BPPL Holdings Limited · A CT HOLDINGS GROUP AND CLSA GROUP COMPANYEQUITY REPORT TITLE | Date 2PER (X) The Business Established in 1991, BPPL Holdings Limited (BPPL) is a leading

CT CLSA SECURITIES (PVT) LIMITED | A Member of the Colombo Stock Exchange

Key Highlights

BPPL Holdings Limited (BPPL) is a leading manufacturer and exporter of cleaning tools and janitorial products for the household and commercial markets. It is one of the largest backwardly integrated brush manufacturers in Southeast Asia, exporting to blue chip customers such as Tesco, Oates, Carrefour, Rubbermaid and Home Depot amongst others

Exports amount for ~98% of total revenue (in FY16) with the remainder generated through local sales. While majority of BPPLs products are exported to the USA (~73%), the company has a presence in other export markets such as Australia, UK, Indonesia, and Canada

In pursuit of more growth opportunities BPPL is expanding into new markets under its own brand in Sri Lanka and Indonesia

Further, the Group expects to expand its operations into the manufacturing of synthetic yarn from recycled PET for the fabric manufacturing industry in FY19E with an investment of Rs.675mn, offering the industry a clear import substitution opportunity with cost savings

Heavy dependency on the US market, which amounts to over 70% of revenue. A slowdown in the US economy or changes to import regulations in the US could adversely affect BPPL

FY17E net profit is forecast at Rs.419mn (+37% YoY) largely due to penetration in the local and Indonesian markets, lower raw material costs and continuing rupee depreciation against the dollar. Meanwhile, net profit forecast at Rs.497mn (+19% YoY) for FY18E and Rs.620mn (+25% YoY) for FY19E amid further penetration into the local and Southeast Asian markets and cost savings from the commissioning of the solar and bio-mass power plants

BPPL is trading at PERs of 8.8x for FY17E, 7.4x for FY18E and 5.9x for FY19E, at a discount to the overall market PER of 10.4x whilst offering high growth prospects, above average ROEs and attractive dividend yields.

We believe investors may find favour in BPPL at current valuations, given it provides investors exposure to a company with the potential to move from a pure play brush manufacturer into a material sciences company in the medium term

The Offer

The objective of the proposed IPO is to facilitate a partial sell down by Hirdaramani Investment Holdings (Pvt) Ltd from the existing holding of 23.4% to 13.4%

BPPL expects to raise Rs.368mn through an Offer for Sale, issuing 31mn existing shares at Rs.12.0 per share, representing a 10% stake of the total share capital

The remaining 90.0% shareholding will be locked-in for a period of twelve months from the date of listing

BPPL Holdings Limited

Initial Public Offering

Sri Lanka

Manufacturing

01 March 2017

Objectives of the Issue

Relative Share Price Performance (%)

Issue Price (Rs) 12.0

Issue Opens 7-Mar-17

Issue Closing 24-Mar-17

Earliest Issue Closing 7-Mar-17

Issue Size (shares mn) 30.7

Issue Size (Rs mn) 368.2

Post IPO Public Stake (%) 10.0

Post IPO Shares (mn) 306.8

Market Cap (US$ mn) 24.3

CSE Listing Board Diri Savi

Carson Cumberbatch PLC 96.3

Late Mr. M. Sri Mahadeva 0.3

Mr. K. C. Vignarajah 0.3

Mr. C. N. Pakianathan 0.3

Mr. J.B. Hirdaramani 0.1

* Employee benefit scheme ^ Managing Director ^^ Director Related Party

DISCLAIMER: This company is not part of CT CLSA core coverage, and this report is only aimed at providing

certain insights on the Initial Public Offering and should not be construed as a comprehensive report for any

particular investment decision or action. This report does not purport to be a complete statement of all material

facts related to the company, and regular continuous coverage and timely updates cannot be guaranteed to the

same level as with core coverage stocks. Please also refer full disclaimer on last page.

