TAPROBANE |
Coverage Initiation
August 8, 2018,
2018
Depressed earnings due to competition
and sluggish market
FAIR VALUE:
70
CURRENT PRICE:
90.50
Chevron Lubricants Lanka PLC (LLUB.N000)
LKR 70
LKR 90.5
LKR74.8-172.0
LKR 21.7bn
49%
LKR 14.5m
Price target
Current Price
52-week range
Market capitalization
Public float
Average daily turnover
YTD Performance
ASPI
Sector
LLUB
-4.5%
-19.5%
-24.3%
Year End 31-Dec
FY16
FY17
FY18e
FY19e
EPS (LKR)
14.5
10.7
9.2
9.5
DPS (LKR)
17.5
12.3
8.3
8.5
NAVPS (LKR)
16.1
16.7
17.6
18.6
P/E (x)
6.2
8.4
9.8
9.5
P/BV
5.6
5.4
5.1
4.8
Di v. Yi el d (%)
19.4
13.6
9.2
9.5
120.6
114.6
90.0
90.0
ROE (%)
81.5
65.2
53.8
52.4
Gros s Ma rgi n (%)
46.9
42.9
40.7
41.3
EBITDA ma rgi n (%)
38.6
32.3
29.7
28.2
Di v. Pa yout (%)
RESEARCH
Chevron Lubricants Lanka (LLUB) is the market leader in the Sri Lankan lubricants
market. Nevertheless, LLUB has seen its market share fall progressively since full
liberalization of the industry in 2006 from a near monopoly to c.40% in 2017.
LLUB is particularly strong in the automobile lubricants market, thanks to its
entrenched market presence, strong branding and established distribution
network. We expect LLUB’s volumes to broadly track industry growth which we
believe will remain in low single digits over the FY18-21 period. With limited
headroom for price increases, we expect LLUB’s margins to erode as increasing
competition limits ability to pass down cost or FX escalation. We expect LLUB’s
EBITDA margin to average at c.27-28% in the FY18-21 period with earning
expected to decline c.3%. At 9.8x FY18 PE and 9.5x FY19 PE cf. justified PE of 5x
we believe LLUB is expensive. Our 12-month DCF based target price is
LKR70/share. We recommend SELL.
Lubricant market is mature; growth to remain sluggish: The lubricants market in
Sri Lanka is a highly competitive, mature market with limited growth
opportunities in the near term. Increase in vehicle imports and use of thermal
power generation both of which are highly unpredictable have been the main
drivers of volumes. With adverse macroeconomic conditions, we expect vehicle
imports to be affected in the near term. The Sri Lankan Government’s move to
use more clean energy should lead to reduced dependence on thermal power
generation.
Margin and volume pressure from increased competition and FX woes: We
believe LLUB will face stiffer competition from competitors looking to increase
market share. The proposed issue of new lubricant blending and distribution
licenses should only increase competition in an already crowded market. LLUB
has seen its market share erode to c.40% in 2017 from c.45% in 2016. We believe
this will induce more price-based competition and would likely see a drop in
LLUB’s volumes and margins. Moreover, LLUB has limited ability to pass down
input cost and FX escalation in a crowded market. We expect LLUB’s EBITDA
margins to erode to c.27% over our forecast period.
LLUB: 52 week price/volume chart
185
3,000,000
165
2,500,000
145
2,000,000
125
1,500,000
105
1,000,000
85
500,000
65
0
7/8/2018
6/8/2018
5/8/2018
Price(Rs.)
4/8/2018
3/8/2018
Source: CSE, Taprobane Research
2/8/2018
1/8/2018
12/8/2017
11/8/2017
10/8/2017
9/8/2017
8/8/2017
7/8/2017
6/8/2017
5/8/2017
Volume
Steep valuation does not justify accumulation: LLUB is trading at 9.8x FY18 P/E
and 9.5x FY19 P/E which we believe is expensive cf. justified PE of 5x. While we
believe that LLUB will maintain its traditionally high dividend payout ratio, the
amount paid as dividends would decrease in line with the expected drop in
earnings. Our 12-month DCF based target price is LKR70/share. We recommend
SELL.
