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August 8, 2018,
2018 Depressed earnings due to competition
FAIR VALUE: 70
and sluggish market
CURRENT PRICE: 90.50
Chevron Lubricants Lanka (LLUB) is the market leader in the Sri Lankan lubricants
Chevron Lubricants Lanka PLC (LLUB.N000) market. Nevertheless, LLUB has seen its market share fall progressively since full
liberalization of the industry in 2006 from a near monopoly to c.40% in 2017.
Price target LKR 70 LLUB is particularly strong in the automobile lubricants market, thanks to its
Current Price LKR 90.5 entrenched market presence, strong branding and established distribution
52-week range LKR74.8-172.0
Market capitalization LKR 21.7bn network. We expect LLUB’s volumes to broadly track industry growth which we
Public float 49% believe will remain in low single digits over the FY18-21 period. With limited
Average daily turnover LKR 14.5m headroom for price increases, we expect LLUB’s margins to erode as increasing
competition limits ability to pass down cost or FX escalation. We expect LLUB’s
YTD Performance
ASPI -4.5% EBITDA margin to average at c.27-28% in the FY18-21 period with earning
Sector -19.5% expected to decline c.3%. At 9.8x FY18 PE and 9.5x FY19 PE cf. justified PE of 5x
LLUB -24.3% we believe LLUB is expensive. Our 12-month DCF based target price is
LKR70/share. We recommend SELL.
145 2,000,000
believe that LLUB will maintain its traditionally high dividend payout ratio, the
125 1,500,000
amount paid as dividends would decrease in line with the expected drop in
105 1,000,000
earnings. Our 12-month DCF based target price is LKR70/share. We recommend
85 500,000
SELL.
65 0
YE 31 Dec (LKR mn) FY16 FY17 FY18e FY19e FY20e FY21e
5/8/2017
6/8/2017
7/8/2017
8/8/2017
9/8/2017
10/8/2017
11/8/2017
12/8/2017
1/8/2018
2/8/2018
3/8/2018
4/8/2018
5/8/2018
6/8/2018
7/8/2018
Industry Outlook
Lubricant industry - Volumes and Sales
70,000 30,000
The Sri Lankan lubricant market is a highly competitive, mature market. At
60,000 25,000 present, the market has 14 players with Lanka IOC (Servo), Laugfs Lubricants and
50,000
40,000
20,000
LLUB being the only domestic manufacturers. In addition, the Ceylon Petroleum
15,000
30,000 Corporation (CPC) has entered into a Build-Operate-Transfer (BOT) project with
10,000
20,000
10,000 5,000
Hyrax Oil SDN BHD of Malaysia to locally blend and distribute lubricants. The bulk
0 0 of lubricant sales volumes comes from the automobile segment (more than 72%)
2009 2010 2011 2012 2013 2014 2015 2016 2017
Total lubricant volumes (KLs) Total lubricant sales (Rs m) followed by industrial (c.17%) and marine (c.6%) segments.
Company Overview
LLUB - Revenue and Sales Volumes
40,000 14000
35,000 12000
Chevron Lubricants Lanka (LLUB), is the market leader of the Sri Lankan lubricant
30,000
10000 market with a share of c.40%. It blends and distributes, lubricants and greases
25,000
20,000
8000
under Delo, Lanka, Havoline and Caltex brands. The automotive sector
6000
15,000
4000
contributes c.70% of revenue with the rest from the industrial segment. The
10,000
5,000 2000 industrial segment comprises mostly of diesel power plants and the state-run
0 0
2010 2011 2012 2013 2014 2015 2016 2017 railways and the public bus transportation service. LLUB also exports to
LLUB - sales volumes (KLs) LLUB Revenue (Rs m)
Bangladesh and the Maldives.
Source: PUCSL, Taprobane Research
LLUB was created by the spin-off of the lubricating oil blending plant of the state-
owned Ceylon Petroleum Corporation (CPC) in 1992. The company was privatized
in 1994 with Caltex purchasing a 51% stake. LLUB enjoyed a monopoly on local
manufacture and distribution of lubricants through CPC owned and managed
service stations till 2004.
80%
should remain stagnant unless in the case of urgent requirement for thermal
60% power (either weather induced or as a requirement to fulfil short term generation
40%
lapses).
20%
0%
Intense competition provides limited ability for price increase: LLUB has very
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
-20%
-40%
limited scope for passing down raw material or FX cost escalation to its
-60%
customers, given the intensely competitive nature of the business. This will
Source: PUCSL, Taprobane Research naturally impact its margins and earnings. With base oil prices showing an upward
price revision and LKR depreciation, we expect LLUB to face margin pressure from
the inability to fully pass down cost escalations over the near term.
Base oil prices Group I& II - FOB Asia LKR depreciation is a concern: LLUB’s raw materials (Base oils and additives) are
1000
almost entirely sourced from overseas. Its topline to a large extent (c.90%) is
800
600 dependent of LKR denominated local sales. This along with the limited scope to
400
increase price by passing down FX related costs should put a dent on LLUB’s
200
0 earnings over our forecast period with LKR expected to depreciate by c.6-7%
20-Oct-17
20-Mar-17
20-Mar-18
20-Apr-17
20-Jun-17
20-Apr-18
20-Jun-18
20-May-17
20-May-18
20-Dec-16
20-Dec-17
20-Nov-17
20-Jan-17
20-Jul-17
20-Jan-18
20-Jul-18
20-Aug-17
20-Feb-17
20-Feb-18
20-Sep-17
annually.
