INITIAL PUBLIC OFFERING

1 | P a g e July 2014, Sri Lanka Equity Research

LUCKY LANKA IPO
Rating: VOTING : DO NOT SUBSCRIBE ISSUE PRICE : Voting LKR6.00
NON VOTING : SUBSCRIBE Non Voting LKR3.00

Valuation
Voting Share
Based on a FCF valuation (WACC of 14.2% and terminal growth of 3%) the share is valued at
LKR6.8 per share with the offer price been at 11.8% discount to the same. However on a
relative basis the offer is at 21.4X FY15e earnings and 13.8X FY16e net profit which is at a
significant premium to the broad market trading on 13.0X FY15e net earnings. Albeit on PBV
basis the offer is fairly priced at 1.7X. Therefore given the premium vs the broad market and just
a marginal discount to FCF based share value, solely on a fundamental valuation point of view
our take is NOT TO SUBSCRIBE.
However given the success of this start-up entrepreneurial venture the popularity of the product
and company in Southern Sri Lanka and the marketing buzz given for the IPO in the current
interest rate environment with limited alternate investment the issue could be fully subscribed
with the intention of mainly short term return.
Non Voting Share
Offered at a 50% discount to boost the voting share, valued at 10.7X FY15e net profit and at
0.8X PBV, the non-voting share is attractive. Also we believe post IPO the voting & non-voting
discount would narrow and there would be 60-65% probability of the non-voting share price to
better the price performance of its voting counterpart. Hence SUBSCRIBE.
Key Strengths
In an era where the government is trying to up the local dairy industry we believe Lucky is on
the correct path to capture the growth of the local dairy industry. Further with the new expansion
they would be able to increase its capacity by c.50% and depicts strong growth prospects
mainly in the outstation areas where they have a much stronger presence than most of its
peers.
Key Risks
The valuations are derived based on the assumption that the government would continue to
support the local dairy industry using by discouraging imports. Therefore any adverse change in
government dairy strategy in future would impact our valuations negatively. Further the FY14
figures are unaudited and if the audited figures change negatively it would impact our
valuations.
Company Overview
Lucky Lanka is engaged in the process of collection (7 extraction centers) of locally produced
fresh milk from rural village farmers (more than 5,000) and process yoghurt and other milk
products and distribute island wide (50 distribution points and 105 vehicles) under the brand
name LUCKY. Company has a daily capacity of 20,000 litres in its production plant in
Kamburupitiya (171 Km south of Colombo) whilst currently has 400 direct employees and over
3,000 indirect employees.

Softlogic Stockbrokers (Pvt) Ltd
#06,37
th
Lane, Queens Road
Colombo 03, Sri Lanka
+94 11 7277000
research@equity.softlogic.lk



Lead Analyst : Asanka Ranasinghe

YE Mar/(LKR mn) FY12 FY13 FY14 FY15E FY16E

Net Profit LKR mn) 4.9 18.0 20.3 56.2 87.1
YoY growth (%) -32.7% 269.4% 13.1% 176.3% 54.9%
EPS (LKR) 0.0 0.1 0.1 0.3 0.4
YoY growth (%) -32.7% 269.4% 13.1% 176.3% 54.9%
BVPS (LKR) 1.5 1.6 1.8 3.5 3.9
DPS (LKR) - - - 0.04 0.07
ROE (%) 1.7% 5.8% 5.6% 7.9% 11.1%
Voting
PER (x) 246.5 66.8 59.0 21.4 13.8
PBV (x) 4.1 3.9 3.3 1.7 1.5
Div yield (%) 0.0% 0.0% 0.0% 0.7% 1.1%
Non Voting
PER (x) 123.3 33.4 29.5 10.7 6.9
PBV (x) 2.1 1.9 1.7 0.8 0.8
Div yield (%) 0.0% 0.0% 0.0% 1.4% 2.2%
ISSUE DETAILS
IPO Proceeds LKR mn
38 mn voting shares @ LKR6.00 228.00
24 mn voting shares @ LKR3.00 72.00
Total 300.00
To be listed on the Diri Savi Board of the CSE



