21st March 2013
Chevron Lubricants Lanka PLC – Corporate Update
Asha Phillip Securities Ltd
Chevron Lubricants Lanka PLC (LLUB.N) @ LKR217/“The Leader in the Lubricant Market “
Sector: Manufacturing
LONG TERM ACCUMILATION
Chevron Lubricants Lanka PLC is the market leader in Sri Lankan Lubricant market with nearly 57% market share in a highly
competitive lubricant industry. We expect the Company top lines to grow by 16.26% in FY2013E while accelerating the after
tax profit by 8.13% under the backdrop of aggressive penetration in export market coupled with local consumption driven
through infrastructure projects. Growth is further accelerated by the expected capacity enhancement which will drive the
company to serve the more profitable export segment, which currently tax at a concessionary 12%. We further expect LLUB
to maintain a 60% dividend payout ratio for FY2013E and FY2014E and gradually accelerate the same to 90% by FY2016E.
Therefore, we are optimistic on the long term growth prospects of the company while assigning a LONG TERM BUY
recommendation.
Equity Research Division
1
21st March 2013
Asha Phillip Securities Ltd
Chevron Lubricants Lanka PLC – Corporate Update
INVESTMENT RATIONALE
o
o
Undisputed Leader with a Renowned Global Brand
Market Price(LKR)
217.00
LLUB has been able to maintain its market leadership with a 57% share in the lubricant market
amidst heavy competition by imported finished lubricants. This has been aided through a wellrecognized global brand, strong principal support by Chevron Corporation USA, aggressive
marketing strategy and a widespread distribution network with over 700 service stations, the
highest outlet penetration in the industry.
Issued Shares (Mn)
120.00
12 Mn High (LKR)
231.00
12 Mn Low (LKR)
160.00
Public Holding
49.00%
Well Managed Operations & a Lean Business Model
Foreign Holding
23.86%
LLUB has a competitive edge over its competitors in terms of quality due to its Principal’s strong
technical expertise. The expected plan to source the major raw material, Base Oil directly from the
Principle in USA would result in a favorable situation in terms of Cost of Production. Further, the
Company’s ability to maintain its GP margins which currently stands at 32% is a critical success
factor in their operations. Lean business model with a reduced staff of 87 in 2012 from 382 in year
2000 was also witnessed as a catalyst for the CAGR 16% growth in earnings for the last 5 years
together with a CAGR 12% growth for the last 12 years.
o
Market Cap (LKR Bn)
25.80
Return Comparison
6M
12M
24M
ASPI
-3.43%
4.74%
-20.56%
Manufacturing
-9.76%
-8.98%
-37.70%
LLUB
13.22%
24.64%
34.21%
Source: APSL Research
Above Average ROE creating Superior Value
Company recorded an exceptional ROE of 55% for FY2012 while expecting to maintain the ratio of
42% by FY2014F due to the relatively low payout ratio amidst high CAPEX but gradually increase the
same to 45% -50% in next three years with the gradual rebound in payout ratio.
160.00
1,800.00
140.00
1,600.00
1,400.00
120.00
1,200.00
100.00
o
1,000.00
Lucrative Dividend Yield with a High Payout Ratio
80.00
800.00
60.00
LLUB expects to maintain its current dividend payout ratio of nearly 60% in both FY2013E & FY2014E
due to its CAPEX requirement for relocating the blending plant but gradually accelerate the same
to 90% by FY2015E. Further, the Dividend Yeild of 5% is considered to be one of the highest in
Colombo Market which is expected to be improved up to 9% in FY2015E under the current market
price.
Equity Research Division
600.00
40.00
400.00
20.00
4-Jan-11
200.00
4-Jul-11
VOL
4-Jan-12
LLUB
4-Jul-12
ASPI
4-Jan-13
MFG
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21st March 2013
Asha Phillip Securities Ltd
Chevron Lubricants Lanka PLC – Corporate Update
Shareholding Pattern
BUSINESS MODEL
2.13%
LLUB is manufacturing, distributing and marketing of lubricant oil and greases in Sri Lanka.The
production plant locates in Kolonnawa with an annual production capacity of 40Mn liters of
lubricants.
