Distilleries Company of Sri Lanka [DIST: LKR122.0]
Distilleries Company of Sri Lanka [DIST : LKR122.00], the leader in Sri Lanka’s locally manufactured hard liquor market is likely to witness growth in beverage sector earnings led by stable margins and a CAGR of 4% in volume growth. The increased stake in SPEN makes it a significant contributor to the bottom line which is expected to grow at a CAGR of 13% FY13-14E. We assign a target price of LKR191.0 with a total return of 62% with dividends on a 18 month period. BUY
Beverage sector dominates profitability: Beverage sector profitability is expected to grow at a CAGR of 13% FY13-14E with the rise in prices over and above the tax increases allowing DIST to maintain margins. This approach has been successfully adopted in the past and is likely to continue in the future. Volumes are likely to grow at a CAGR of 4% 2012-13E with a marginal dip expected in 2012E amidst tough economic conditions (2013E volume growth of 9%). Beverage sector is expected to contribute 98% of the overall PBT excluding profit from associate companies.
Investment in SPEN may boost earnings: DIST increased its stake in SPEN, a leading conglomerate from 28% to 39%. With SPEN’s heavy exposure to the tourism segment we expect earnings to grow by 15% in FY13E and 12% in FY14E boosting DIST’s profit from associate companies to LKR1.8 bn (17% YoY) in FY13E and LKR2.0 bn (12% YoY) in FY14E led the rise in SPEN stake.
Valuations and Dividends: We forecast DIST earnings to grow 3% to LKR6.1 bn for FY13E while FY14E may reach LKR7.6 bn (25% YoY). Based on recurrent earnings the counter trades at a PER of 6.1x FY13E and 4.9x FY14E. We expect the counter to bottom out at 6x earnings on historical trend and with the improving growth rates to trigger buying interest. We provide a target price of LKR191.0 and a total return of 62% with dividend on an 18 month time horizon. BUY