EQUITY RESEARCH – 1Q2021 EARNINGS UPDATE

17th May 2021

LLUB.N
Chevron Lubricants Lanka PLC
HOLD Hold for dividends; lack of long term growth prospects limit price upside
Price (LKR) – 107.75
Year-end Dec (LKR mn) 2019 2020 1Q2021 2021E 2022E 2023E
Target Price (LKR) – 103.16
Revenue 11,856 11,637 4,353 14,039 13,894 13,669
Total Return (%) – 6.5%
YoY Change (%) 9.2% -1.8% 53.0% 20.6% -1.0% -1.6%
Gross profit 4,435 4,617 1,835 5,931 5,414 5,052
Share Data
Market Cap (USD mn) 131.2 GP Margin (%) 37.4% 39.7% 42.1% 42.2% 39.0% 37.0%

Market Cap (LKR bn) 25.8 Operating profit 2,918 3,036 1,429 4,354 3,885 3,502

12mos ADTO (USD thsd) 83.5 YoY Change (%) 6.4% 4.0% 99.0% 43.4% -10.8% -9.9%
12mos H/L (LKR) - V 114.0/46.0 Profit for the period 2,100 2,226 1,539 3,272 3,007 2,784

Free Float V (%) 49 YoY Change (%) 5.6% 6.0% 198.0% 47.0% -8.1% -7.4%
EPS (LKR) 8.8 9.3 6.4 13.6 12.5 11.6
PER (x) 8.6x 10.7x n/a 7.6x 8.2x 8.9x

DPS (LKR) 8.0 7.9 n/a 11.6 10.6 9.9

Share Price (Indexed from Jan 2019)

1Q2021 earnings grew 198% YoY to LKR 1.5bn, supported by a +53% YoY expansion in topline to LKR 4.4bn.
The growth in top-line was a result of a c.+15-20% upward retail price revision in February, coupled with higher
LLUB.N
volumes in the retail segment and better export performance. GP margins expanded 190bps to 42.1% for the
170 ASPI quarter benefitting from higher selling prices, better capacity utilization due to pent up demand and lower
150 base oil prices in comparison to 1Q2020. We anticipate LLUB’s 2021E bottom line to grow 47.0% YoY to LKR
3.3bn (vs. previous LKR 2.2bn) due to the upwards price revisions supporting margins, which are impacted by
130 rising raw material prices and LKR depreciation.

110
Temporary boost to 1Q2021 earnings while sustainable growth remains low - During 1Q2021 LLUB recorded
90 higher sales volumes despite a c.15-20% price hike that came in to effect in February. According to management, the
spike in volumes emerged from the pent up demand stemming from delayed vehicle servicing from the previous year,
70
during which mobility restrictions were imposed for the second time in 4Q2020. Our channel checks with lubricant
50 dealers indicate that there may have also been a temporary market share gain for LLUB due to supply disruptions of
Servo (c. 19.42% market share as of 3Q2020) and Laugfs lubricants (c.10.74% market share as of 3Q2020) in certain
Jan-19

Jan-20

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Apr-21
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Oct-19

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areas of the country. While all lubricant brands have increased their prices, LLUB further increased their prices in April,
bringing the total YtD price increase to 30% which could cause a disruption in its’ market share in the long term once
its’ key competitors start replenishing stocks to areas with a shortage. Further, the impact of the vehicle import ban is
two pronged. While in the long run it will adversely impact the company due to limited vehicle growth, in the short
term the higher frequency of oil drainage in older vehicles will support volumes since majority of the revenue is driven
via the retail segment (c.70% in 2020). Looking ahead, as there is still an ASP difference between LLUB brands and it's
competitors (c.20-25%), we expect a market share erosion (41.5% as of 3Q2020) going forward.

Gross margins to be impacted by currency depreciation and recovering oil prices - Higher capacity utilization
Natalie Kulasekere and the lag effect of the lower base oil prices which were prevailent during the latter part of 2020 drove the margin
Email: nataliek@cal.lk expansion in 1Q2021 (42.1% in 1Q2021 Vs 40.2% in 1Q2020). As LLUB is mostly import dependant, the recovering
crude oil prices (+22% YtD) coupled with the LKR/USD depreciation (+5.3% YtD) could impact margins going forward.
This could be further magnified in the long run due to LLUB’s inability to further accommodate more significant price
hikes as the products are already priced at a premium in comparison to its’ competitors. We expect LLUB's gross
margins to record 42.2% (+250bps YoY) for 2021E, supplemented by the strong performance in 1Q2021.