The main raw material used in the lubricant manufacturing process is Base Oil which represents
approximately 75% of the total cost of production. The entire Base Oil requirement is imported
from France & Asia Pacific based countries.
Approximately 20% of the cost of production accounts for Additives (Chemicals), which are
imported from Singapore.
Cost Structure
Retail Segment
The retail segment comprises primarily of automotive
lubricants for passenger cars, vans, trucks, threewheelers and motor cycles. This segment records a 65%
share to the total revenue of the company and witnessed
a slowdown in 2012 amidst the drop in the vehicle market
fueled by high interest rates, increased import tariffs,
slower credit growth, depreciated rupee and the fuel
price hike.
Chevron Ceylon Ltd
HSBC Nominees- Lux
Aberdeen Global
27.63%
51.00%
2.85%
2.98%
4.55%
8.86%
HSBC Nominees - Lux
Aberdeen Global-EME
HSBC Nominees- Lux
Aberdeen Asia Smaller
Group
Caceis Bank Luxembourg
Source: Company, APSL Research
Base Oil is extracted from Crude Oil
Other
5%
Additives
20%
Base Oil
75%
Source: Company,
Company, APSL
APSL Research
Research
Source:
Industrial Segment
The power generation sector, commercial transportation & construction sector dominates the industrial segment which contributes the balance 35% of
the revenue. Trade volumes to the power generation sector curtailed slightly during 2012 due to the high rain falls during the latter part of the year which
constrained the thermal power generation. Transport & construction sector recorded a modest performance during the year primarily due to many large
scale projects that are underway coupled with the growth in commercial vehicles.
Equity Research Division
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21st March 2013
Chevron Lubricants Lanka PLC – Corporate Update
Asha Phillip Securities Ltd
Key Business Sectors
Export Market
Export Sales registers a 6% share to the total revenue while focusing on two main markets of
Bangladesh & Maldives.
Industrial
Sector
35%
Bangladesh


Restricted non-essential imports were relaxed in the second half of 2012.
LLUB has concentrated on retail penetration in Bangladesh and newly ventured into the
industrial segment by entering into the highly growing power generation sector.
Maldives
 The Automotive sector in Maldives is one of the fastest growing sectors with attractive growth
potential
 LLUB has a strong presence in high speed diesel power generation and small transport vessels.
Automotive
Sector
65%
Source: Company, APSL Research
Export Sales Vs Local Sales
Lubricant Industry at a Glance





Lubricant Industry in Sri Lanka is estimated to be LKR 19 Bn (0.3% of GDP) by 2012, grew at a
CAGR of 13.7% for last 5 years.
70% of total sales volume were contributed by the Automotive sector
A regulated industry under the Public Utilities Commission of Sri Lanka, comprising of 13
licensed players
Chevron Lubricants PLC & Lanka IOC PLC are the only two lubricant manufacturers, sharing 64%
of the local lubricant requirement. Around 87% of the blending is carried out by the LLUB whilst
IOC produces the balance 13%.
Highly concentrated market – 88% of the market is shared amongst 5 players
Export
Sales
6%
Local
Sales
94%
Source: Company, APSL Research
Equity Research Division
4
21st March 2013
Chevron Lubricants Lanka PLC – Corporate Update
Asha Phillip Securities Ltd
OPERATIONAL & FINANCIAL OUTLOOK
CAPEX to Revenue would Climb Up to 13% in FY2014E but Stabilize at Average 0.5% thereafter
LLUB maintains an average CAPEX to Revenue ratio of 0.5% historically. Company currently operates the blending plant in a leased property by Ceylon
Petroleum Corporation (CPC) which is scheduled to be expired by June 2014. Therefore, the Company is currently progressing on the construction of a
new blending plant on a four and half acre block of land in Sapugaskanda with a CAPEX budget of USD 1.5 Mn (LKR 1.9 Bn) in order to relocate the
operations by FY2014. The new plant will accommodate an additional 20% capacity while expecting to commence blending operations by mid FY2014
onwards. Replacement CAPEX to Revenue ratio is expected to be smoothened to average 0.5% thereafter. The entire CAPEX budget of LKR 1.9 Bn is
expected to be financed by internally generated funds without hampering the current zero debt capital structure.