YE 31 Dec (LKR mn)
Revenue
Net Profit
EPS (LKR)
+/- %YoY
PER (X)
DPS (LKR.)
DY (%)
EBITDA
+/- %YoY
ROE (%)
FY16
12,089
3,481
14.5
12.7
6.2
18
19.4
4,666
8.9
81.5
FY17
11,052
2,565
10.7
(26.3)
8.4
12
13.6
3,567
(23.6)
65.2
Source: Company Data, Taprobane Research
FY18e
10,823
2,215
9.2
(13.7)
9.8
8
9.2
3,213
(9.9)
53.8
FY19e
11,593
2,274
9.5
2.6
9.5
9
9.5
3,274
1.9
52.4
FY20e
11,826
2,317
9.7
1.9
9.3
9
9.7
3,336
1.9
50.7
FY21e
12,183
2,310
9.6
(0.3)
9.4
9
9.6
3,315
(0.6)
48.1
TAPROBANE |
Coverage Initiation
RESEARCH
Industry Outlook
Lubricant industry - Volumes and Sales
70,000
30,000
60,000
25,000
50,000
20,000
40,000
15,000
30,000
10,000
20,000
5,000
10,000
0
0
2009
2010
2011
2012
2013
2014
Total lubricant volumes (KLs)
2015
2016
2017
Total lubricant sales (Rs m)
Source: PUCSL, Taprobane Research
The Sri Lankan lubricant market is a highly competitive, mature market. At
present, the market has 14 players with Lanka IOC (Servo), Laugfs Lubricants and
LLUB being the only domestic manufacturers. In addition, the Ceylon Petroleum
Corporation (CPC) has entered into a Build-Operate-Transfer (BOT) project with
Hyrax Oil SDN BHD of Malaysia to locally blend and distribute lubricants. The bulk
of lubricant sales volumes comes from the automobile segment (more than 72%)
followed by industrial (c.17%) and marine (c.6%) segments.
The lubricant market is officially regulated by the Ministry of Petroleum
Resources. Whilst plans are afoot to further liberalise the industry, the enabling
legislations are yet to come into force. In line with the Government policy of
liberalizing all utility services, the lubricants market was also expected to be
placed under the purview of the Public Utilities Commission of Sri Lanka (PUCSL).
Nevertheless, the relevant legislations are yet to be enacted. As such, the PUCSL
functions as a shadow regulator, under a decision of the Cabinet of Ministers
The Government is reportedly considering another round of licensing with up to
4-5 licenses supposedly on offer. While lubricant blending requires little capex,
the biggest barrier to market entry is regulatory restrictions, whereby licensing is
issued only on a periodical basis. The last round of licensing was called in 2013,
only to be abruptly cancelled. Another barrier to entry is that Lubricant licenses
are issued specific to the brand and cannot be easily transferred, even with the
acquisition of the company marketing or manufacturing the said brand.
Company Overview
LLUB - Revenue and Sales Volumes
40,000
14000
35,000
12000
30,000
10000
25,000
8000
20,000
6000
15,000
4000
10,000
2000
5,000
0
0
2010
2011
2012
2013
2014
LLUB - sales volumes (KLs)
2015
2016
2017
LLUB Revenue (Rs m)
Chevron Lubricants Lanka (LLUB), is the market leader of the Sri Lankan lubricant
market with a share of c.40%. It blends and distributes, lubricants and greases
under Delo, Lanka, Havoline and Caltex brands. The automotive sector
contributes c.70% of revenue with the rest from the industrial segment. The
industrial segment comprises mostly of diesel power plants and the state-run
railways and the public bus transportation service. LLUB also exports to
Bangladesh and the Maldives.
Source: PUCSL, Taprobane Research
LLUB was created by the spin-off of the lubricating oil blending plant of the stateowned Ceylon Petroleum Corporation (CPC) in 1992. The company was privatized
in 1994 with Caltex purchasing a 51% stake. LLUB enjoyed a monopoly on local
manufacture and distribution of lubricants through CPC owned and managed
service stations till 2004.
