FC Research SRI LANKA

Analyst: Amanda Lokugamage Initiating Coverage

CHEVRON LUBRICANTS LANKA PLC HOLD

LLUB.N0000 Current Price: LKR 370.0 Fair Value: LKR 360.0 Oct 2015
KEY DATA Slippery Battle
Share Price (LKR) 365.00
52w High/Low (LKR) 456.5/334.3 Y/E 31 Dec 2013 2014 2015E 2016E 2017E
Average Daily Volume (Shares) 24,736 Revenue (LKR mn) 11,202 11,520 11,798 12,588 12,829
Average Daily Turnover ('000) 9,680 Excl Super Gains Tax (LKR Mn) 2,532 2,747 3,093 3,127 3,247
Issued Share Capital (Shares mn) YoY % Growth 12% 8% 13% 1% 4%
Market Capitalisation (LKR mn) 45,120 Net Profit (LKR Mn) 2,532 2,747 2,229 3,127 3,247
Price Performance (%) 1 mth 3 mths 12mths EPS (LKR) adjusted for Super Gains Tax 21.1 22.9 18.6 26.1 27.1
LLUB -4.6% 3.1% -4.6% YoY % Growth 12% 8% -19% 40% 4%
ASPI -2.7% 0.9% 3.0% Valuations
Major Shareholders as at 30th Jun 2015 PER (X) 17.5 16.2 19.9 14.2 13.7
Chevron Ceylon Limited 51.0% PBV (X) 9.2 8.5 8.2 7.7 7.3
HSBC Intl Nom Ltd-SSBT Wasatch Frontier 5.3% Dividend Yield (%) 4.1% 5.4% 4.5% 6.3% 6.6%
Citigroup Global Markets Limited 2.6% NAVPS 40.3 43.3 45.2 47.8 50.5
Caceis Bank Luxembourg 2.3% DPS (LKR) 15 20 17 23 24
BNYM SA/NV- Blackrock Frontiers Investment Trust 1.9% Payout Ratio 71% 87% 90% 90% 90%
Public Holdings 49.0%

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

Increasing Volumes despite Shrinking Market Share: LLUB total volumes

are likely to experience a marginal c.3%YoY growth in 2016E with a CAGR
of 4% over 2014-16E albeit the shrinking market share which stands at 49%
in 2014 opposed to 53% a year ago. Increasing vehicle population resulting
from the lower tariff base coupled with higher vehicle permits issued by
the government led to an overall growth in the lubricant consumption.

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:
First Capital does not hold positions in LLUB nor does
First Capital envisage taking positions in this share
for the succeeding 7 trading days to this report.
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
stands at LKR 360.0 (average of discounted cash flow based value of LKR
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

Figure 3: Volume Lubricant Sector and LLUB

Source: PUCSL

(Source: PUCSL)

Figure 4: Volume New Vehicle Registration
and Vehicle Population
2.1 Liberalisation of the Lubricant Industry: Followed by the liberalization of
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.

2.2 Growth in New Vehicle Registration: We have seen a mammoth 76%YoY

growth in new vehicle registration in 2010 subsequent to the governments
massive tariff reduction in mid-year coupled with the increase in number of
vehicle permits issued by the government of Sri Lanka. The growth in new
vehicle registration continued in the following years albeit at a slower pace
(Source: RMV) with a CAGR of 5% over 2010-14 period. With the massive growth recorded

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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.

Increased vehicle population is expected to result in an increased demand for

lubricant consumption. However, increase in new vehicle registration is likely
to have a lagging effect on the demand for LLUB with the consumers shifting
to LLUB brand subsequent to the expiry of the warranty period.

Figure 5: Customers Shifting to LLUB

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Figure 6: Crude Oil and Base Oil Price

3.0 Falling Base Oil Prices overweight the LKR Depreciation
Movements
3.1 Falling Base Oil Prices: Base oil prices reached its lowest of USD 851 per
Base oil prices with a 3 month lag metric ton again in January 2015 followed by a slight increase over the period
of 6 months prior to stabilizing at USD 958 per metric ton (-40%YoY) which is
still way below compared to the average price of USD 1,408 per metric ton
recorded in 2014. In the past, base oil prices have experienced a correlation
between the crude oil prices with a 6 month lagging effect.

However, over the years the lagging effect lessened leading to the
fluctuations in base oil prices being consistent with that of crude oil.

Figure 7: Base Oil Price Movement - 2015

Correlation between Base oil Price
and Crude oil Price
With a 3 month lag - 76%
With a 6 month lag - 48%

(Source: Lube and Greases and Index Mundi)

(Source: Lubes & Greases)

Figure 8: Base Oil Prices Forecast

(Source: Lubes & Greases and FC Research Estimates)

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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.

