TEXTURED JERSEY LANKA [TJL] INTERIM RESULTS 11 AUGUST 2015

TJL recorded a bottom line growth of 25.7% YoY to LKR206.2 mn chiefly led by margins widening and the volume growth reflected on the back of fully utilization of recently added 10-12% additional production capacity. NP margin stood at 7.5% in 1QFY16 cf. 6.1% in 1QFY15. Growing customer demand continued to be evident though out 1QFY16. Moreover the company further expects to expand its valued added segment’s revenue contribution to c.26% in FY16E and FY17E with hopes on touching synthetic fabric manufacturing market which could aid immensely to widen TJL’s current NP margins beyond 9.5%.

TJL witnessed a marginal revenue growth of 3.1% YoY to LKR2,761.6 mn in 1QFY16 against LKR2,678.6 mn in 1QFY15 mainly on the back of volume growths in their value added products segment. However with the newly added capacity through acquisitions, we further believe that TJL will witness a topline growth of c.11% YoY in FY16E and a 13.0%-15.0% growth in FY17E. Cost of sales for the quarter under consideration dipped c.1% YoY to LKR2.4 bn with the effective optimization of product mix. However the multi fuel boiler which was to commission during 1QFY16, is still under testing phase and is expected to be fully operational during 2HFY16 to further reduce TJL’s cost of sales.

Gross profit for the quarter grew c.48% YoY to LKR323.0 mn largely due to GP margins improving by c.350 bps YoY to 11.7% and also being aided by the consolidated healthy results of recently acquired Quenby Lanka Prints (QLP). The positive movement in cotton prices also favored gross margins to expand YoY though dipped by 370bps QoQ.

Operating Profit grew c.53% YoY to LKR187.6 mn driven by improved GP margins as well as by EBIT margin expanding to 6.8% (up c.220 bps YoY) in 1QFY16 from 4.6% in the comparative quarter of FY15. However total operating expenses for the quarter escalated 34.1% YoY largely due to administration expenses rising heavily by c.41% YoY to accommodate the planned expansion strategies of recently acquired Ocean India (Pvt.) Ltd and QLP. Moreover distribution expenses also rose marginally to LKR19.6 mn whilst other income for the period saw a dip of c.24% YoY.

Net finance income dipped c.58% YoY to LKR7.4 mn on the back of 33.3% YoY reduction in finance income due to low interest rate environment during quarter under consideration. TJL maintained its near debt free balance sheet with a strong net cash position till 30st March 2015. However in 1QFY16 the company as recorded LKR1.4 bn short term debt in order to manage and optimize the current cash flows and investments. TJL being a BOI venture is tax exempted until September 2016 while being entitled to 15% payment for 8 years thereafter.

Based on the expected cost savings from the multi fuel boiler and new capacity additions in FY16, we further upgrade our forecast TJL’s net earnings for FY16E by c.3.3% to LKR1,572.0 mn (up by 18% YoY) and also upgrade FY17E net profit by 5% to LKR1,825.2 mn (up 16.1% YoY). Thereby the share trades at 13.4x forecast FY16E net profit and 11.6x forecast FY17E earnings offering a dividend yield of 4.8% and 5.6% for FY16E and FY17E respectively. Moreover ROEs are expected to be in the range of 20.7%-22.2% for FY16E to FY17E. Therefore we maintain BUY.