Equity Research

Chevron Lubricants Lanka PLC

Interim Update Q3 FY 14
Quarterly revenue increased by 11% compared to corresponding previous quarter
while gross margin increased to 41% from 36%. Financial income has reduced by 63%
QOQ while distribution cost has reduced by 8% despite the sales growth. Net profit
increased by 23% QOQ.

Investment Considerations
Chevron's market share dropped to 53% in 2013 from 55% in 2012 (LLUB enjoyed a market
share of 73% in 2009). However, Sri Lankan lubricant market has expanded from 45 Mn
Liters of annual production in 2009 to 53 Mn Liters in 2013 while Chevron's annual sales
volume has been coming down since 2010 (35 Mn Liters in 2010 to 28 Mn Liters in 2013).
With high competition of liberalization of the industry, LLUB has struggled to maintain its
market share.
Oil price plunge has impacted well for the lubricant industry as gross margins are expected to
improve with sales price of lubricant being intact with robust demand. With the low interest
rate environment and expected downward fuel price change, we expect the demand for
vehicles to rise, which would bode well for the lubricant products. We believe the lubricant
demand will keep the sales price unchanged despite the fact that the raw material (base oil)
can be bought at cheaper price. LLUB and IOC in particular will enjoy the situation as those
two are the only authorized parties to blend oil and produce lubricants locally.
LLUB's new plant is expected to have a excess capacity of 10% and we expect a revenue
growth of 8% on average in medium term. LLUB's gross margin has improved from 36% in
previous corresponding quarter to 41% during Q3 FY14. We expect gross margin to be
around 50% during next year with low raw material prices.

SELL
LKR 397.30
LKR 454.90
-12.66%
High

LOLC SEC Valuation

Share Price
Upside/(Downside)
Risk Level
(refer page 07 for recommendation)

Share Details
Bloomberg Ticker
CSE Sector
GICS Sector
Market Cap (LKR Mn)
Issued Quantity (Mn)
30-day avg T/O (LKR Mn)
Beta (6 months)

LLUB SL
Manufacturing
Energy
54,588
120
17.99
1.08

Quarter Financial Summary

LKR Bn
Revenue
Net Profit
S/H's Equity
Total Assets
ROA
ROE

FY 13 Q4
2.82
0.59
4.84
7.05
38.95
56.48

FY 14 Q1
2.99
0.76
5.60
7.64
36.77
49.82

FY 14 Q2
2.71
0.68
5.80
6.95
38.86
48.42

FY 14 Q3
3.08
0.75
5.95
7.70
38.40
49.20

Price Multiples

LLUB is trading at a trailing PE is at 19.64X and PBV is at 9.18X, comparatively higher to the
respective sector multiples at 17.60X and 2.30X.

Price Behavior
LKR

LLUB's ROE and ROA have gradually come down from FY 11 while now seem to be stabilizing
around 50% and 40% respectively.

PE (X)
PBV (X)
Price to Sales (X)
Divdend Yield (%)

500
450
400
350
300
250
200
16-Jan-14

19.64
9.18
4.71
4.40

16-Apr-14

16-Jul-14

16-Oct-14

LLUB Share Price

ASI movement (adjusted to LLUB base price)

Per Share Details as at 30.09.2014 (LKR)

Earnings per share (trailing 12m)
Net Asset Value per share
Sales per share (trailing 12m)
Dividend Per Share (trailing 12m)

Valuation
LLUB has improved its margins despite the low growth in sales due to severe competition.
However, global oil price plummet will benefit LLUB's margins further compared to the
majority of the rest of the competitors who import and distribute lubricants locally. LLUB's
share price has risen by 50% during the last 6 months. Our FCFE model values the counter at
LKR 397.30, taking a cost of equity of 13%. We revise our recommendation to SELL.