USE OF IPO FUNDS (LKR mn)
Settlement of loans 200.00
Improving existing production plant 75.00
New project implementation 25.00

Opening date of the issue 07 July 2014
Closing date of the issue 24 July 2013
Or such other earlier date if the issue is
oversubscribed
on oversubscription
Minimum subscription (voting shares) 1,000
(Non-voting shares) 1,000


BASIS OF ALLOTMENT
Investor category %
Unit Trusts 10.0
Retail Individual Investors* 45.0
Non Retail Investors 45.0
*subscribe below LKR100,000/-
1,200.00

MAIN SHAREHOLDERS
Mr Lal K A Guanwardena 52.90%
Ms B A Gunawardena 7.56%
Ms D A Gunawardena 7.56%
Ms N A Gunawardena 7.56%
GOH Family Investment Holdings 2.84%
IPO Shares 21.59%



INITIAL PUBLIC OFFERING
2 | P a g e July 2014, Sri Lanka Equity Research

COMPANY OVERVIEW
The company was established in 1991 by Mr. Lal Keerthi Gunawardhana as a milk processing unit with a capacity of
300 cups per day. Over the past two decades the company has achieved significant growth and has its own
production plant in Kamburupitiya (171 Km south of Colombo) with a daily capacity of 20,000 litres.

Today Lucky Lanka is engaged in the process of collection (7 extraction centers) of locally produced fresh milk from
rural village farmers (more than 5,000) and process yoghurt and other milk products and distribute island wide (50
distribution points and 105 vehicles) under the brand name LUCKY.

The product range comprises of Vanilla, Strawberry, Chocolate, Treacle, Fruit Jelly and Fresh Fruit Yoghurts, Curd,
Pasteurized Milk, Sterilized Milk, UHT Milk, Flavoured Milk, Fruit Drink Bottles and Drinking Yoghurt. Lucky recently
introduced Lucky Milk Toffee also to the market.

Company currently has 400 direct employees and over 3,000 indirect employees. Lucky Yoghurt is the one and only
yoghurt manufacturer with SLS certification for the first time in Sri Lanka and also has ISO 22000, HACCP
international standards.

FINANCIAL OVERVIEW
Lucky Lankas revenue has grown at a 5 year CAGR of 15% FY10-FY14 to stand at LKR896.5 mn by FY14. During
the current financial year revenue growth has been rather slow at 6.5% YoY but we believe by using LKR100.0 mn of
the IPO proceeds company would be able to grow its revenue by 15.0% YoY and 25.0% YoY in FY15E and FY16E
respectively. Over the last 5 years the firm has enjoyed an average gross profit (GP) margin of 42.2% but on a
conservative basis we forecast a GP margin of 40.0% for the nest 2 years.

















During the last 5 years (FY10-FY14) companys profit has grown at a slower pace (5 year CAGR of 2.5%) largely due
to higher operating costs and finance cost. We believe there would be a reduction in EBIT margins in the short term
due to higher distribution and promotional costs but lesser debt burden (LKR200.0 mn of IPO proceeds are used to
retire debt) would result in higher profitability. We forecast profit to grow c.1.5x in FY15E to LKR53.3 mn (NP margin
5.2%) and further expect 57.9% YoY growth in net profit to LKR84.2 mn (NP margin of 6.5%) in FY16E.

Over the years companys leverage has been rather high at 90% level. However going forward with the retirement of
debt we would expect a drastic improvement in its leverage to c.15%. Further the inflow LKR300.0 mn of capital would
further strengthen its equity position where its book value per share (BVPS) would increase to LKR3.5 compared to
LKR1.8 in FY14.