Market Share
Market Share to Maintain at 58% amidst Intense Competition
LLUB’s market share experienced a gradual deterioration due to new entrants of lubricant
importers via the newly issued licenses during the past 5 years. In 2008, market share stood at
78% and gradually declined to 57% in 2011 mainly owing to the heavy price undercuts by importers.
Government budget 2013 provided an additional cushion to lubricant manufactures by imposing
a 6% CESS on imported finished lubricants which stamped a tax advantage of 13% for local
blenders over the lubricant importers. Therefore, the probability of undercutting the prices for
importers to gain market share is highly remote. Therefore, we believe the LLUB’s market share
to maintain at 58% with increased advertising budget and growing development in quality
conscious lubricants by Original Equipment Manufacturers.
Local Lubricant Consumption to Grow by Average 4% YoY
Laugfs
5%
ExxonM
obil
7%
CPC
8%
Others
12%
Lanka
IOC
11%
LLUB
57%
Source: PUCSL, APSL Research
Current local lubricant consumption stands at 58,554 KL in 2011, grew by nearly 8% YoY. Further,
we expect a flat growth in the overall lubricant market for 2012 due to the slowdown in
economic activities amidst the escalated interest rates, depreciated currency, restricted credit
growth, upward revision of energy prices etc. Further, the increased import tariffs on motor
vehicles resulted a heavy decline in vehicle imports to the country, resulting a challenging period
for lubricant companies. Moreover, adverse weather conditions prevailed in the island also
affected negatively causing less volumes in the agricultural sector.
Given the growth in local infrastructure projects, we expect a boost in commercial vehicles &
machinery imports. Further, the gradual increase in lubricant consumption by the imported
Equity Research Division
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21st March 2013
Asha Phillip Securities Ltd
Chevron Lubricants Lanka PLC – Corporate Update
motor vehicles during past 2 years will result in a moderate growth in local lubricant volumes.
Further, the growing demand for power generation in the country will keep the lubricant
demand more exciting going forward.
Exports to Total Revenue to Accelerate to 8% in FY2013E and to Reach 10% by FY2016E
LLUB’s export sales are expected to increase to 8% of total sales from its existing 6% due to the
growing power sector in Bangladesh & highly potential automotive sector in Maldives. Given the
government’s concessionary corporate tax rate of 12% on Export profits, we believe the LLUB will
focus more on export market which will result in the effective tax rate to decline going forward.
LLUB is continuing to make significant investments to strengthen branding and manage product
development to facilitate the requirements in the Bangladesh market.
Base Oil Prices (US$ per MT)
1400
1300
1200
Base Oil Prices to Remain Current Levels amidst Global Uncertainty
1100
The base oil prices are positively correlated to the crude oil prices. Therefore when the demand
for crude increases and results in prices increasing the production of base oil is reduced and
therefore a shortage in the market leads to the base oil prices to increase in the market.
However, producers have become more efficient with the supply chain processes and therefore
it could be expected that the future prices will remain within the same range.
1000
5/18/2011
6/18/2011
7/18/2011
8/18/2011
9/18/2011
10/18/2011
11/18/2011
12/18/2011
1/18/2012
2/18/2012
3/18/2012
4/18/2012
5/18/2012
6/18/2012
7/18/2012
8/18/2012
9/18/2012
10/18/2012
11/18/2012
12/18/2012
1/18/2013
2/18/2013
Chevron Corporation, the principal company of Chevron Lubricants Lanka PLC is constructing
their own Base Oil refining facility in the current Pascagoula refinery in the US. The facility will
manufacture 25,000 barrels per day of premium base oil, the main ingredient in the production
of lubricant oil. Chevron will become the world's largest producer of premium base oil with this
development. The Construction is scheduled to be completed by year-end 2013. At the same
time, LLUB expects to import their entire Base Oil requirement by its parent in the USA from
mid-2014 onwards while enjoying a cost advantage comparatively to the existing level.