Shareholder Details
Chevron Ceylon Ltd
Aberdeen Asset Management Asia
Wasatch Advisors Inc
Shareholders below 5%

Analyst (s)

+94 117 880837

damithwa@lolcsecurities.com

Recommendation Guidance, Important Disclosures and Analyst Certification: Page 07

51%
24%
4%
25%

Source:CSE, Bloomberg, LOSEC Research

Damith Wasantha

16 January 15

23.16
49.57
96.67
20.00

Interim Update: Chevron Lubricants Lanka PLC | 16 January 15

Graph 01: Quarterly Revenue and Profit

Graph 02: Quarterly GP margin

Source: Bloomberg

ROA
Source: Bloomberg

Graph 05: Brent Crude Oil Price Movement

120

FY14 Q2

FY14 Q1

FY14 Q2

FY14 Q1

Source: Bloomberg

Graph 06: Exchange Rate Movement

Crude Oil prices declined

rapidly during past few months
and the situation will bode well
for the LLUB

140

FY13 Q4

FY13 Q3

FY13 Q2

FY13 Q1

FY12 Q4

FY12 Q3

FY12 Q2

FY11 Q4

FY11Q3

FY11 Q2

FY14 Q2

FY14 Q1

FY13 Q4

FY13 Q3

FY13 Q2

FY13 Q1

1,600
1,400
1,200
1,000
800
600
400
200
0

FY 12 Q1

ROE

FY12 Q4

FY12 Q3

FY12 Q2

FY 12 Q1

FY11Q3

FY11 Q4

FY11 Q2

80%
70%
60%
50%
40%
30%
20%
10%
0%

FY 11 Q1

Source: Bloomberg

Graph 04: Capital Expenditure

FY 11 Q1

Graph 03: ROA and ROE

FY13 Q4

FY13 Q3

FY13 Q2

FY13 Q1

FY 11
Q1
FY11
Q2
FY11
Q3
FY11
Q4
FY 12
Q1
FY12
Q2
FY12
Q3
FY12
Q4
FY13
Q1
FY13
Q2
FY13
Q3
FY13
Q4
FY14
Q1
FY14
Q2

FY12 Q4

500

FY12 Q3

1,000

FY12 Q2

1,500

FY 12 Q1

2,000

FY11Q3

2,500

FY11 Q4

LKR Mn

3,000

FY11 Q2

3,500

FY 11 Q1

45%
40%
35%
30%
25%
20%
15%
10%
5%
0%

4,000

131.5

100

131

80

130.5

60

Exchange rate has slightly increased

but remained stable overall in 2014.
We expect the exchange rate
fluctuations to have low impact on
LLUB.

132

130

40
129.5

20
0
01/16/14

04/16/14

07/16/14

129
01/16/14

10/16/14
Source: Bloomberg

04/16/14

07/16/14

10/16/14

01/16/15
Source: Bloomberg

2 | LOLC Securities Limited

Interim Update: Chevron Lubricants Lanka PLC | 16 January 15

Valuation
We have taken into account a cost of equity of 13% and a free cash flow terminal growth of 5%. We expect oil prices
to remain low in next year as well. We have conservatively taken a mid-term growth of 10%. Our FCFE model values
the counter at LKR 397.30. At the current share price, LLUB is trading at forward PE of 18.31X and a forward PBV of
8.89X.
LLUB's trailing multiples are quite high compared to domestic manufacturing sector's and global peer companies'
multiples which can be justified by the high ROE of LLUB.

Table 01: Valuation Sensitivity Matrix

Terminal
Growth
Rate

Share price in LKR

3%
4%
5%
6%
7%

20%
451.60
498.80
561.70
649.80
781.90

12%
398.80
433.90
479.00
539.10
623.30

Cost of Equity
13%
342.70
367.10
397.30
435.70
486.20

14%
322.10
343.10
368.80
400.90
442.20

15%
293.40
310.20
330.30
354.90
385.60

Source:CSE, Bloomberg, LOSEC Research

Table 02: Peer Comparison

Name

Market Cap (USD Mn)

Chevron Lubricants Lanka Plc (Sri Lanka)

Lanka Ioc Plc (Sri Lanka)
Laugfs Gas Plc - Voting (Sri Lanka)
Alon Usa Energy Inc (United States)
Adams Resources & Energy Inc (United States)
Pantry Inc (United States)