Figure 9: LKR: USD Exchange Rate

(Source: CBSL)

Figure 10: LKR USD Exchange Rate Forecast 2015E-2019E

FC Research expects a YoY

LKR depreciation of 7% in
2016 and 3% thereafter

(Source: CBSL and FC Research Estimates)

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4.0 LLUB to Generate 15 Month Total Return of +5%

Y/E 31 Dec 2013 2014 2015E 2016E 2017E
Revenue (LKR mn) 11,202 11,520 11,798 12,588 12,829
Excl Super Gains Tax (LKR Mn) 2,532 2,747 3,093 3,127 3,247
YoY % Growth 12% 8% 13% 1% 4%
Net Profit (LKR Mn) 2,532 2,747 2,229 3,127 3,247
EPS (LKR) adjusted for Super Gains Tax 21.1 22.9 18.6 26.1 27.1
YoY % Growth 12% 8% -19% 40% 4%
Valuations
PER (X) 17.5 16.2 19.9 14.2 13.7
PBV (X) 9.2 8.5 8.2 7.7 7.3
Dividend Yield (%) 4.1% 5.4% 4.5% 6.3% 6.6%
NAVPS 40.3 43.3 45.2 47.8 50.5
DPS (LKR) 15 20 17 23 24
Payout Ratio 71% 87% 90% 90% 90%

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.

Company is expected to marginally increase the payout ratio to c.90% in 2015

(87% in 2014) and maintain at the same level thereafter leading to a DPS of LKR
17.0 (subsequent to the provision made for Super Gains Tax of 25%). Up to date
LLUB has paid LKR 11.0 per share as interim dividend (LKR 5.0 as first interim and
LKR 6.0 as second interim in May and September respectively). Company has
made four dividend payments in 2014 in the months of May, August, November
and December and is expected to maintain the same trend in the current year.

4.1 Fair Value of LKR 360.0 and total return of +5%

Expeceted LLLU Price for 2016E

DCF Valuations based Target Price 350.1
PER based Target Price 364.9
Average Target Price 357.5
Target Price (Rounded Up) 360.0

Return

Target Price 360.0

Current Price 370.0
Capital Gain (LKR) -10.0
Dividend FY16E (LKR) 29.2
Capital Gain % -3%
Dividend Yield % 8%
Total Return % 5%

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4.2 Average PER of 14.0 times

Figure 11: PE Band Graph

PER based Valuation

2016E Earnings (LKR 'Mn) 3,127
No. of Shares ('Mn) 120

FY16E EPS 26.1

Expected Average PER 14.0
Price at 14.0x 2016E Earnings 364.9

(Source: FC Research Estimates)

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.

4.3 Discounted Cash flow Valuation

COE (K e) Valuations 2016E

Enterpri s e Va l ue 40,412
Rf 10%
Debt (-) -
Rm 14%
Ca s h (+) 1,595
1.07
Tota l Va l ue of Equi ty 42,007
K e=Rf m -Rf ) 14%
No. of Sha res 120
Value of Equty per Share 350

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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Appendix 1 Performance Ratio

Y/E 31st Dec 2013 2014 2015E 2016E 2017E
Revenue -5% 3% 2% 7% 2%
Cost of Sale 11% 2% 6% -10% -1%
Growth

Gross Profit 8% 12% 15% 2% 3%

EBIT 9% 12% 17% 1% 3%
Net Profit 12% 8% 13% 1% 4%
GP Margin 37% 40% 45% 43% 44%
Margin

EBIT Margin 28% 31% 35% 33% 34%

NP Margin 23% 24% 26% 25% 25%

(Sources: Company Reports and FC Research Estimates)

Appendix 2 Income Statement

Profit & Loss Statement

Y/E 31 December 2013 2014 2015E 2016E 2017E
Revenue 11,202 11,520 11,798 12,588 12,829
Cost of sales (7,077) (6,917) (6,483) (7,151) (7,215)
Gross profit 4,125 4,603 5,314 5,438 5,614
Other operating income 2 13 13 13 13
Selling and distribution (443) (534) (590) (629) (641)
Admin expenses (510) (511) (560) (616) (670)
EBIT 3,175 3,571 4,178 4,209 4,315
Finance Income 279 129 117 135 195
PBT 3,454 3,700 4,295 4,343 4,510
Taxation (922) (953) (1,203) (1,216) (1,263)
Net Profit for the Period 2,532 2,747 3,093 3,127 3,247
Super Gains Tax - - (863) - -
Net Profit for the Period 2,532 2,747 2,229 3,127 3,247

(Sources: Company Reports and FC Research Estimates)

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Appendix 3 Balance Sheet

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

Equity and Liabilties

Capital and reserves
Ordinary shares 600 600 600 600 600
Retained Earnings 4,240 4,599 4,822 5,135 5,460
4,840 5,199 5,422 5,735 6,060
Non - current liabilties
Deferred tax liabilities - 102 102 102 102
Defined benefit obligation 122 120 120 120 120
122 221 221 221 221
Current liabilities
Trade and other payables 1,600 653 669 714 727
Current tax liabilities 491 403 500 534 559
Borrowings - - - - -
2,090 1,056 1,168 1,247 1,286
Total liabilities 2,212 1,278 1,390 1,469 1,508
Total equity & liabilties 7,052 6,477 6,812 7,204 7,567

(Sources: Company Reports and FC Research Estimates)

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Appendix 4 Cash Flow Statement

Cashflow Statement
Y/E 31 December 2013 2014 2015E 2016E 2017E
Net profit before tax 3,454 3,700 4,295 4,343 4,510
Adjustments (128) - - - -
Changes in Working Capital 73 48 60 63 67
Interest received 236 (92) (46) (49) (55)
Inerest paid (0) 0 - - -
Defined Benefit Obligations paid (10) 44 - - -
Tax Paid (908) 1 14 15 12
Net cashflow from operating activities 2,716 3,702 4,324 4,373 4,534

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

(Sources: Company Reports and FC Research Estimates)

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