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Sri Lanka | Beverage, Food & Tobacco Initiation of coverage

EQUITY RESEARCH 19 December 2013

Cargills (Ceylon) PLC (CARG.N0000)
A consumption play
Cargills (Ceylon) PLC (CARG) is the largest organized food retailer by market capitalization listed on the Colombo Stock Exchange (CSE), and also manufactures a range of fast-moving consumer goods (FMCG) and operates a fast-food chain. The company is majority owned by its parent company CT Holdings PLC (CTHR), itself one of the largest traded conglomerates on the CSE. We expect the typical signs of consumption growth, such as rising GDP and private consumption expenditure, to support CARG’s revenue growth, at an 11.3% CAGR over FY14E-FY16E. We also forecast CARG’s EBIT margin to expand to 4.3% in FY16E from 4.1% in FY13. Margin development across all segments is likely to be tempered by persisting high operating costs, particularly electricity and fuel expenses, as well as currently underwhelming results from the brewery and biscuits businesses. CARG’s debt and gearing levels in the past three years have risen due to a string of acquisitions and investments to expand capacity of several product lines. Our SOTP and P/E analyses yield a valuation range of LKR110-149, compared with the share price of LKR149 as of 18 December 2013. We forecast revenue to post an 11.3% CAGR over FY14E-FY16E as consumption levels are set to improve. CARG’s revenue is likely to be driven by its retail segment, which we forecast to also grow at an 11.2% CAGR to FY16E, spurred by improving macroeconomic indicators, such as increasing GDP per capita and consumption expenditure. We also expect CARG’s supermarket count to grow 38% to 292 stores in FY16E from 211 as at the end of FY13, compared with an almost 50% increase over FY10-FY13. The aforementioned factors should also support the growth of the FMCG segment, at a forecast CAGR of 11.2%, as…...

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