415
234
121
742
230
861

PE (x)

PBV (X)

19.64
7.13
12.96
39.78
n.a
57.69

9.18
1.66
2.21
1.14
1.40
2.54

Dividend
Yield %
4.40
2.60
4.81
3.75
1.60
n.a

ROE %
49.20
25.45
17.67
2.86
8.30
3.99

Source:CSE, Bloomberg, LOSEC Research

3 | LOLC Securities Limited

Interim Update: Chevron Lubricants Lanka PLC | 16 January 15

Table 03: Return comparison

LLUB

%
3 months
6 months
YTD
1 year

ASI Index

33.79
49.15
13.84
63.63

4.78
12.70
3.44
23.44

S&P SL 20
Index
5.16
13.42
4.32
24.47

LIOC
19.42
46.70
-3.67
47.83
Source:CSE, Bloomberg

Graph 07: Share Price Movement

2,000,000

150
Price

SMAVG (50)

SMAVG (100)

130

1,000,000

110

500,000

Rs

Volume

1,500,000

Volume

90

100
75
50
25
0
1/17/12

70
RSI (14)

7/17/12

1/17/13

7/17/13

1/17/14

7/17/14
Source:CSE, Bloomberg

Graph 08: PE Chart

Graph 09: PBV Chart

25

12
10

20

15

6
10

5
0
1/17/12

2
7/17/12

1/17/13

PE ratio

7/17/13

Highest

1/17/14
Average

7/17/14

0
01/17/12

07/17/12

01/17/13

PBV ratio

Lowest

07/17/13

Highest

01/17/14
Average

Source:CSE, Bloomberg

Graph 10: Price per Sales

Source:CSE, Bloomberg

8
7
6
5
4
3
2
1
0
1/17/12

4
3
2
1

7/17/12

1/17/13

Price to Sales ratio

7/17/13
Highest

1/17/14
Average

7/17/14

7/17/12

1/17/13

RCL dividend yield

Lowest

7/17/13
Highest

1/17/14

Graph 12: CSE PE Chart

7/17/14

Average

Source:CSE, Bloomberg

Lowest
Source:CSE, Bloomberg

Graph 13: CSE PBV Chart

16

2.2

15

14
13

1.8

12

1.6

11

1.4

10

1.2

9
8
01/17/12

Lowest

Graph 11: Dividend Yield

0
1/17/12

07/17/14

07/17/12
ASI PE ratio

01/17/13

07/17/13
Highest

01/17/14
Average

07/17/14
Lowest
Source:CSE, Bloomberg

1
1/17/12

7/17/12
ASI PBV ratio

1/17/13

7/17/13
Highest

1/17/14
Average

7/17/14
Lowest
Source:CSE, Bloomberg

4 | LOLC Securities Limited

Interim Update: Chevron Lubricants Lanka PLC | 16 January 15

Table 04: Forecast Financial Statements

Figures in LKR Mn
Income Statement

FY 2012

FY 2013

FY 2014 (9M)

FY 2015 (F)

FY 2016 (F)

FY 2017 (F)

11,754
-7,942
3,812
-468
2,948
211
3,142
-854
2,288
2,288

11,202
-7,077
4,125
-376
3,175
213
3,454
-922
2,532
2,532

8,777
-5,120
3,657
-468
2,948
-68
3,142
-854
2,288
2,288

12,096
-7,016
5,080
-406
4,055
-10
3,978
-1,062
2,917
2,917

12,955
-6,477
6,477
-435
5,381
74
5,388
-1,438
3,950
3,950

13,874
-6,937
6,937
-466
5,766
192
5,892
-1,572
4,320
4,321

2,517
985
2,132
5,635
311
5,946
190
477
1,733
87
1,820
600
3,526
4,126
5,946

2,485
990
1,929
5,666
1,387
7,052
360
0
2,090
122
2,212
600
4,240
4,840
7,052

2,216
1,305
2,110
5,630
2,074
7,705
1,011
0
3,100
204
1,756
600
5,349
5,949
7,705

