TOKYO CEMENT COMPANY – Earnings Update “Defining the Indistinctive Leadership” – STRONG BUY

FIRST CAPITAL RESEARCH – COMPANY REPORT

Earnings Performance –

Earnings up by 118% YoY: TKYO’s earnings for the 2QFY17 was recorded at LKR 1.1Bn oppose to LKR 490Mn recorded in comparative quarter in FY16 registering a 118%YoY. On a QoQ basis the earnings saw a 66% growth compared to LKR 644Mn recorded in 1QFY17. During the 1HFY17, TKYO generated an earnings of LKR 1.7Bn as opposed to LKR 956Mn recorded in 1HFY16 registering an impressive YoY growth of 79%.

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Revenue generation grows by 24%YoY: Resultant to the boom in the construction sector coupled with the company’s investment into capacity enhancement to reach total plant capacity to 2.8Mn MT that’s coming into effect towards the latter part of the year 2016, topline was recorded at LKR 9.8Bn during the 2QFY17 with a 24%YoY growth in comparison to LKR 8Bn recorded in 2QFY16 while on a QoQ basis the same was recorded a growth of 30% as opposed to LKR 7.6Bn recorded in 1QFY17. During the 1HFY17 the topline was recorded at LKR 17.4Bn with a YoY growth of LKR 14.9Bn during 1HFY16. LKR 60.0 increase in Maximum Retail Price (MRP) to LKR 930.0 per 50kg of cement bag towards the latter part of the 1H2016 also impacted favourably on the revenue.

Future Outlook

Boom in construction sector led by Government led Infrastructure projects: With the recommencement of the construction of the Government led Infrastructure projects coupled with the Port City project and the initiation of the Western Region Megapolis development project undertaken by the government are likely to lead to a boom in the overall construction sector which is expected to boost the volumes of TKYO which in turn would increase the topline. TKYO revenue is expected to reach c.LKR 34.8Bn in FY17E registering a 15%YoY growth while the same for FY18E expected to reach c.LKR 40.8Bn.

Capital investments to increase volume and improve margins: Investment of USD 50Mn in construction of a new cement manufacturing plant in Trincomalee is expected to add 1.0Mn metric ton enhancing the overall capacity to 2.8Mn metric ton per annum. This would enable TKYO to increase volume thus benefit from the boom created in the industry. Further, newly built 8MW biomass plant would enable to meet the energy requirement of the increase capacity. These investments are expected to increase cost efficiencies and improve the GP margin to c.24% and c.25% in FY17E and FY18E respectively. TKYO invested USD 2Mn investment in a Joint Venture to manufacture 300,000 MT of sand per annum locally which would bring down the cost further.

Recommendation

Total return of 32% for both TKYO.N and TKYO.X: FC recommends a STRONG BUY on TKYO.N with a fair value of LKR 86.0 [LKR 87.3 on DCF based and LKR 85.0 on PER based] providing a total return of 32% and STRONG BUY on TKYO.X with a fair value of LKR 69.0 providing a total return of 32% for FY18E. For FY17E we expect a fair value of LKR 78.0 on TKYO.N while LKR 62.0 for TKYO.X.