ACL - Corporate Update - BUY - 20 09 16

ACL CABLES PLC [ACL.N0000]

Corporate Update – BUY

Current Price: LKR 62.5.0 Fair Value: LKR 80.0

“Entwined with construction uptrend”

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ACL Cables PLC, the largest manufacturer of cables in Sri Lanka is expected to grow its revenues at a CAGR of c.10% FY16-19E. This will be primarily driven by the expected increase in government and institutional construction activities. FC Research estimates that the company, as the market leader with a strong brand equity, is able to sustain an average profit margin of 8% in FY17-19E. BUY

§ Revenues to grow at c.10% FY16-19E: The revenue growth of ACL is expected to be levered by both CEB and institutional sources which comprises 60-70% of the revenues together. The government signaled of recommencing the infrastructure drive which was on a temporary halt during FY16. The fresh government has large scale projects forthcoming such as Megapolis, Port City and accelerated housing projects which are expected to give the construction sector a boost.

§ Margins galvanized by strong fundamentals: FC Research estimates that the average gross margins to remain at 24% between FY17-19E. ACL being the largest manufacturer of cables in Sri Lanka having 70% of market share and a reputation for quality and innovation, will be able to pass on any possible increase in its costs to the customers. The World Bank expects the Copper and Aluminum prices to correct from its record low levels of USD 4,500 and increase between 3-4% p.a from 2017 onwards. In addition, FC Research estimates LKR to depreciate against dollar by c.3.5% p.a. during FY17-19E exerting further pressure on ACL’s profit margins.

§ ACL to provide a return of c.19%: FC Research estimates a fair value of LKR 80.0 [DCF based LKR 79, PER based LKR 82] for the FY18E providing an annualized return of 19% at the current price of LKR 62.5.

§ Investment risks: The government is a key player whose policy decisions inevitably affects ACL. Any possible delays in the planned projects will directly affect the revenue growth potentials of ACL. In addition, payment delays by customers may put pressure on working capital while ACL may be able to pass on only part of the expected material cost increase.

Disclosure on Shareholding:

First Capital Group and its affiliates hold 475,978 shares in ACL. Neither First Capital Group nor its affiliates have traded in the shares of ACL in the three trading days prior to this document, and will not trade in the shares of ACL for seven trading days following the issue of this document.