Downgrade to HOLD
Chevron Lubricants Lanka [LLUB : LKR170.00], the leader in Sri Lanka’s lubricants market (65% market share), is likely to record a slower than anticipated earnings growth (6% – 2012E and 24% – 2013E) led by likely decline in margins amidst rising input costs and lower dividend pay-out with plans to build a new blending plant. We revise Dec 2012 price target to LKR176.0 and total target return to 8% with dividends. Downgrade to HOLD.
LLUB Margins to decline: LLUB margins are likely to drop to 28.7% in 2012E from 31.5% in 2011. The rise in crude oil prices have led to a rise in base oil prices while the 18% depreciation in the rupee in the last 2 months would add to the LLUB woes. The present economic conditions and the recent policy decisions of the CBSL and GoSL is likely to reduce disposable income of consumers preventing LLUB immediately passing on the full cost in terms of price increases.
Dividend Pay-out to be limited to 65%: The company has already initiated plans to build a new blending plant with the lease of the existing plant nearing expiration in 2014. The move may result in LLUB conserving cash for capex leading to a decline in dividend pay-outs. We expect the dividend pay-out to fall to 65% for the next 2 years, lower than the earlier anticipated 80%. The plant is expected to be commissioned in 2014 with bulk of the capex planned in 2013E.
Valuations and Dividends: Amidst the expected decline in margins, earnings for 2012E is expected to be limited to LKR2.1 bn (revised down from LKR2.6 bn), a modest growth of 6% whilst earnings for 2013E may reach LKR2.5 bn (24% YoY). After our corporate update in Jan 2012, the counter has appreciated 1% and a DPS of LKR3.0 was distributed providing a total return of 4%. With the earnings outlook LLUB is unlikely to outperform the market. The counter trades at a PER of 7.7x 2013E earnings. Our revised target price for LLUB stands at LKR176.0 amidst a further LKR8.5 DPS upto Dec 2012 producing a total target return of 8%. HOLD