Revenue

0%
5%
10%
15%
20%
25%
30%
0
200
400
600
800
1,000
1,200
1,400
FY10 FY11 FY12 FY13 FY14 FY15E FY16E
(LKR mn)
Revenue YoY growth
PAT

-100%
-50%
0%
50%
100%
150%
200%
250%
300%
0
10
20
30
40
50
60
70
80
90
100
FY10 FY11 FY12 FY13 FY14 FY15E FY16E
(LKR mn)
PAT YoY growth
Source : Softlogic Equity Research/
Lucky Lanka Prospectus
Source : Softlogic Equity Research/
Lucky Lanka Prospectus


INITIAL PUBLIC OFFERING
3 | P a g e July 2014, Sri Lanka Equity Research











FUTURE STRATEGIES
1
Gedarata Kiri Project

Company began this project in Matara district to promote the habit of drinking fresh milk in Sri Lanka. The second
stage of this project would start in Colombo.

Lucky Milk Bar

Company has opened a modern retail outlet to sell all Lucky brand products at the entrance of the Southern Highway.
Firm is planning to establish 1,000 outlets of that nature Island-wide to increase its market share.

Retail Three-wheeler network

Lucky has decided to offer its products to the door step of the consumers using retail three-wheel network and the
project is implemented through franchising agreements with upcoming entrepreneurs.

National Policy of Standardization of School Canteens

The company intends to increase the availability of high nutrition milk based products in school canteens that will
support to boost the sales in this market segment.

Introducing dry distribution channel

Due to seasonal fluctuations of chill product range, the Company has identified the requirement of introducing dry
product range with separate distribution channel. This product range includes milk toffee, sterilized milk bottles and
flavoured milk bottles. Extension of the product range by introducing Lucky bottled water and Biscuit with yoghurt will
add high turnover on this channel. This distribution channel is planned to operate by 50 new vehicles.

MARKET FOR MILK PRODUCTS AND YOGHURT

Almost all the products in the market are priced at the same level and therefore we believe it is the quality and the
brand name is the driving force in increasing market share. We are of the view that Lucky has a relatively strong
presence in the Southern Province (market share information are not available) and the suburbs but we believe they
would face severe competition from other brands like Highland, Kotmale, Ambewela, Richlife and CIC in penetrating
the Colombo district.

Margins

0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E
GP margin EBIT margin NP margin
Source : Softlogic Equity Research/
Lucky Lanka Prospectus


INITIAL PUBLIC OFFERING
4 | P a g e July 2014, Sri Lanka Equity Research




VALUATION
We believe the issue is fairly valued at an issue price of LKR6.0 per share. Based on free cash flow valuation (WACC
of 14.2% and terminal growth of 3.0%) we have derived a value of LKR6.8 per share which is at 11% premium to the
voting share. However with an issue price of LKR3.0, the non-voting share is significantly attractive at a 54% premium
to the free cash flow value.













Based on relative valuations, at an issue price of LKR6.0 the voting share is trading 21.4x FY15E earnings and 13.8x
FY16E earnings. The non-voting is attractive at 10.7x FY15E earnings and 6.9x FY16E earnings. On book value
multiples the voting is trading at 1.7x and the non-voting is trading at 0.8x for FY1515E.

We are of the view that the closest comparable local peer is Kotmale and it also trades at a discount to Lucky of
FY15E earnings. We do not believe a higher PER of 21.7x is justifiable given the size of the company and its
operations.

We believe the business case for Lucky is sound and has potential to grow. Based on the valuations we believe the
non-voting share offers value with a 54% discount to intrinsic value and trading at 10.7x FY15E earnings. Further the
gap between the voting and the non-voting share in the market is c.30%, hence non-voting share has more upside.
Recommend Subscribe

On the contrary we believe the voting share has limited upside given it is just 11% discount to our intrinsic value and
21.4x 1 year forward earnings multiple is also at a significant premium to the broader market 4 quarter trailing multiple
of 14.2x. Hence we believe there would be opportunity to accumulate the voting share at lower levels from the market.
Recommend Not Subscribe

KEY RISKS
The valuations are derived based on the assumption that the government would continue to support the local dairy
industry using by discouraging imports. Further compared to other countries the dairy industry in Sri Lanka is quite
small and fragmented. Therefore protectionism is needed to safeguard the local industry from competition. Any
adverse change in government dairy strategy in future would impact our valuations negatively.