Source: Bloomberg
LLUB expects to import the entire Base Oil
requirement by its parent in USA by mid2014 onwards with a cost advantage
Average Base Oil Prices continued its
However the base oil markets around the world have seen a sustained period of sluggish
demand, new plants in the Middle East and Asia have injected extra capacity into the market.
The inevitable result has been a slide in pricing from mid-2011. The outlook for 2013 does not
look much better considering the uncertainty in the market, caused by the on-going economic
slowdown that has resulted in the slowdown of the core end user markets such as the
automotive sector.
Equity Research Division
downward trend, falling 16% YoY and 5%
QoQ to USD 4.18 per gallon
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21st March 2013
Asha Phillip Securities Ltd
Chevron Lubricants Lanka PLC – Corporate Update
Regionally the expectations are the same with European buyers expecting a further fall in prices
beyond the first quarter amidst the sellers battling for scares business.
In Asia , 2013 started with a bullish sentiment amidst the Lunar New Year especially in China.
Base oil prices have been rising since the start of the year however this phenomenon is
expected to be short lived and prices are expected to fall by early March. In the long run it is
uncertain whether improvements could be seen as global economic recovery is far from certain.
EBIT Margin
25.50%
25.11%
25.00%
24.50%
24.00%
24.40%
24.72%
23.92%
23.52%
23.50%
23.27%
23.00%
Financial Outlook– Beyond 2013



22.50%
Revenue to grow by average 11% for FY2013E – FY2015E amidst expected increase in export
sales along with the moderate growth in local lubricant consumption.
GP margin to maintain at healthy 32%-33% in FY2013E-FY2015E with the expected rise in
average blended price per liter by 3% YoY coupled with the stabilization of exchange rate.
Expected flat movement in Base Oil prices will protect steep deterioration in the selling price.
EBIT & EBITDA margin is expected to be improved from current 24.72% & 25.09% to 25.11% &
26.07% by FY2015E respectively. However, the EBIT margin is expected to drop to 23.89% in
FY2013E & 23.90% in 2014E with the expected plant relocation cost & increased depreciation.
22.00%
FY2010


Return on Equity (ROE) to maintain at 45% to 48% during next three years from FY2013EFY2015E.
Post-Tax Profit forecast stand at LKR 2.44 Bn for FY2013E (up by 8% YoY) and to record LKR
2.59Bn for FY2014E.
Dividend Pay Out ratio to be slowed at 60% for FY2013E & FY2014E mainly owing to the LKR
1.9Bn CAPEX budget on plant relocation which is planned to be financed by internally
generated funds. Thereafter, we expect LLUB to push up the payout ratio to 80%-90% in post
relocation period.
Equity Research Division
FY2012
FY2013E
FY2014E
FY2015E
Source: Company, APSL Research
Revenue, Net Profit & GP Margin
LKR Mn
18,000
33.50%
15,852
16,000
14,638
13,665
14,000
11,040
12,000

FY2011
10,000
11,754
33.00%
32.50%
9,471
32.00%
8,000
6,000
31.50%
4,000
31.00%
2,000
-
30.50%
FY2010 FY2011 FY2012 FY2013E FY2014E FY2015E
Revenue
Net Profit
GP Margin
Source: Company, APSL Research
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21st March 2013
Asha Phillip Securities Ltd
Chevron Lubricants Lanka PLC – Corporate Update
VALUATION & RECOMMENDATION
o
o
o
o
o
We have derived our target price of LKR 233/- based on
 50% weighted two stage DCF valuation methodology, with a Cost of Equity of 15% and
a conservative terminal growth rate of 1.5%
 30% weighted Dividend Discount Model (DDM) with an average payout ratio of 80% for
FY2013E to FY2017E
 20% weighted Price to Earnings Multiple (PER) based on the FY2013E earnings
Further, we arrived the intrinsic value from DCF method under three different scenarios which
are weighted accordingly.
