Grain Elevators PLC -Initiation of Coverage by SC Securities

We initiate coverage on Ceylon Grain Elevators PLC (GRAN) with a BUY recommendation giving a 12 month target price of LKR70.0 implying 12.0% upside from the current market price of LKR62.5.

We have primary derived our price target based on the DCF valuation methodology. Further, we have also considered a relative valuation (P/E based), in order to reinforce our valuation argument. We expect the Group Revenue to expand with a CAGR of c. 10.4% for the FY15-FY19E period. We also expect the Group Net Profits to grow with a CAGR of c. 12.2% during the same period.

Bulls say
·         Growing purchasing power stemming from revised public sector salaries and reduced prices of essentials from the last budget, to drive the top line from increasing demand conditions.

·         Per capita income target of USD7,000+ by 2020E to drive demand for chicken feed and day old chicks.

·         Growing tourism sector to drive demand for chicken from growing number of hotels and restaurants

·         Increasing health conscious life styles to promote chicken as a source of clean and as a cheaper source of protein.

·         We expect the price ceiling imposed on a Kg of chicken to be lifted in the forth coming period, with this the large scale broiler farms would ramp up the production triggering more demand for feed and DOC.

·         We expect reduced cost of production and improved margins going forward on the back of importing and stocking of cheaper maize from new found low cost destinations.

·         Self reliance on local production of chicken without any imports would enable the local poultry producers to absorb growing demand for chicken. We expect this to drive demand for feed and DOC.

·         Growing large and small scale rural based commercial chicken rearing to drive demand for DOC.

·         In the short term, we expect the rough sea conditions during 2H15, to limit the sea food availability and to drive the prices. Therefore, as a close substitute to sea food we expect demand for chicken to increase.

·         GRAN as a heavy electricity user with capital intensive production processes to benefit from reduced electricity tariffs. We expect this to improve margins of GRAN in the forth coming period.

Bears say
·         Demand conditions for DOC are cyclical, therefore a decline in demand could severely affect the Day old chicks, which are one-day stocks.

·         Possible outbreak of a disease could impact the Biological stock worth over LKR2.2bn, this could result in staggering losses and threaten the business continuity of DOC.

·         Possible adverse weather conditions to affect the food maize production and availability

·         Re banning of food maize importation to protect the local maize production could result in creating a shortfall in the industry and drive maize prices up.

·         Competition from other meat categories such as Fish

·         A depreciation of the SL rupee could affect earning in an adverse manner as more than 50.0% of raw materials are imported.

·         If the trend of producing their own feed could increase by small and medium scale broiler farmers could limit the market size that demand compound feed. This could hurt GRAN results.

Thanks Sri.
It seems Bulls sayings are more likely to happen than the Bears Sayings in normal course of events.

If I were to read rosy looking reports I'd dig deeper. Broker huts need to sell something. Rarely do you come up with a SELL too. Not saying it's bad at these prices but I tend to be cautious.

Never buy after reading the first page. Look for the reasons. This particular report's extract was in the media too as news. Normally that does not happen. Is that publicity because something is on the cards? Like rights?

June Quarter could be a record profit quarter for some poultry stocks. This may continue till end of the year too. This is mainly due to supply constraint at Pussela Farms due to disease outbreak.

In the medium term, the El Nino is causing havoc to Indian Maize crop. local prices have risen by 30 % in last 6 months. There is an expectation of the inevitable rupee devaluation post election which may not help the cause.      

All things considered it could be a good year (best in the last 3-4 years) for listed Poultry producers.

Yesterday I got my LBO alert on mobile phone as


Grain elevator could grow net profit by 12% annually . 12 mnt price target of Rs 70from SC securities. GRAn Rs 64.30+3.3%

This is the first time I got such a message and really wondered why such media backing for a share..

As government sector employees got salary increments definitely there should be a rise in FMCG sector.. All consumption related share prices will move up at the cost of construction related.. Cargills growth of EPS proved that...

Thus GRAN, Bairaha, TAFL, CCSs, KFP, Cargills , Richard Peiris, and all other related to FMCG will have a good time with 2015...

But as mentioned above $ appreciation will be a threat...

yellow knife wrote:Yesterday I got my LBO alert on mobile phone as


Grain elevator could grow net profit by 12% annually . 12 mnt price target of Rs 70from SC securities. GRAn Rs 64.30+3.3%

This is the first time I got such a message and really wondered why such media backing for a share..

Exactly my point. I may have seen a few media "news" reporting specific extracts from a broker report but not publicized like this. Fishy.

FG

Can you remember how media acted when East-West went for a land revaluation and created a bubble in the market...?  I may post on East West once I gather these past documents...