FY14 figures presented in the prospectus are unaudited and therefore we believe if numbers negatively change
subsequent to the audit it would impact our valuations.




WACC and Terminal growth sensitivity

1.0% 2.0% 3.0% 4.0% 5.0%
10.0% 9.0 9.9 11.0 12.4 14.5
12.0% 7.3 7.9 8.5 9.3 10.3
14.2% 6.1 6.4 6.8 7.2 7.8
16.0% 5.3 5.5 5.8 6.1 6.5
18.0% 4.7 4.8 5.0 5.2 5.5
20.0% 4.2 4.3 4.4 4.6 4.8
Terminal Growth (%)
WACC (%)
Peer comparison

Peer comparison
Mkt Cap
(LKR mn) PER (x) PBV (x) ROE (%)
Div yield
(%)
Broader Market 2,554,134.0 14.2 2.2 11.4% 2.8%
Lucky Lanka - V 1,056.2 21.4 1.7 7.9% 0.7%
Lucky Lanka -NV 72.0 10.7 0.8 7.9% 1.4%
Lanka Milk Foods 4,500.0 175.4 0.5 0.3% 1.3%
Kotmale Holdings 1,649.0 16.6 1.6 9.9% N/A
* Broader market on 4 qtr trailling basis
** Other on 1 year forward basis
Source : Softlogic Equity Research Source : Softlogic Equity Research


INITIAL PUBLIC OFFERING
5 | P a g e July 2014, Sri Lanka Equity Research

INDUSTRY OVERVIEW
The agricultural sector contributes c.11% of GDP where the livestock subsector contributes only 0.7% of GDP. Dairy
sector is the most important of all livestock sub sectors. This is primarily because of the influence it can make on the
rural economy. Sri Lanka imports around 70,000-75,000 MT milk powder spending around LKR40.0 bn. Sri Lanka
produces c.300 mn litres domestically which is approximately 40% of the total requirement.

The government attention is most focused on the dairy sub sector; to develop this sector into a 'local industry'. The
government policy on dairy development is aimed at producing 50% of country's requirement of milk by the year 2015.
In order to achieve this target government plans to import high quality cows and plans to increase the annual average
yield in excess of 1,500 litres per cow. To further support the dairy sector a special loan scheme at an interest rate of
8% will be implemented in support of SMEs in the dairy sector to promote dairy farms, collection centers and
equipment, the development of animal feed etc and the high CESS will be maintained on the importation of butter,
yoghurt and dairy products.

Milk Production

0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
0
50
100
150
200
250
300
350
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
(LKR mn)
Milk production (Mn Ltr) YoY growth
Milk items consumption and expenditure
(Ave. monthly per person)

Milk items Unit Quantity Value (LKR)
Cow milk ml 110.33 7.34
Goat milk ml 7.67 1.16
Sterilized milk ml 5.70 0.60
Curd - 13.14
Yoghurt/Moru - 24.77
Condensed milk grams 2.09 1.74
Milk powder grams 341.36 271.21
Infant milk powder grams 25.12 30.69
Butter grams 5.18 4.88
Margarine grams 10.46 6.37
Cheese grams 2.46 4.03
Milk packets (liquid) number 0.13 2.63
Other milk & milk products - 3.56
Source : Dept. of Census & Statistics/ Softlogic Equity Research Source : Dept. of Census & Statistics/ Softlogic Equity Research


INITIAL PUBLIC OFFERING
6 | P a g e July 2014, Sri Lanka Equity Research


FINANCIAL SUMMARY






Income Statement
YE Mar/LKR mn FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E

Revenue 440.6 514.1 546.2 681.6 841.8 896.5 1,031.0 1,288.7
Cost of sales 248.1 279.7 306.7 405.9 505.8 527.1 618.6 773.2
Gross profit 192.5 234.4 239.5 275.8 336.0 369.4 412.4 515.5
Other income 1.5 8.0 2.0 0.4 3.1 0.8 1.5 2.0
Operating cost 180.9 192.7 193.2 220.1 269.4 283.4 340.6 413.4
EBIT 13.0 49.8 48.3 56.0 69.7 86.8 73.3 104.1
Finance cost 7.3 31.3 41.0 51.2 51.7 66.4 17.1 17.1
PBT 5.7 18.4 7.2 4.9 18.0 20.3 56.2 87.1
Taxation - - - - - - - -
PAT 5.7 18.4 7.2 4.9 18.0 20.3 56.2 87.1