3,151
1,094
1,912
6,419
1,797
8,216
357
0
2,087
122
2,209
600
5,407
6,007
8,216

4,890
1,171
1,765
8,089
1,680
9,769
330
0
2,060
122
2,182
600
6,987
7,587
9,769

6,538
1,254
1,891
9,945
1,575
11,520
353
0
2,083
122
2,205
600
8,715
9,315
11,520

Net Income
Depreciation & Amortization
Changes in Non-Cash Capital
Cash From Operations

2,288
44
527
2,914

2,532
76
73
2,716

2,189
32
-268
2,085

2,917
190
-90
3,016

3,950
177
42
4,169

4,321
165
-185
4,300

Capital Expenditures
Increase in Investments
Cash From Investing Activities

-68
0
-63

-1,128
0
-1,128

-736
-734

-600
0
-600

-60
0
-60

-60
0
-60

-1,380
0
-1,345
1,505

-1,620
0
-1,620
-32

-1,620
0
-1,620
-269

-1,799
0
-1,799
617

-2,370
0
-2,370
1,739

-2,592
0
-2,592
1,648

Revenue
Cost of Revenue
Gross Profit
Operating Expenses
Operating Income
Net Non-Operating Gains (Losses)
Pretax Income
Income Tax Expense
Income Before XO Items
Net Profit att. to shareholders

Balance Sheet
Cash & Near Cash Items
Accounts & Notes Receivable
Inventories
Total Current Assets
Total Long-Term Assets
Total Assets
Accounts Payable
Other Short-Term Liabilities
Total Current Liabilities
Total Long-Term Liabilities
Total Liabilities
Share Capital
Retained Earnings & Other Equity
Total Equity
Total Liabilities & Equity

Cash Flow Statement

Dividends Paid
Change in Short-Term Borrowings
Cash from Financing Activities
Net Changes in Cash

Source:CSE, Bloomberg, LOSEC Research

5 | LOLC Securities Limited

Interim Update: Chevron Lubricants Lanka PLC | 16 January 15

Table 05: Forecast Ratios

FY 2012

FY 2013

FY 2014(9M)

FY 2015 (F)

FY 2016 (F)

FY 2017 (F)

32%
19%
55%
38%
19.06
11.50

37%
23%
52%
36%
21.10
13.50

42%
26%
49%
38%
19.06
15.00

42%
24%
49%
35%
24.30
15.00

50%
30%
52%
40%
32.92
19.75

50%
31%
46%
38%
36.00
21.60

0%
0.00
1.44
0.16

0%
0.00
1.46
0.00

0%
0.00
1.37
4.00

0%
0.00
1.37
0.00

0%
0.00
1.29
0.00

0%
0.00
1.24
0.00

3.25
2.02
1.98
34.38

2.71
1.79
1.59
40.33

1.82
1.14
1.14
49.57

3.08
2.16
1.47
50.06

3.93
3.07
1.33
63.22

4.77
3.87
1.20
77.62

Growth Ratios
Revenue Growth YOY%
Earnings growth YOY%
Total Assets YOY%
Total Debt YOY%

6%
14%
37%
-100%

-5%
11%
19%
0%

5%
13%
9%
0%

7%
35%
19%
0%

7%
9%
18%
0%

-100%
-100%
-100%
0%

Investment Ratios
PE Ratio (X)
Price to Book Value (X)
Dividend Yield (%)

11.41
6.33
5.29%

12.53
6.55
5.11%

19.64
9.18
4.40%

18.31
8.89
3.37%

13.52
7.04
4.44%

12.36
5.73
4.85%

Profitability Ratios
GP Margin (%)
NP Margin (%)
ROE (%)
ROA (%)
Earnings per share (LKR)
Dividend per Share (LKR)
Credit Ratios
Debt/Equity Ratio (%)
Interest Coverage (X)
Total Assets/Equity (X)
Net Debt/EBIT (X)
Liquidity Ratios
Current Ratio (X)
Quick Ratio (X)
Asset Turnover Ratio (X)
Net Asset Value per share (LKR)

Source:CSE, Bloomberg, LOSEC Research

6 | LOLC Securities Limited

Interim Update: Chevron Lubricants Lanka PLC | 16 January 15

Recommendation Guidance
BUY expected return > 10% in excess of benchmark return
SELL expected return less than benchmark return
HOLD expected return between 0% and 10% in excess of benchmark return
Investment Horizon: 3 years
Benchmark Interest Rate: Average Weighted Fixed Deposit Rate (AWFDR) published by Central Bank of Sri Lanka.

