LUCKY LANKA IPO (Voting; LKR 6.00 ; Non Voting; LKR 3.00)

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.

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.

Courtesy - Softlogic Stockbrokers

Thanks SG