Balance Sheet
YE Mar/LKR mn FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E

Non current assets 120.5 279.5 316.9 557.1 536.2 513.2 536.9 460.6
Current assets 73.2 98.0 91.2 123.4 183.6 252.6 382.4 562.2
TOTAL ASSETS 193.7 377.5 408.1 680.5 719.8 765.8 919.2 1,022.9
Equity 5.2 187.2 194.4 292.2 310.2 360.5 708.3 782.3
Non current liabilities 48.4 48.3 76.1 166.2 194.6 123.3 21.5 21.5
Current liabilities 140.8 142.1 137.6 222.1 214.9 282.0 189.4 219.1
TOTAL EQUITY & LIABILITIES 194.5 377.5 408.1 680.5 719.8 765.8 919.2 1,022.9

Ratios
YE Mar/LKR mn FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E

GP margin (%) 43.7% 45.6% 43.8% 40.5% 39.9% 41.2% 40.0% 40.0%
EBIT margin (%) 3.0% 9.7% 8.8% 8.2% 8.3% 9.7% 7.1% 8.1%
NP margin (%) 1.3% 3.6% 1.3% 0.7% 2.1% 2.3% 5.5% 6.8%
OPEX/Revenue 41.1% 37.5% 35.4% 32.3% 32.0% 31.6% 33.0% 32.1%
ROE (%) 110.8% 9.8% 3.7% 1.7% 5.8% 5.6% 7.9% 11.1%
ROCE (%) 8.7% 6.8% 2.3% 0.9% 3.2% 3.5% 7.8% 10.9%
ROA (%) 3.0% 4.9% 1.8% 0.7% 2.5% 2.7% 6.1% 8.5%
EPS (LKR) 0.03 0.09 0.04 0.02 0.09 0.10 0.28 0.44
BVPS (LKR) 0.03 0.94 0.97 1.46 1.55 1.80 3.54 3.91
DPS (LKR) N/A N/A N/A N/A N/A N/A 0.04 0.07
Payout N/A N/A N/A N/A N/A N/A 15.0% 15.0%
Sales per share (LKR) 2.2 2.6 2.7 3.4 4.2 4.5 5.2 6.4

Inventory days 13 21 37 35 33 38 35 35
Receivable days 32 38 24 25 36 65 40 40
Payable days 143 76 63 93 73 68 70 70
WC days (99) (18) (2) (33) (5) 35 5 5

Inventory turnover (x) 29.1 17.8 9.9 10.4 11.1 9.5 10.4 10.4
Asset turnover (x) 2.3 1.4 1.3 1.0 1.2 1.2 1.1 1.3
Interest cover (x) 1.8 1.6 1.2 1.1 1.3 1.3 4.3 6.1

Current ratio 0.52 0.69 0.66 0.56 0.85 0.90 2.02 2.57
Quick ratio 0.46 0.58 0.44 0.38 0.64 0.70 1.71 2.30

Debt/Total Equity 17.67 0.69 0.80 0.95 0.97 0.83 0.12 0.11
Debt/Share Capital N/A 8.55 10.43 18.48 20.06 1.01 0.14 0.14
Debt/Total Capital 0.92 0.31 0.39 0.44 0.45 0.39 0.02 0.02

Revenue growth 16.7% 6.3% 24.8% 23.5% 6.5% 15.0% 25.0%
EBIT growth 281.4% -3.0% 16.1% 24.3% 24.6% -15.6% 42.1%
Profit growth 220.9% -60.8% -32.7% 269.4% 13.1% 176.3% 54.9%





