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LLUB Corporate Update 22-10-15 HOLD 2
LLUB Corporate Update 22-10-15 HOLD 2
LLUB, the local arm of Chevron Corporation, USA is the market leader in the
Figure 1: LLUB Price Volume Graph
lubricant manufacturing sector and one of the three players authorized to
blend lubricants locally, is expected to record an earnings of LKR 3.1bn with a
CAGR of c.6% over 2014-17E (excl. Super Gains Tax). Significant growth in
vehicle population coupled with low base oil prices prevailing in the market
are expected to improve EBIT to c.33% in 2016E (31% in 2014). LLUB fair value
stands at LKR 360.0 converting to a total return of only +5%. HOLD
Falling Base Oil Prices Overweight the LKR Depreciation: Base oil price
experienced a continuous downtrend falling by a dramatic 40% over a
period of one year since mid-2014 reaching USD 851 per metric ton
recording the all-time lowest in early 2015. Local currency experienced a
rapid depreciation against the USD reaching LKR141:1USD (-8%) levels in
the latter part of the current year. Sharp depreciation of the local currency
(Source: CSE) abated the benefit of the low base oil prices, preventing LLUB from
enjoying the low cost of production, improved margins and earnings.
Disclaimer on Shareholding: LLUB to Provide a 15 Month Return of +5%: We believe LLUB earnings are
likely to grow by mere c.1% in 2016E to LKR 3.1bn. Our fair value for LLUB
First Capital does not hold positions in LLUB nor does
First Capital envisage taking positions in this share
stands at LKR 360.0 (average of discounted cash flow based value of LKR
for the succeeding 7 trading days to this report. 350.1 and PER based price of LKR 364.9) resulting a capital gain of -3% and
dividend yield of +8%.
FC Research Slippery Battle
1.0 Introduction
Figure 2: ASPI vs LLUB 1.1 Trailblazer in Lubricants: LLUB with a market share of 49% in 2014 (53%
in 2013) is the market leader in lubricant industry in the country. Being one
of the three out of thirteen players who are authorized to blend lubricants
locally, LLUB managed to retain the crown albeit the shrinking market share.
1.2 Share Price Performance: LLUBs share has been trading between LKR
336-457 during the last 12 month period. Currently it trades at LKR 370, a
+10% increase in price since October 2014. Over the period of one year share
has outperformed the market mainly driven by the improved earnings.
(Source: FC Research)
2.0 Increasing Volumes despite Shrinking Market Share
Source: PUCSL
(Source: PUCSL)
Figure 4: Volume New Vehicle Registration 2.1 Liberalisation of the Lubricant Industry: Followed by the liberalization of
and Vehicle Population the lubricant market in 2006 eight new players entered the market
intensifying the competition with 13 players battling for 49mn liter demand
in the market in 2006. LLUB held 85% of the market share in 2006 which
experienced a gradual yet steady decline in the market share over the past
couple of years with the market share plunging below 50% in 2014.
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FC Research Slippery Battle
in new vehicle registrations total vehicle population grew by 18% in 2010 and
6% in 2014 to reach 3.75mn vehicles. We expect the new vehicle registration
to be c.23% and c.-9% in 2015E and in 2016E respectively while total vehicle
population to reach c.4.3mn vehicles in 2016E.
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FC Research Slippery Battle
However, over the years the lagging effect lessened leading to the
fluctuations in base oil prices being consistent with that of crude oil.
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FC Research Slippery Battle
3.2 LKR Rapid Depreciation against USD: Resultant to the heavy imports
mainly led by automobile widened the balance of payment increasing the
demand for USD which led to LKR experiencing a rapid 8% depreciation
against the USD in the latter part of the year which is likely to close at
LKR142:1USD by the end of 2015.
(Source: CBSL)
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FC Research Slippery Battle
LLUB Valued at LKR 360.0: We believe LLUB earnings to grow to LKR 3.1bn
registering a growth of mere c.1% in 2016E on the back of shrinking market share
and depreciating local currency.
Return
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FC Research Slippery Battle
Considering the higher PE at which the LLUB has been traded in the past,
on average we expect LLUB to trade at a PER of 14.0x on 2016E earnings,
above the average PE of the manufacturing sector.
WACC WACC
Ke 14% 350 9% 10% 11% 12% 13%
1% 369 333 298 279 260
Kd (1-t) 7%
Terminal 2% 409 363 321 299 275
D/E As s umpti on 40 / 60 Growth (%) 3% 463 403 350 323 295
Termi na l Growth (%) 3% 4% 538 456 387 352 318
WACC 11% 5% 651 530 435 391 347
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FC Research Slippery Battle
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FC Research Slippery Battle
Balance Sheet
As at 31 December 2013 2014 2015E 2016E 2017E
Assets
Non current assets
Property plant and equipment 1,297 2,244 2,318 2,400 2,482
Non current receivables 90 66 66 66 66
1,387 2,310 2,385 2,466 2,548
Current Assets
Inventories 1,929 1,746 1,788 1,908 1,945
Receivables and prepayment 1,252 1,130 1,157 1,235 1,259
Short term investments 1,389 - 347 625 938
Cash and cash equivalents 1,096 1,291 1,134 970 878
5,666 4,167 4,427 4,738 5,019
Total Assets 7,052 6,477 6,812 7,204 7,567
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FC Research Slippery Battle
Investing Activities
Fixed Assets (1,128) (995) (135) (144) (149)
Net cashflow from investing activities (1,128) (995) (135) (144) (149)
Financing Activities
Dividends (1,620) (2,940) (2,006) (2,815) (2,923)
Net Cashflow from financing activities (1,620) (2,940) (2,006) (2,815) (2,923)
Net cash and cash equivalents (32) (1,195) 191 113 221
Cash and cash equivalents at beginning of year 2,517 2,485 1,290 1,481 1,595
Cash and cash equivalents at end of year 2,485 1,290 1,481 1,595 1,816
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