LLUB has an extensive distribution channel serving the retail automobile
lubricants market. This is primarily through service stations (both independent
service stations and co-branded service centres). LLUB’s products are also
marketed at Caltex Oil Marts and selected filling stations.
TAPROBANE |
Coverage Initiation
Automobile Lubricant sales volumes
50,000
800,000
45,000
700,000
40,000
600,000
35,000
30,000
500,000
25,000
400,000
20,000
300,000
15,000
200,000
10,000
100,000
5,000
0
0
2010
2011
2012
2013
2014
2015
Automobile lubricants volumes (KLs)
2016
2017
Vehicle registrations
Source: PUCSL, CBSL, Taprobane Research
RESEARCH
Automotive lubricant usage is dependent on vehicle import policy: Automotive
lubricants account for c.72% of the Sri Lankan lubricant market. LLUB’s topline is
also reflective of this trend. Price based competition is prevalent in the B2B (drum
sales) segment, while in the B2C (retail pack sales) segment, branding and
distribution channel strength are important factors. The increased focus on ecofriendly, fuel efficient passenger vehicles with extended oil drain cycles as well as
electric vehicles which require substantially less servicing should see volumes
stagnate in the automobile segment. While increased focus on logistics and road
and rail based passenger transportation should see some volume growth, we feel
that this would only see a modest increase over the near term.
Thermal power is a key driver of demand: Drought induced thermal power
generation is a key driver of lubricant volumes. Diesel generators used in thermal
power generation consume significantly more lubricants than hydro or coal
power plants. With the Sri Lankan Government’s drive towards cleaner energy
such as solar and wind power, lubricant usage in the electricity generation sector
should remain stagnant unless in the case of urgent requirement for thermal
power (either weather induced or as a requirement to fulfil short term generation
lapses).
annual increase in thermal generation (YoY%)
120%
100%
80%
60%
40%
20%
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
0%
-20%
-40%
-60%
Source: PUCSL, Taprobane Research
Base oil prices Group I& II - FOB Asia
1000
800
600
400
200
Group I SN150-FOB Asia
Group I SN500-FOB Asia
Group II SN150-FOB Asia
Group II SN500/600-FOB Asia
Source: Lube Report Asia, Taprobane Research
20-Jul-18
20-Jun-18
20-May-18
20-Apr-18
20-Mar-18
20-Feb-18
20-Jan-18
20-Dec-17
20-Nov-17
20-Oct-17
20-Sep-17
20-Aug-17
20-Jul-17
20-Jun-17
20-May-17
20-Apr-17
20-Feb-17
20-Mar-17
20-Jan-17
20-Dec-16
0
Intense competition provides limited ability for price increase: LLUB has very
limited scope for passing down raw material or FX cost escalation to its
customers, given the intensely competitive nature of the business. This will
naturally impact its margins and earnings. With base oil prices showing an upward
price revision and LKR depreciation, we expect LLUB to face margin pressure from
the inability to fully pass down cost escalations over the near term.
LKR depreciation is a concern: LLUB’s raw materials (Base oils and additives) are
almost entirely sourced from overseas. Its topline to a large extent (c.90%) is
dependent of LKR denominated local sales. This along with the limited scope to
increase price by passing down FX related costs should put a dent on LLUB’s
earnings over our forecast period with LKR expected to depreciate by c.6-7%
annually.
Base oil prices should continue to rise gradually in FY18-20 period: Asian Group I
and Group II Base oil prices have increased by more than c.25% across all grades
of base oils. LLUB uses Group I and Group II base oil and does not plan to shift to
higher grade oils. While historically base oil prices lagged crude oil prices, this
trend has shortened in recent months. We expected base oil prices to increase in
the FY18-20 period. Again, we are concerned over LLUB’s ability to pass a major
portion of base oil price increase to customers given the prevailing market
conditions.
Counterfeit products have affected the industry: The market for counterfeited
lubricants has continued to be a problem for the players representing global
lubricant brands. While there are no official estimates, the size of the grey market
has been tagged at c.10-15% of the official market. The PUCSL has conducted
raids to curb the grey market, but lack of enabling legislations has hampered this
effort.
