Wednesday, November 24, 2010

Impressive earnings by F&B sector

The CSE’s F&B sector has a market cap of Rs.267.4 b which amounts to 12.1% of total market. The sector trades at a discount at 16.6x with total market multiples trading at 21x annualised aggregate June 2010 earnings.

We estimate that historically the sector has grown earnings at more than 18.8% over the last five years which by any estimation is healthy growth for an economy rocked by the turmoil of the ethnic conflict.

Cumulative revenue growth is 19.3% YoY with sequential growth coming to 3.7%. Cumulative earnings growth is 44.2% YoY and 15.7% sequentially on the back of net margin growth from 9.33% in June and 8.61% in the comparative period last year to 10.4%. 80% of the sector’s earnings come from five companies and these (Distilleries, CTC, Nestle, Ceylon Tea Services and Cargills) account for 81.6% of total sector capitalisation.

Impressive results in terms of earnings and revenue growth were posted by Coco Lanka, Three Acre Farms, Bairaha and Convenience Food.

Bairaha and Three Acre Farms demonstrated the poultry industry’s strong recovery due to higher pricing caused by supply constraints as well as by demand augmented by the recovery in tourism arrivals which are a significant market. With the festive season fast approaching along the prospects of even better earnings in the second half of the year we feel that these counters are trading at unsustainably low multiples.

Coco Lanka benefited both from strong revenue growth as well as gains from the disposal of short term investments which is also a factor in their extremely low earnings multiple. Convenience Food also benefited from GP margin growth as well as revenue growth most probably due to the expansion of the company’s distribution to the Northern Province.

Of the larger companies Nestle, Ceylon Tea Services and Distilleries posted notable sequential earnings gains while Cargills, Lion and CTC slowed down at least in comparison to their June results.

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