CAL maintains a HOLD on LLUB – CAL expects LLUB’s bottom-line to expand 47% YoY to LKR 3.3bn in 2021E. At an
85% dividend payout, CAL expects LLUB to provide an LKR 11.59 dividend per share translating to a dividend yield of
10.8% at current prices. CAL maintains a HOLD based on 1) Stagnant volume growth due to higher price differential
between LLUB and other players leading to market share erosion 2) Margin erosion due to rising oil prices and LKR
depreciation, coupled with limitations in multiple price hikes due to the ASP differential between LLUB and
competitors' products 3) A 1-year DCF based target price of LKR 103.16 which may provide a positive return of 6.5%
(4.3% share downside and a 10.8% dividend yield). LLUB trades at a 2021E PER of 7.6x.
Income statement (LKR mn) 2019 2020 2021E 2022E 2023E Valuation

Revenue 11,856 11,637 14,039 13,894 13,669 Valuation (DCF) 103.2

Growth % 9.2% -1.8% 20.6% -1.0% -1.6%

Cost of sales 7,421 7,020 8,108 8,480 8,617
Gross profit 4,435 4,617 5,931 5,414 5,052
Margin % 37.4% 39.7% 42.2% 39.0% 37.0% WACC Assumptions
Distribution expenses 789 778 772 695 683
Administrative expenses 730 808 813 843 875 WACC Assumptions
Other income 2 4 8 8 8
Operating profit 2,918 3,036 4,354 3,885 3,502 WACC Assumptions
Margin % 24.6% 26.1% 31.0% 28.0% 25.6% WACC 12.1%
Net Finance cost 26 147 190 291 364 Terminal growth rate 1.0%
Profit Before Taxation 2,944 3,099 4,544 4,176 3,866
Margin % 24.8% 26.6% 32.4% 30.1% 28.3%

Tax (844) (874) (1,272) (1,169) (1,083)

Profit for the Year 2,100 2,226 3,272 3,007 2,784

Margin % 17.7% 19.1% 23.3% 21.6% 20.4%

Balance Sheet (LKR mn) 2019 2020 2021E 2022E Company Profile
Assets Lubricants [LLUB] is the market leader

2,272 2,101 2,031 1,967 1,907 (c.41.5% market share in 2020) in the Sri
Property Plant and Equipment
Lankan lubricant industry which comprises
Intangible Assets - - - - -
of 13 players who are authorized to
Inventories 1,939 2,691 2,888 3,020 3,069
import, export, sell, supply and distribute
Trade and Other Receivables 1,078 1,082 1,154 1,142 1,124 lubricants. Chevron Sri Lanka
Other non current assets 74 79 79 79 79 manufactures and distributes lubricants
Cash and cash equivalents 870 1,899 2,643 3,037 3,435 under the brands Caltex, Havoline, Delo

Total Assets 6,233 7,852 8,795 9,245 9,615 and Lanka in Sri Lanka. Over 90% of
products marketed by Chevron Sri Lanka
Equity
are produced locally at its blending plant
Stated Capital 600 600 600 600 600 in Lindel Estate, Sapugaskanda.
Retained Earnings 3,536 3,580 4,071 4,522 4,940
Total Equity 4,136 4,180 4,671 5,122 5,540
Liabilities
Debt - - - - -
Trade and Other Payables 788 2,167 2,221 2,323 2,361
Other Current liabilities 1,309 1,504 1,903 1,800 1,713
Total Liabilities 2,097 3,671 4,124 4,123 4,075
Total Equity and Liabilities 6,233 7,852 8,795 9,245 9,615

2
Disclaimer
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reliable. Capital Alliance Securities (Private) Limited however does not warrant its completeness or accuracy. Opinions and estimates given constitute a
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Rating Definition
STRONG BUY Strong upside. Total return (incl. dividends) is expected to be above 25% within the next 12
months.
BUY Good upside. Total return (incl. dividends) is expected to be between 15% to 25% within the
next 12 months.
HOLD For existing shareholders. Total return (incl. dividends) is expected to be between 0% to 15%
within the next 12 months.
NEUTRAL Moderate to substantial risk to fundamentals resulting from factors outside the business
environment. Could yield in either upside or downside to the share price.
SELL Strong downside. Total return (incl. dividends) is expected to be below 0% within the next 12
months.

Contacts

Udeeshan Jonas
Chief Strategist
Tel: +94 11 231 7786
E-mail: udeeshanj@cal.lk

Devin Jayasundera Ishara Nilam Pravir Goonewardene

E-mail: devinj@cal.lk E-mail: isharan@cal.lk E-mail: pravirg@cal.lk

Nilakshi De Mel Natalie Kulasekere Yomal De Silva

E-mail: nilakshim@cal.lk E-mail: nataliek@cal.lk E-mail: yomald@cal.lk

For general queries please email calresearch@cal.lk or

contact us on +94 11 2317777
Address: Level 5 “Millennium House”, No. 46/58 Nawam
Mawatha, Colombo 02, Sri Lanka