Friday, April 20, 2012

Dhammika-Nimal duo’s 12th acquisition brews a perfect cuppa!

■Royal Ceramics sees prospects and related party synergies in 51% buy of Asia Siyaka Commodities for Rs. 363 m

 ■New Chairman Nimal says broking, credit and warehouse biz will be expanded

 ■Listing via introduction coming up

The famous duo Dhammika Perera and Nimal Perera last week effected the 12th acquisition, reaffirming their prowess of growing via strategic buys spanning a decade.

This time around via the acquisition of a 51% stake in Asia Siyaka Commodities Ltd. by Royal Ceramics Plc (RCL), the duo hopes to brew a perfect cuppa though times are challenging for the tea industry.

 In a deal worth Rs. 336.6 million, RCL bought the 51% stake amounting to 132.6 million shares at Rs. 2.54 each.

 For Asia Siyaka, the fourth largest tea broker, few notches down from where it was originally, the acquisition marks another phase of coming under a new set of shareholders.

 Set up in 1998 under the Asia Capital Group along with a team of professional brokers, Asia Siyaka saw in July 2011 the exit of its co-founder selling 40% stake for Rs. 175 million to Asia Siyake Pvt Ltd., which is an entity formed by directors and staff. 

 At least by the sale price the enterprise was valued at Rs. 437.5 million. A few months later, Ishara Nanayakkara of LOLC Group and Dinal Wijemanne bought a 35% stake for Rs. 228 million putting the value at Rs. 651 million which is almost equal to the price at which RCL based its acquisition.

Asia Siyaka’s revenue is estimated at over Rs. 400 million whilst it had made a net profit of Rs. 50 million last year. 

 RCL Managing Director Nimal Perera who will shortly assume duties as Chairman of Asia Siyaka told the Daily FT yesterday that the acquisition was strategic with a long term perspective.

 Asia Siyaka will also be listed via an introduction with the application submitted before 31 March being processed by the Colombo Stock Exchange.RCL bought stake from Dinal Wijemanne (15%) and some staff holdings whilst Ishara reduced his stake from 20% to 17.5%. Co-founder Anil Cooke will remain the CEO at Asia Siyaka.

 The acquisition also signals that RCL, the market leader in tiles and bath ware, is keen to pursue select diversification.

 The acquisition of Asia Siyaka’s control comes hot on the heels of RCL consolidating LB Finance Plc as an associate, having increased the stake to 25% recently. Last year it acquired Ever Paint and Chemical Industries Ltd., mostly as a Research and Development venture.

 Given its financial muscle (RCL Group’s retained earnings were at Rs. 4.8 billion and Rs. 2.6 billion at company level as at end 2011) and expertise from LB Finance, the fastest growing in its league, Asia Siyaka is likely to enhance its credit offerings to smaller tea factories.

 The warehouse business operated via a subsidiary will be expanded as well harnessing the three acre land space available according to Nimal.

 Apart from its own customer base, Asia Siyaka is also expected to benefit from the synergies from Hayleys Plc’s plantation business. Dhammika directly and indirectly controls both RCL and Hayleys.

 Hayleys two plantation companies Talawakelle and Kelani Valley have a combined tea crop of 13 million kilos (2011) accounting for 4% of national production.

 Talawakella Plantation Plc was ranked No. 1at the Colombo Tea Auctions for prices amongst the Regional Plantation Companies for the eight and fifth year in succession for high and low grown elevations respectively. Its average price registered was well above the national averages.

 Last year tea prices declined for the first time since 2000 at the Colombo tea auctions. The national average price declined by Rs. 10.72 per kilo to Rs. 359.89 per kilo.

 Colombo auction centre however continued to receive the highest price at US $ 3.29 per kilo.

 Forbes and Walker Tea Brokers however said yesterday that weekly auction average of sale No.14 of Rs.396.54 (US$3.06) for the second consecutive week was higher than the corresponding sale average of 2011 of Rs.373.27 (US$3.35).

 Medium Growns totalling Rs.358.36 (US$2.27) for sale No.14 of 2012 show a gain of Rs.4.72 vis-a-vis Rs.353.64 (US$3.18)of 2011. Low Growns too totalling Rs.418.72 (US$3.23) show a significant gain of Rs.37.78 vis-a-vis Rs.380.94(US$3.42) of 2011.

 High Grown’s however totalling Rs.357.70 (US$2.76) show a decrease of Rs.8.42 vis-a-vis Rs.366.12 (US$3.79).

 Forbes said it was evident that Medium/Low Grown’s have shown a growth YoY in Rupee terms. High Grown prices remain below the corresponding sale prices of 2011. You will also observe that although we have seen a growth YoY in Rupee terms, we remain below the corresponding prices of 2011 in US$ terms.

 Whilst the Dhammika and Nimal duo see prospects in Asia Siyaka’s under RCL banner, Hayleys and Talawakelle Plantations Chairman Mohan Pandithage in the latter’s 2011 Annual Report noted that the tea industry was at cross roads; requiring a breakthrough in productivity to remain viable.

“It is important that all stakeholders including policy makers, recognise that international competitiveness is a prerequisite for the stability of the industry. Hence, industry wage structure, work practices and government policy should soon move to mirror the required flexibilities,” he added.

“We look to 2012 with cautious optimism expecting at least some of our key export markets returning to normalcy before long. Possible tight supply situation from rising domestic demand in India and China too could help prices to improve. We on the other hand are concerned with the on-going embargo on Iran, increase in domestic interest costs and liquidity constraints,” said Pandithage whose comments more or less echoed sentiments from rest of the regional plantation companies.

 Industry analysts said that commodity broking business survives on volume and price garnered by clients for their produce in auctions. Whilst better times for the overall plantation industry could boost prospects for brokers, entities such as Asia Siyaka could also maximise earnings from their other services such as credit and warehousing facilities.

 RCL in the first nine months of 2011/12 financial year saw its bottom line grow by 45% to Rs. 1.48 billion whilst in the third quarter the Company produced a net profit of Rs. 752.5 million.

 This performance was emphasised by analysts as outstanding given the fact that RCL is only dealing with a single product sector. Group revenue rose by 23% to Rs. 5.8 billion in the nine months whilst for the quarter it rose to Rs. 2.4 billion from Rs. 1.8 billion a year earlier.

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