LPG segment remained the core contributor adding c.82% to group net earnings in 4QFY15 with segmental net profit up 44.8% YoY to LKR616.2 mn. LPG net margin increased 25.9% YoY in 4QFY15 cf. 16.6% YoY in the comparative quarter on the back of cost of sales coming down 22.2% YoY. Meanwhile LGL also being a duopoly for Vehicle Emission Testing (VET) in the market recorded a growth of 18.0% YoY to LKR106.7 mn in net earnings. With its operating costs being flat, the key sub sector contributed c.14% to the group’s net profit for 4QFY15.
Group revenue dipped 3.0% YoY and c.11% QoQ to LKR2,752.8 mn. Cumulative revenue of FY15 saw a marginal dip of 0.9% YoY to LKR11,521.8 mn due to the fall of retail gas prices within the period. The chief contributor LPG segment which added c.87% to group revenue in 4QFY15 witnessed a 7.3% YoY dip primarily due to the decline in retail gas price by near c.14% during the year. However VET saw a revenue growth of 9.6% YoY adding c.10% while the leisure segment increased 3.3% YoY to LKR89.9 mn in 4QFY15 to groups’ revenue.
Group gross profit increased by 112.3% YoY to LKR833.4 mn with margin expanding 30.3% YoY (13.8% in 4QFY14) backed by gross margin expansion in LPG business. LPG segment gross margins expanded to 21.0% YoY (5.9% in 4QFY14), reflecting the c.50% YoY dip in average Arabian Gulf LPG prices to USD547/MT (as per Bloomberg data) in 4QFY15.
Group EBIT up 7.5x YoY to LKR448.8 mn in 4QFY15 on the back of margins widening to 16.3% YoY cf. 1.8% YoY in 4QFY14. The 21.5% YoY dip in cost of sales to LKR1,919.4 mn and 13.9% YoY increase in other operating income to LKR77.7 mn further aided the EBIT growth. LPG segment which contributed c.82% to group EBIT in 4QFY15 recorded an increase of 63.1% YoY to LKR649.4 mn in EBIT. Segmental EBIT margin also witnessed a growth of 27.3% YoY in 4QFY15 from 15.5% YoY in 4QFY14 as a result of costs of sales falling 22.2% YoY. The VET segment added c.13% to EBIT recording a 29.3% YoY increase to LKR104.8 mn with margin widening to 38.6% YoY in 4QFY15. However administration costs which were up 14.6% YoY were heightened as a result of escalated operating costs in the leisure segment (up 84.4% YoY to LKR89.1 mn) and property segment.
Group finance costs escalated 149.9% YoY to LKR29.9 mn in 4QFY15 cf. LKR12.0 mn in 4QFY14 as a result of leisure segment debt near LKR1.0 bn loan taken for the Chilaw resort. Meanwhile finance income also dipped 21.9% YoY to LKR12.9 mn given the low interest rates environment. However though the Government plans to introduce a pricing formula for fuel and electricity tariffs based on international market prices, this will not indicate a deterioration of LGL’s current margins posed on its key segment LP Gas since government being the other major competitor in LPG segment.
Earnings multiple of LGL Voting denotes 10.0x and 9.3x for FY16E and FY17E and Non-Voting share which trades at 8% discount to the Voting share trades at multiples of 9.2x and 8.6x respectively mainly backed by the positive growth potential in LPG segment locally where only 22% of the population currently utilizing LPG for their house hold duties with a majority using fire wood. The counter offers attractive dividend yields of 5.9% and 6.3% for the Voting share and 6.4% and 6.9% for the Non-Voting share in FY16E and FY17E respectively. Moreover the group is expected to yield ROEs of 17.5% over FY16-FY17E. Therefore we maintain BUY.
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