TAPROBANE |
Coverage Initiation
Marine Lubricant sales volumes
4,500
6,000
4,000
5,000
3,500
3,000
4,000
2,500
3,000
2,000
1,500
2,000
1,000
1,000
500
0
0
2010
2011
2012
2013
2014
2015
Marine lubricants volumes (KLs)
2016
2017
Vessel arrivals
Source: PUCSL, CBSL, Taprobane Research
ARPU - Lubricant industry vs. LLUB
500
450
400
350
300
250
200
150
100
50
0
2009
2010
2011
2012
2013
2014
Industry (Ex. LLUB) ARPU (Rs.)
Source: PUCSL, Taprobane Research
2015
2016
LLUB ARPU (Rs.)
RESEARCH
The Bangladesh lubricant market is a growth opportunity for LLUB: The
Bangladesh lubricant market is estimated at c.100m litres per annum with the
grey market estimated to be c.60% of the total market. It is estimated that five
players – Mobil, Bangladesh Petroleum, Total, Shell and Castrol together account
for c.63% of the market. Automobile lubricants account for c.75% of the
Bangladesh lubricant market with the rest made up by the industrial segment. As
the Bangladeshi market grows, we expect LLUB to benefit given the brand
advantage of Chevron. Currently the Chevron brand has a c.2% market share.
LLUB’s export revenue grew c.12% YoY in FY17 to LKR1.1bn (c.10% of revenue).
Change in top management should bring new strategy: With recent changes in
LLUB’s senior management, we feel that LLUB has an opportunity to explore
alternative strategies for growth and profitability. While the adverse
macroeconomic and local lubricant market conditions pose severe challenges,
LLUB can now re-think its pricing and market share strategy. While LLUB’s ARPU
has on average been higher than the industry, this gap has declined in recent
years. LLUB has also stated that its majority shareholder, Chevron, has no
immediate plans to divest its stake in LLUB.
2017
Marine lubricants segment has potential for growth: With Sri Lanka positioning
itself as a maritime hub, we see growth potential in the marine lubricants market.
Currently this market accounts for c.6-7% of total lubricant volumes. With the
Colombo port traditionally being a convenient bunkering port, lubricant services
too can be provided, especially at the outer port limit (OPL). Nevertheless, this
requires specialised vessels used to transport lubricants to ships anchored in the
open sea.
Sino-US trade war could see increased additives and lubricant production in the
Asian region: With the US being a net exporter of lubricants and related products
to China, US firms may choose to establish plants in the Asian region to
circumvent higher tariffs in China. Additionally, Asian lubricant producers may
ramp up production to meet any supply shortfall in the Chinese market.
Nevertheless, it is too early to predict what impact this may have on prices.
Valuation is expensive: We expect LLUB’s earnings to gradually decrease by c.3%
on the back of lower volumes and weak pricing. Nevertheless, we believe that
LLUB will maintain its traditionally high dividend payout ratio.
Compared to a justified PE of 5x, LLUB is trading at 9.8x FY18 P/E and 9.5x FY19
P/E and in our view is expensive. While LLUB has traditionally been viewed as a
dividend play, the amount paid as dividends should moderate in line with the
expected slowdown in earnings. Our 12-month DCF based target price is
LKR70/share (Ke -17.5%, g - 0%). We recommend SELL.
