RICHARD PIERIS PLC [RICH] INTERIM RESULTS 27 AUGUST 2015

Richard Pieris & Co. PLC (RICH) saw a net earnings growth of 36.4% YoY to LKR573.4 mn in 1QFY16 mainly on the back of healthy performance recorded in Retail, Plastics, Tyre and Rubber segments. NP margins widened by c.80 bps YoY to 5.6% in 1QFY16. The Retail segment which acts as the core contributor to group earnings saw a top line growth of 18% YoY mainly on the back of improved sales volumes, backed by the expanded retail chain. Meanwhile the Plastics and Tyre segments also saw healthy sales volumes backed by low rubber prices during the quarter under review recording strong EBIT margin expansions to further enhance RICH’s bottom line during 1QFY16.

RICH saw a top line growth of 16.8% YoY to LKR10,317.1 mn mainly on the back of progress visible in the top lines of all its main sectors namely Retail (up 18% YoY), Plastics (up 33% YoY), Rubber (up 14% YoY) and Tyre (up 20% YoY) due to high sales volumes recorded for the quarter. However Plantations topline remained flat YoY at LKR1,882.5 mn in 1QFY16. Retail sector remained as RICH’s key topline contributor with a contribution of 49% to LKR5,044.5 mn whilst Plantations and Plastics sectors also contributed 18% and 14% respectively in 1QFY16.

Group witnessed a gross profit growth of 22% YoY to LKR2,450.5 mn chiefly led by the healthy top line performance and GP margin widening to 23.8% cf. 22.8% in 1QFY15. However the group’s cost of sales also escalated c.15% YoY to LKR7,866.6 mn on the back of accommodating high sales volumes.

Operating profit rose 18% YoY to LKR920.3 mn in 1QFY16 driven by EBIT growths in Retail (up 21.8% YoY to LKR341.2 mn), Plastics (up c.90% YoY to LKR291.5 mn) and Rubber (up c.36% to LKR164.6 mn) segments. Plastics sector recorded an operating profit of LKR291.5 mn in 1QFY16 mainly driven by the continuous success received though RICH’s water tanks, hybrid mattresses and export business growth. Moreover Financial Services also witnessed an EBIT growth of 318.6% YoY to LKR55.4 mn. However Plantation segment saw an operating loss of LKR22.4 mn recording an EBIT dip of 113.7% YoY in 1QFY16 led by low global commodity prices and inclement demand conditions.

Moreover group EBIT margins remained flat at c.9% for the quarter under consideration amidst administrative expenses increasing c.15% YoY to LKR1.1 bn whilst selling and distribution expenses also edging up by c.38% YoY.

RICH’s net finance costs dipped 3.1% YoY to LKR152.1 mn during the quarter under review against LKR157.0 mn during 1QFY15 mainly backed by c.7% YoY decline in group’s finance costs to LKR208.7 mn. Moreover finance income for the quarter further dipped 15% YoY to LKR56.6 mn, given the low interest rate environment.

Group opened its newest large format retail store in Kottawa during 4QFY15 whilst it also began commercial operations in 4 Arpico daily outlets during the period. Nevertheless we believe that the Arpico hypermarkets remain to be attractive comparatively to other supermarket chains such as Cargills and Keells owing to the convenience factor which the urban working population require. The growing economic landscape in the country possesses enormous growth opportunities for the group which has presence in leading consumable household products. Hence we believe RICH would largely benefit from growing consumerism in the coming years.

Kegalle Plantations (KGAL) announced its final interim dividend of LKR45.0 per share totaling up to LKR1.1 bn which is due to be paid during FY16E.

RICH is attractive on 8.9X FY16E net profit and 7.6X FY17E net earnings. Whilst trading on 1.7X reported book value with a ROE of c.17% is the highest among the listed diversified entities return on equity (diversified sector ROE 9.2%). Further, based on Sum-of the parts valuation (taking a conservative approach), we attribute a fair value of LKR20.0 to the share vs. which it presently trades at a c.59% discount. RICH maintains a commendable dividend policy where in FY15 the dividend yield amounted to 3% whilst for FY16-17E we forecast a pay-out of c.40% which would generate a dividend yield of 4.5%-5.3% against the diversified sector dividend yield of 1.6%. Hence we maintain BUY.