Currently, the counter trades at 10.6x earnings, 5.1x Book value, 7.9x EV/EBITDA, 1.9x EV/Sales
based on one year forward (FY2013E) estimates.
Given the relatively high Dividend Payout Ratio, our valuation extended towards the Dividend
Discount Model (DDM) too while assigning a weight of 30% to the fair value.
Since the average payout ratio stands at 80% Book Value multiples were not taken into account.
DCF
Value per Share
DDM
197.90
309.58
Scenario - 3
Optimistic
58%
4%
3%
8%
130
3%
55%
2%
8%
8%
133
8%
60%
6.5%
4%
10%
125
2%
197.13
172
288
80%
15%
5%
Intrinsic Value
Weightage
Intrinsic Value (Weighted)
197.90
Source: APSL Research
4.51%
Tide Water Oil
36.79
11.32
11.32
LLUB
10.67
5.62%
Castrol INDIA
-8.80%
42.66%
-5.33%
50%
30%
20%
Dividend Yeild
PER
205.44
Potential
Potential
Scenario- 2
Pesimistic
Indian Based Peers vs LLUB
217.00
Intrinsic Value (Weighted)
Scenario -1
Best Case
Market Share
Average local industry Growth
Growth in Prices
Export Market to Total Revenue
USD / LKR
Average Base Oil Price Growth
PER
Current Price ( 18th March 2013)
Weights
Sensitivity Analysis - DCF
1.62%
232.91
Source: www.moneycontrol.com ,APSL Research
7.3%
Source: APSL Research
The intrinsic valuation does not accommodate a considerable upside in near future under conservative assumptions. Further, it does not result a
downside risk either. Considering the Company’s high payout ratio which result an attractive dividend yield of 5.6% in FY2013E and 9% by FY2015E
coupled with the low beta factor which warrant the share to be resilient amidst any market down fall (Safe Counter) , we still believe the counter would
be a prospective long term investment with stable returns.
Equity Research Division
8
HISTORICAL FINANCIALS & PROJECTIONS
Revenue
FY2010
9,471,256,226
FY2011
11,039,945,418
FY2012
11,754,046,112
FY2013E
13,664,728,980
FY2014E
14,637,657,683
FY2015E
15,852,165,052
YoY Growth %
8.98%
16.56%
6.47%
16.26%
7.12%
8.30%
Cost of Sales
(6,426,102,922)
(7,565,448,536)
(7,949,962,149)
(9,276,170,382)
(9,899,135,156)
(10,580,140,009)
Gross Profit
3,045,153,304
YoY Growth %
Gross Profit Margin %
Other Operating Income
Distribution expenses
Administration expenses
EBIT including non recurring
4,738,522,528
5,272,025,044
15.4%
8.0%
11.3%
32.15%
31.47%
32.36%
32.12%
32.37%
33.26%
(373,759,003)
2,267,429,437
31,176,114
12,294,729
(390,500,092)
(425,356,670)
(389,940,738)
(473,547,778)
2,725,232,166
2,917,474,244
2,212,512
(601,248,075)
(573,918,617)
3,215,604,418
2,370,043
(658,694,596)
(673,332,253)
3,408,865,722
2,566,689
(702,623,146)
(589,224,399)
3,982,744,188
1,552,499
31,176,114
12,294,729
2,212,512
2,370,043
2,566,689
2,265,876,938
2,694,056,052
2,905,179,515
3,213,391,906
3,406,495,678
3,980,177,498
EBIT Margin
EBITDA - Recurring
4,388,558,598
9.5%
1,552,499
YoY Growth %
Depreciation & Amortization
3,804,083,963
14.1%
(405,517,363)
Non Recurring items
EBIT excluding non recurring
3,474,496,882
-1.6%
1.00%
18.90%
7.84%
10.61%
6.01%
16.84%
23.92%
24.40%
24.72%
23.52%
23.27%
25.11%
63,046,919
47,306,892
43,836,111
47,590,280
91,311,541
151,906,121
2,328,923,857
2,741,362,944
2,949,015,626
3,260,982,186
3,497,807,219
4,132,083,619
YoY Growth %
0.10%
17.71%
7.57%
10.58%
7.26%
18.13%
EBITDA Margin
24.59%
24.83%
25.09%