INITIAL PUBLIC OFFERING
7 | P a g e July 2014, Sri Lanka Equity Research















































Softlogic Stockbrokers (Pvt) Ltd
# 06, 37
th
Lane, Queens Road, Colombo 03
Sri Lanka
Telephone +94 117 277 000 |Fax +94 117 277 099
E-mail research@equity.softlogic.lk
Equity Research
Danushka Samarasinghe Asanka Ranasinghe Tharushi Perera
danushka.samarasinghe@equity.softlogic.lk asanka.ranasinghe@equity.softlogic.lk tharushi.perera@equity.softlogic.lk
+94 11 7277001 + 94 11 7277052, +94 77-1078497 + 94 11 7277052, +94 77-3482321

Kavindu Ranasinghe Chamithri Ratnapala
kavindu.ranasinghe@equity.softlogic.lk chamithri.ratnapala@equity.softlogic.lk
+94 11 7277031 + 94 11 7277033, +94 77-3723506

Imalka Hettiarachchi Nishanthi Hettiarachchi
imalka.hettiarachchi@equity.softlogic.lk nisha.hettiarachchi@equity.softlogic.lk
+94 11 7277032 +94 11 7277030, +94 11 77 1078499

Equity Sales
Dihan Dedigama dihan.dedigama@equity.softlogic.lk 011 7277010 / 0117277055, 0777689933
Hussain Gani hussain.gani@equity.softlogic.lk 011 7277020 / 777209986
Prasanna Chandrasekera prasanna.chandrasekera@equity.softlogic.lk 011 7277056
Eardley Kern l.kern@equity.softlogic.lk 011 7277053, 0777348018
Zimry Liyabdeen zimry.liyabdeen@equity.softlogic.lk 011 7277057
Achindi.Silva achindi.silva@equity.softlogic.lk 011 7277054 077 3825087
Chandima Kariyawasam chandima.kariyawasam@equity.softlogic.lk 011 7277058, 0777885778
Hisham Haniffa hisham.haniffa@equity.softlogic.lk 0773828781

Branches
Horana
Madushanka Rathnayaka madushanka.rathnayaka@equity.softlogic.lk 034 7451000 0773566465
Negombo
Krishan Williams krishan.williams@equity.softlogic.lk 031 7451000 0773569827











The information contained in this report is for general information purposes only. This report and its content is copyright of Softlogic Stockbrokers and all
rights reserved. This report- in whole or in part- may not, except with the express written permission of Softlogic Stockbrokers be reproduced or
distributed or commercially exploited in any material form by any means whether graphic, electronic, mechanical or any means. Nor may you transmit it
or store it in any other website or other form of electronic retrieval system. Any unauthorised use of this report will result in immediate proceedings.

The report has been prepared by Softlogic Stockbrokers (Private) Limited. The information and opinions contained herein has been compiled or arrived
at based upon information obtained from sources believed to be reliable and in good faith. Such information has not been independently verified and no
guaranty, representation or warranty, express or implied is made as to its accuracy, completeness or correctness, reliability or suitability. All such
information and opinions are subject to change without notice. This document is for information purposes only, descriptions of any company or
companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as, an offer, or
solicitation of an offer, to buy or sell any securities or other financial instruments. In no event will Softlogic Stockbrokers be liable for any loss or damage
including without limitation, indirect or consequential loss or damage, or any loss or damage whatsoever arising out of, or in connection with the use of
this report and any reliance you place on such information is therefore strictly at your own risk.

Softlogic Stockbrokers may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysis in which
they are based before the material is disseminated to their customers. Not all customers will receive the material at the same time. Softlogic
Stockbrokers, their respective directors, officers, representatives, employees, related persons and/or Softlogic Stockbrokers, may have a long or short
position in any of the securities or other financial instruments mentioned or issuers described herein at any time and may make a purchase and/or sale,
or offer to make a purchase and/or sale of any such securities or other financial instruments from time to time in the open market or otherwise, in each
case either as principal or agent. Softlogic Stockbrokers may make markets in securities or other financial instruments described in this publication, in
securities of issuers described herein or in securities underlying or related to such securities. Softlogic Stockbrokers may have entirely underwritten the
securities of an issuer mentioned herein.