Risk Level Evaluation

High: Maximum price volatility to be up or down more than 50% monthly
Medium: Maximum price volatility to be up or down between 25% - 50% monthly.
Low: Maximum price volatility to be up or down less than 25% monthly.
Risk Level is calculated taking the historical standard deviation measures.

Financial Glossary
EPS = Earnings per Share
ROA = Return on Assets (adjusted net profit/average total assets)
ROE = Return on Equity (adjusted net profit/average total equity)
CAGR = Compound Annual Growth Rate ((End Value/Start Value) ^ (1/number of years) -1)
GP= Gross Profit
EBITDA= Earnings before interest, tax, depreciation and amortization
PBT= Profit before tax
PAT= Profit after tax
NP= Net Profit
PBV= Price to book value ratio
PE= Price to earnings ratio

Analyst certification: The Analyst(s) who is/are responsible for compiling or co-compiling this research and whose names appear as the analyst(s) of the research certify that the
views expressed in this research accurately reflect the personal view of the analyst(s) about the subject securities and issuers and/or other subject matter as appropriate and has
taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. No part of the compensation received by the analyst(s) was, is or will
be directly or indirectly related to specific inclusion of specific recommendation or views in this research. On a general basis analysts performance appraisal may be influenced by
quality of the content and efficacy of the research. The analyst(s) who is/are responsible for compiling or co-compiling this research and whose names appear as the analyst(s)
receive compensation based on overall revenues of LOLC Securities Limited and its holding company (Lanka ORIX Company PLC LOLC Group), which may include brokerage
revenue from transactions involved with the securities mentioned in this research.

General Disclaimer: LOLC Securities Limited is a company incorporated in Sri Lanka and licensed by the Securities and Exchange Commission of Sri Lanka to operate as a
stockbroker/stock dealer in Sri Lanka. LOLC Securities Limited is a trading member of Colombo Stock Exchange. This research is based on information from sources that LOLC
Securities Limited believes to be reliable. Whilst reasonable care has been taken to ensure accuracy of the information presented in the research, LOLC Securities Limited does not
give a guarantee on the accuracy of the information presented in the paper nor will take the responsibility on investment decisions taken based on the information provided by the
research and hence LOLC Securities Limited nor its employees accepts any liability whatsoever for any loss arising from investments decisions taken using the information provided
in this paper. The reader also should note this paper does not give recommendations to any particular category of investors and investor should consult investment advisors for
further clarifications regarding risks involved in investing in equity market. Investing in securities has inherent risks with no guaranteed return and price may be subjected to significant
volatilities. No part of this report should be considered as a solicitation to buy or sell any security or product or to engage in or refrain from engaging in any transaction. LOLC
Securities Limited or its employees may or may not hold positions in the securities discussed in the research and the information provided in the research should not be construed as
a buy or sell instruction for any securities mentioned in the research, Unless otherwise specifically mentioned. This research is intended for general use for clients of LOLC Securities
Limited and must not be copied in whole or in part or distributed to any third party for commercial use without permission from LOLC Securities Limited. If the reader is not the
intended recipient please inform LOLC Securities Limited immediately by return email to research@lolcsecurities.com. LOLC Securities Limiteds other staff including sales people,
traders and other professionals may provide oral or written market commentaries or trading strategies to our clients which reflect opinions which are contrary to the opinions
expressed in this research which may be influenced by different circumstances.

7 | LOLC Securities Limited

Interim Update: Chevron Lubricants Lanka PLC | 16 January 15

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