

8.0 8.2

6.3 7.2 7.4

8.0 8.0

0

2

4

6

8

10

2007

2008

2009

2010

2011

2012

2013

2014

2015E

2016E

%

0

1,000

2,000

3,000

4,000

5,000

2007

2008

2009

2010

2011

2012

2013

2014

2015E

2016E

USD

7.7

13.6

7.0 7.0 6.9 5.8

4.5 3.5

0

2

4

6

8

10

12

14

16

2007 2008 2009 2010 2011 2012 2013 2014

%

100

150

200

250

Jan-07 Sep-08 May-10 Feb-12 Oct-13 Jun-15

LKR

LKR/USD LKR/EUR LKR/GBP

0%

4%

8%

12%

0

200

400

600

2007 2008 2009 2010 2011 2012 2013 2014

% of GDP LKRbn

Fiscal deficit As a % of GDP

102 102 91 88 85 81 86 82 79 79 78 76 71 67

0

20

40

60

80

100

120

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

201…

201…

%

Bukit Darah PLC

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The Sri Lankan equity market offers a rare and attractive alternative to investors in an investment era impacted by economic growth worries. Backed by the country’s robust economic growth, the Sri Lankan capital market is well set to offer attractive returns to investors who are keen to be a part of this emerging market success story. There are several strong incentives for entering the Sri Lankan capital market.

Figure 75: Post war, the ASPI has significantly outperformed global and developed market indices

Figure 76: Post war, the ASPI has also outperformed some of the best-performing regional indices

Source: Bloomberg *Note: All figures re-based to 1 July 2009

Source: Bloomberg *Note: All figures re-based to 1 July 2009

Figure 77: The CSE’s market capitalization has nearly tripled since 2009

Figure 78: FDI inflows reached USD1.7bn in 2014

Source: Bloomberg, CBSL Source: Ministry of Finance and Planning, Board of Investment of Sri Lanka

Figure 79: Most sector P/Es are below market average and historical valuations

Figure 80: Trend is similar on a P/BV multiple

Source: Colombo Stock Exchange Source: Colombo Stock Exchange

0

80

160

240

320

400

Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15

%

ASPI Dow Jones FTSE 100

MSCI World DAX

0

100

200

300

400

Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15

%

ASPI Bombay (BSE 500)

Jakarta (JCI) Philippines (PASHR)

Thailand (SET) Vietnam (VNINDEX)

MSCI Emerging Market Index

1,092

2,211 2,214 2,168 2,418

3,105

2,688

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2009 2010 2011 2012 2013 2014 2015(June)

LKRbn

601 516

1,066

1,279 1,391

1,685

0

400

800

1,200

1,600

2,000

2009 2010 2011 2012 2013 2014

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Bukit Darah PLC

47


IMPORTANT DISCLAIMER

This document has been prepared on behalf of the Colombo Stock Exchange (“CSE”) by Amba Research Lanka Private Limited (“Amba”) and is sponsored by the CSE. The views expressed in this document are those of the authors based on available and accessible information from the public domain and do not represent those of the CSE. Please note, inter alia, that with the publication of this document on the CSE website, www.cse.lk, neither Amba , as author, nor CSE (as sponsor) intend to assume and are not assuming any responsibility or liability (including under contract, common law or tort) to any party arising out of or with respect to this document. This document is not intended to, and does not form part of any contract with anyone (including a contract between author and reader/recipient) and no one shall have any right (contractual or otherwise) to enforce any claim in relation to the document either directly or indirectly.

Except as otherwise indicated, you may only view and print one copy of the document for your own personal, non-commercial use. You may not copy, store [either in hardcopy or in an electronic retrieval system] transmit, transfer, broadcast, publish, reproduce, create a derivative work from, display, distribute, sell, license, rent, lease or otherwise transfer any of the contents to any third person (including, without limitation, to others in your company or organization) whether for direct or indirect commercial or monetary gain or otherwise without the prior written permission of Amba and CSE.

This document does not contain any investment advice nor does it constitute an offer to buy, sell or hold any of the investment product(s)/asset class (es) mentioned herein. Prospective investors are required to possess sufficient knowledge when evaluating the advantages and risks inherent to such investment product(s)/asset class(es) mentioned herein and to take into consideration their circumstances and financial position when assessing the suitability of such investments.. Prior to making an investment decision, prospective investors are strongly advised to obtain independent advice from competent legal, financial, tax, accounting and other professionals. Amba and CSE shall not be held liable in any manner for any direct, indirect or consequential loss that may arise as a result of investing in the investment product(s)/asset class (es) mentioned herein. Amba and CSE expressly disclaim any fiduciary responsibility or liability for any consequences, financial or otherwise from any reliance placed on the information in this document. The investment product(s)/asset class (es) described in this document may not be eligible for sale or subscription within a particular jurisdiction or to particular categories of investors. This document is not intended for distribution to a person or, within a jurisdiction where such distribution would be restricted or illegal. It is the responsibility of any person reading this document to observe all applicable laws and regulation of the relevant jurisdiction. Neither Amba, nor CSE, shall be responsible for any error which may have occurred at the time of printing of this document. The information set out in this document is subject to change without notice.

The information contained herein has been obtained from sources believed to be reliable and Amba and CSE make no warranty, expressed or implied, as to the accuracy, timeliness, completeness or correct sequencing of the information.

This document does not purport to list all of the terms and conditions, nor to identify or define all or any of the risks that would be associated with the purchase or sale of the investment product(s)/asset class (es) described herein. Please note that any price levels, rates, simulations, illustrations, terms or conditions contained herein are indicative only, and may vary in accordance with changes in market conditions. All the information included in this document is current at the time of preparing this document and subject to change at any time. Any forecast, projection or forward looking statement made in this document embodies assumptions and predictions about future events that by their nature cannot be verified as facts. They are not necessarily indicative of future or likely performance, of investment product(s)/asset class (es), countries, markets or companies. Any past market conditions or product performances may not be representative of future market conditions or product performances.

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