CHEVRON LUBRICANTS LANKA PLC (LLUB.N : LKR376.10)------Softlogic Equity Research

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Chevron Lubricants Lanka PLC (LLUB) is a 51% owned subsidiary of Chevron Ceylon (part of the global lubricant giant Chevron Texaco Corporation) which commenced its initial business operations in 1994. LLUB is the current market leader in the Sri Lankan lubricant industry with an overall market share of c.49% engaged in manufacturing and distributing quality lubricants under the brand names Caltex, Havoline, Delo and Lanka for both local as well as exports markets.
Revenue dipped marginally by 2.8% YoY to LKR2,997.6 mn during 3Q15 due to selective value added services and discounts offered to company’s distribution agents. However LLUB saw healthy sales volumes contributed from the local market, along with Bangladesh and Maldives accounting for 8%-9% of the total revenue with no price revisions performed during the quarter under review.

The gross profit (GP) increased 9.1% YoY in 3Q15, largely due to the cost of sales dipping c.11% YoY to LKR1,621.3 mn. This was mainly on the back of lower raw material costs, as a result of the declining global oil prices and base oil prices compared to 2014. Moreover, GP margin also widened 500 bps YoY to 45.9% during the quarter under consideration. However though crude oil prices recovered at c.USD55-65 levels during the past quarter, oil prices have further dipped averaging to USD51.3 per barrel during 3Q15. Hence, with the anticipated declining trend of global oil prices and the corresponding base oil prices, lower raw material costs would aid LLUB to benefit from wider margins in the medium to long term.

EBIT margin gained c.420 bps YoY to 36.4% which led company’s operating profit to grow 10.0% YoY to LKR1,090.2 mn in 3Q15. This was backed by the dip in administrative expenses of c.5% YoY to LKR145.5 mn in 3Q15 due to the rigorous cost management procedures utilized by LLUB. Meanwhile, other income from operating activities dipped marginally by 5.0% YoY to LKR2.6 mn However, LLUB witnessed a c.6% YoY growth in total OPEX for the quarter under consideration chiefly led by escalated distribution expenses ( up c.19% YoY), as a result of the aggressive advertising campaign used by LLUB to strengthen their brand name and gain market share in the highly competitive lube industry.

LLUB saw its bottom line growing by 11.3% YoY from LKR675.3 mn on the back of net profit (NP) margin widening by 350 bps YoY to 27.8% despite the tax expenses rising by c.14% YoY to LKR303.5 mn. During a three year period, LLUB has been successfully able to widen its GP, EBIT and NP margins from 32%, 25% and 18% in 2012 to 45%, 36% and 28% respectively in 2015. Therefore, despite the intense industry pressures faced, LLUB would continue to maintain prevailing margins given the short term benefits on raw material costs, efforts put into moving towards high margin products, precautionary measures taken by the company well ahead of external cost increases together with other cost saving initiatives.

We forecast 2015E and 2016E net profit at LKR3,157.8 mn (up 15.0% YoY) and LKR3,448.1 mn (up 9.2% YoY) respectively assuming GP and NP margins at 44-46% and 27-28% respectively taking into consideration the possible further direct cost advantages. Thus on a recurrent basis, LLUB trades on 14.3x forecast 2015E net profit and 13.1x forecast 2016E earnings with ROEs of 55-56%. Further with a c.85-87% dividend payout, the share attractively yields dividends of 6.6% for 2016E and a fair value of LKR435.0 and thus we revise up our recommendation to a BUY.

Thanks CSE SAS