TAPROBANE |
Coverage Initiation
Income statement summary (LKR m)
FY15
Y/e 31 Dec
11,564
Revenue
5,196
Gross Profit
4,286
EBITDA
4,143
EBIT
175
Interest (expense)/ income
4,319
Profit before tax
(1,231)
Taxes
3,088
NPAT
FY16
12,089
5,671
4,666
4,515
187
4,703
(1,221)
3,481
FY17
11,052
4,741
3,567
3,406
90
3,496
(931)
2,565
FY18e
10,823
4,410
3,213
3,060
16
3,076
(861)
2,215
FY19e
11,593
4,786
3,274
3,125
33
3,158
(884)
2,274
FY20e
11,826
4,341
3,336
3,188
30
3,218
(901)
2,317
FY21e
12,183
4,337
3,315
3,170
39
3,208
(898)
2,310
Cashflow summary (LKR m)
Y/e 31 Dec
Profit Before Tax
Cash From Operating Activities
Cash From Investing Activities
Cash from Financing Activities
Net Changes in Cash
Free Cash Flow
Free Cash Flow per Basic Share
Operating Cashflow per Share
FY15
4,319
3,184
(95)
(2,040)
1,049
3,089
13
13
FY16
4,703
3,862
(91)
(4,200)
(429)
3,771
16
16
FY17
3,496
1,446
(92)
(3,240)
(1,886)
1,354
6
6
FY18e
3,076
2,698
(108)
(1,993)
597
2,590
11
11
FY19e
3,158
2,234
(116)
(2,046)
72
2,118
9
9
FY20e
3,218
2,348
(118)
(2,085)
144
2,229
9
10
FY21e
3,208
2,324
(122)
(2,079)
124
2,203
9
10
FY15
2,196
4,759
7,045
2,059
303
240
20
7,045
FY16
2,133
4,839
7,047
2,820
366
240
16
7,047
FY17
2,067
3,452
5,596
1,181
408
240
17
5,596
FY18e
2,023
4,133
6,232
1,711
408
240
18
6,232
FY19e
1,989
4,428
6,494
1,745
408
240
19
6,494
FY20e
1,960
4,707
6,744
1,764
408
240
20
6,744
FY21e
1,936
4,992
7,005
1,793
408
240
20
7,005
FY15
0.4
18.5
44.9
37.1
26.7
62.5
FY16
4.5
8.9
46.9
38.6
28.8
81.5
FY17
(8.6)
(23.6)
42.9
32.3
23.2
65.2
FY18e
(2.1)
(9.9)
40.7
29.7
20.5
53.8
FY19e
7.1
1.9
41.3
28.2
19.6
52.4
FY20e
2.0
1.9
36.7
28.2
19.6
50.7
FY21e
3.0
(0.6)
35.6
27.2
19.0
48.1
Balance sheet summary (LKR m)
Y/e 31 Dec
Property, Plant & Equipment
Total Current Assets
Total Assets
Total Current Liabilities
Total Long-Term Liabilities
Shares Outstanding *
Book Value per Share
Total Liabilities & Equities
* adjusted for share split
Ratio analysis
Y/e 31 Dec
Revenue growth (%)
EBITDA growth (%)
Gross margin (%)
EBITDA margin (%)
Net profit margin (%)
Return on equity (%)
Source: Company Data, Taprobane Research
RESEARCH
Coverage Initiation
TAPROBANE |
RESEARCH
Sales Team
Ni ra nja n Ni l es
Chi ef Executive Offi cer
ni l es @ta proba ne.lk | +94 11 5328160
Ma hes h Pi eri s
Di rector - Ins titutiona l Sa l es
ma hes h@ta proba ne.lk | +94 11 5328155
Romes h Kenny
Ma na ger - Ins titutiona l Sa l es
romes h@ta proba ne.lk | +94 11 5328166
B.L.A. Da ya na nda
As s i s ta nt Ma na ger
da ya na nda @ta proba ne.lk | +94 11 5328168
Ga ya n Si l va
As s i s ta nt Ma na ger - Reta i l Sa l es
ga ya n@ta proba ne.lk | +94 11 5328170
Ma l ka Ra na weera
Inves tment Advi s or
ma l ka @ta proba ne.lk | +94 11 5328156
Pa s i ndu Ya ta wa ra
i nves tment a dvi s or
pa s i ndu@ta proba ne.lk | +94 11 5328140
Chi ntha ka Weera ra thna
Inves tment Advi s or
chi ntha ka @ta proba ne.lk | +94 11 5328112
Research
Abdul Ha feel
Seni or Res ea ch Ana l ys t
ha feel @ta proba ne.lk | +94 11 5328193
Disclaimer
The report has been prepared by Taprobane Securities (Private) Limited. The information and opinions contained herein have been compiled or arrived at based upon information
obtained from sources believed to be reliable and in good faith. Such information has not been independently verified and no guaranty, representation or warranty, express or
implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes
only, descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as, an
offer, or solicitation of an offer, to buy or sell any securities or other financial instruments.