Group I SN150-FOB Asia Group I SN500-FOB Asia
Group II SN150-FOB Asia Group II SN500/600-FOB Asia
Base oil prices should continue to rise gradually in FY18-20 period: Asian Group I
and Group II Base oil prices have increased by more than c.25% across all grades
Source: Lube Report Asia, Taprobane Research of base oils. LLUB uses Group I and Group II base oil and does not plan to shift to
higher grade oils. While historically base oil prices lagged crude oil prices, this
trend has shortened in recent months. We expected base oil prices to increase in
the FY18-20 period. Again, we are concerned over LLUB’s ability to pass a major
portion of base oil price increase to customers given the prevailing market
conditions.
Counterfeit products have affected the industry: The market for counterfeited
lubricants has continued to be a problem for the players representing global
lubricant brands. While there are no official estimates, the size of the grey market
has been tagged at c.10-15% of the official market. The PUCSL has conducted
raids to curb the grey market, but lack of enabling legislations has hampered this
effort.
Coverage Initiation TAPROBANE | RESEARCH
Marine Lubricant sales volumes The Bangladesh lubricant market is a growth opportunity for LLUB: The
4,500 6,000 Bangladesh lubricant market is estimated at c.100m litres per annum with the
4,000
5,000
3,500 grey market estimated to be c.60% of the total market. It is estimated that five
3,000 4,000
2,500
3,000
players – Mobil, Bangladesh Petroleum, Total, Shell and Castrol together account
2,000
1,500 2,000 for c.63% of the market. Automobile lubricants account for c.75% of the
1,000
500
1,000 Bangladesh lubricant market with the rest made up by the industrial segment. As
0 0
2010 2011 2012 2013 2014 2015 2016 2017 the Bangladeshi market grows, we expect LLUB to benefit given the brand
Marine lubricants volumes (KLs) Vessel arrivals
advantage of Chevron. Currently the Chevron brand has a c.2% market share.
LLUB’s export revenue grew c.12% YoY in FY17 to LKR1.1bn (c.10% of revenue).
Source: PUCSL, CBSL, Taprobane Research
Change in top management should bring new strategy: With recent changes in
LLUB’s senior management, we feel that LLUB has an opportunity to explore
ARPU - Lubricant industry vs. LLUB alternative strategies for growth and profitability. While the adverse
500
450
macroeconomic and local lubricant market conditions pose severe challenges,
400
350
LLUB can now re-think its pricing and market share strategy. While LLUB’s ARPU
300
250 has on average been higher than the industry, this gap has declined in recent
200
150 years. LLUB has also stated that its majority shareholder, Chevron, has no
100
50 immediate plans to divest its stake in LLUB.
0
2009 2010 2011 2012 2013 2014 2015 2016 2017
Industry (Ex. LLUB) ARPU (Rs.) LLUB ARPU (Rs.) Marine lubricants segment has potential for growth: With Sri Lanka positioning
itself as a maritime hub, we see growth potential in the marine lubricants market.
Source: PUCSL, Taprobane Research
Currently this market accounts for c.6-7% of total lubricant volumes. With the
Colombo port traditionally being a convenient bunkering port, lubricant services
too can be provided, especially at the outer port limit (OPL). Nevertheless, this
requires specialised vessels used to transport lubricants to ships anchored in the
open sea.
Sino-US trade war could see increased additives and lubricant production in the
Asian region: With the US being a net exporter of lubricants and related products
to China, US firms may choose to establish plants in the Asian region to
circumvent higher tariffs in China. Additionally, Asian lubricant producers may
ramp up production to meet any supply shortfall in the Chinese market.
Nevertheless, it is too early to predict what impact this may have on prices.
Compared to a justified PE of 5x, LLUB is trading at 9.8x FY18 P/E and 9.5x FY19
P/E and in our view is expensive. While LLUB has traditionally been viewed as a
dividend play, the amount paid as dividends should moderate in line with the
expected slowdown in earnings. Our 12-month DCF based target price is
LKR70/share (Ke -17.5%, g - 0%). We recommend SELL.
Coverage Initiation TAPROBANE | RESEARCH
Ratio analysis
Y/e 31 Dec FY15 FY16 FY17 FY18e FY19e FY20e FY21e
Revenue growth (%) 0.4 4.5 (8.6) (2.1) 7.1 2.0 3.0
EBITDA growth (%) 18.5 8.9 (23.6) (9.9) 1.9 1.9 (0.6)
Gross margin (%) 44.9 46.9 42.9 40.7 41.3 36.7 35.6
EBITDA margin (%) 37.1 38.6 32.3 29.7 28.2 28.2 27.2
Net profit margin (%) 26.7 28.8 23.2 20.5 19.6 19.6 19.0
Return on equity (%) 62.5 81.5 65.2 53.8 52.4 50.7 48.1
Ni ra nja n Ni l es
Chi ef Executive Offi cer
ni l es @ta proba ne.lk | +94 11 5328160
Ma hes h Pi eri s
Di rector - Ins titutiona l Sa l es
ma hes h@ta proba ne.lk | +94 11 5328155
Romes h Kenny
Ma na ger - Ins titutiona l Sa l es
romes h@ta proba ne.lk | +94 11 5328166
B.L.A. Da ya na nda
As s i s ta nt Ma na ger
da ya na nda @ta proba ne.lk | +94 11 5328168
Ga ya n Si l va
As s i s ta nt Ma na ger - Reta i l Sa l es
ga ya n@ta proba ne.lk | +94 11 5328170
Ma l ka Ra na weera
Inves tment Advi s or
ma l ka @ta proba ne.lk | +94 11 5328156
Pa s i ndu Ya ta wa ra
i nves tment a dvi s or
pa s i ndu@ta proba ne.lk | +94 11 5328140
Research
Abdul Ha feel
Seni or Res ea ch Ana l ys t
ha feel @ta proba ne.lk | +94 11 5328193
Disclaimer
The report has been prepared by Taprobane Securities (Private) Limited. The information and opinions contained herein have 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. 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.