23.86%
23.90%
26.07%
Finance Expenses / Income
Pre tax Profit
66,520,994
42,548,090
193,982,748
38,913,163
41,683,781
63,408,660
2,333,950,431
2,767,780,256
3,111,456,992
3,254,517,582
3,450,549,502
4,046,152,848
YoY Growth %
Income Tax (Expense)/Reversal
Post tax Profit
-0.44%
18.59%
12.42%
4.60%
6.02%
17.26%
(832,676,236)
(767,164,188)
(854,124,891)
(813,629,395)
(855,736,277)
(995,353,601)
1,501,274,195
YoY Growth %
Net Profit Margin %
Diluted No Shares
2,257,332,101
2,440,888,186
2,594,813,226
3,050,799,247
33.26%
12.83%
8.13%
6.31%
17.57%
15.85%
18.12%
19.20%
17.86%
17.73%
19.25%
120,000,000
120,000,000
120,000,000
120,000,000
120,000,000
12.51
16.67
18.81
20.34
21.62
25.42
2,237,529,316
3,158,145,384
4,125,817,833
5,102,173,108
6,140,098,398
6,750,258,247
18.65
26.32
-
-
Earnings per Share (LKR)
Shareholders' Funds (LKR)
2,000,616,068
0.43%
Net Asset Value per share(LKR)
Enterprise Value (LKR)
120,000,000
34.38
42.52
51.17
56.25
26,040,000,000
26,040,000,000
26,040,000,000
26,040,000,000
ROE %
67.10%
63.35%
54.71%
47.84%
42.26%
45.20%
ROCE %
67.10%
63.35%
54.71%
47.84%
42.26%
45.20%
11.54
10.67
10.04
PER (times)
PBV (times)
6.31
EV/EBITDA (times)
EV/Sales (times)
Dividend Payout Ratio
Dividend per Share (LKR)
97.92%
53.98%
12.25
5.10
Dividend Yeild
8.54
3.86
8.82
7.98
7.44
6.30
2.22
1.91
1.78
1.64
60%
60%
58.48%
9.00
4.24
80%
11.00
12.20
12.97
20.34
5.07%
5.62%
5.98%
9.37%
Source : Company, APSL Research
10.00%
120.00%
9.00%
100.00%
8.00%
7.00%
80.00%
6.00%
60.00%
5.00%
4.00%
40.00%
3.00%
2.00%
20.00%
1.00%
0.00%
0.00%
FY2010
FY2011
FY2012
Payout Ratio
FY2013E FY2014E FY2015E
Dividend Yeild
DISCLAIMER : This document has been prepared and issued by Asha Phillip Securities Ltd, on the basis of publicly available information, internally developed data and other sources believed to be reliable.
While every effort has been made to ensure that the data quoted and used for the research behind this document is reliable, there is no guarantee that it is correct. Asha Phillip Securities Ltd, nor any
Director, Officer or employee accept no liability whatsoever in respect of any errors or omissions. This document is a piece of economic/Financial research and is not intended to constitute investment
advice, nor to solicit dealing in securities or investments. Asha Phillip Securities Ltd may act as a Broker in the investments which are the subject of this document or related investments and may have
acted upon or used the information contained in this document, or the research or analysis on which it is based, before its publication. Asha Phillip Securities Ltd, Its Directors, Officers or Employees may
also have a position or be otherwise interested in the investments referred to in this document. This is not an offer to sell or buy the investments referred to in this document.
RESEARCH DIVISION
Thakshila Hulangamuwa
Vice President - Business Development
thakshi@ashaphillip.net
+94 113070494
Pasindu Perera
Manager -Research
pasindu@ashaphillip.net
+94 112429109
Anuradha Basnayake
Trainee Research Analyst
Nishantha Warnakulasuriya
Trainee Research Analyst
Lasantha Senanayake
Research Analayst
lasantha@ashaphillip.net
+94 112429137
Ranuka De Silva
Research Analyst
ranuka@ashaphillip.net
+94 112429129
9