Issue Information

Rasika Nanayakkara

Email : [email protected] Phone : +94 11 2552290

Year ended 31 March FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

Revenue (Rs mn) 1,433 1,569 1,766 1,931 2,088 2,380 2,655 3,105

Net Profit (Rs mn) 133 187 203 148 307 419 497 620

EPS (Rs) 0.4 0.6 0.7 0.5 1.0 1.4 1.6 2.0

EPS Growth (%) - 41.0 8.5 -27.0 107.1 36.5 18.6 24.7

P/E Ratio (X) - - - - - 8.8 7.4 5.9

PEG Ratio (X) - - - - - 0.2 0.4 0.2

Gross Dividend per Share (Rs) 0.0 0.0 0.1 0.2 0.4 0.5 0.6 0.8

Gross Dividend Yield (%) - - - - - 4.6 5.4 6.7

Net Book Value per Share (Rs) 3.8 3.1 3.7 4.1 5.5 6.4 7.3 8.5

Price to Book Value (X) - - - - - 1.9 1.6 1.4

Return on Equity (%) 11.4 17.6 19.3 12.4 20.8 22.9 23.6 25.4

Market Price per Share (Rs) - - - - - 12.0 12.0 12.0

BPPL: Valuation Ratios

Source: IPO Prospectus and CT CLSA Note: Adjusted for Capital Issues (if any)

• BPPL’s IPO is issued at a discount to broader market PER multiples, providing double digit

EPS growth prospects, above average ROEs and attractive dividend yields - Subscribe

Ownership Structure (%)

Source: IPO Prospectus

Pre-IPO

Infinity Capital 50.3

LOLC Investment Hldgs. 26.3

Hirdaramani Inv. 23.4

Post-IPO

Infinity Capital 50.3

LOLC Investment Hldgs. 26.3

Hirdaramani Inv. 13.4

Public 10.0

EQUITY REPORT TITLE | Date A CT HOLDINGS GROUP AND CLSA GROUP COMPANY 2

The Business

Established in 1991, BPPL Holdings Limited (BPPL) is a leading manufacturer and exporter of cleaning tools and janitorial products for the household and commercial markets. It is one of the largest backwardly integrated brush manufacturers in Southeast Asia, exporting to blue chip customers with the likes of Oates, Carrefour, Rubbermaid, Home Depot, Tesco amongst others

Exports amount for ~98% of total revenue (in FY16) with the remainder generated through local sales. BPPL exports a variety of products under three segments, namely Brush, Wood and Fibre. Nearly 80% of BPPL’s revenue is generated through exports of generic brushes

BPPL caters mainly to the professional cleaning tools market, which is estimated to account for 10-15% of the global net imports of cleaning tools

BPPL distributes its finished goods to leading players such as United Stationers and Bunzl in the janitorial sector, Grainger, Fastenal in the industrial sector, Home Depot, Lowe’s and Tesco in the retail sector and Burger King, McDonalds and Starbucks through Century Products for the restaurant and food services sector

In pursuit of more growth opportunities, BPPL is expanding into new markets under its own brand. “Tip Top” was launched in Sri Lanka in 2015 with products marketed at leading supermarket chains. “Jab” was launched in Indonesia in 2016 with plans to expand into Malaysia in FY19E

BPPL’s products marketed under its own brand are differentiated over cheaper, generic products by investments made in premium packaging, localization of branding and in-store marketing efforts

Further, the Group expects to expand its operations into the manufacturing of synthetic yarn from recycled PET (polyethylene terephthalate) for the fabric manufacturing industry in FY19E with an investment of Rs.675mn, offering the industry a clear import substitution opportunity with cost savings

The company engages in sustainable and eco-friendly operations by using Forest Stewardship Council (FSC) certified wood, recycled or virgin PET plastic, natural and synthetic fibre based products, with its operations being certified under the Leadership in Energy and Environmental Design (LEED)

BPPLs wooden back manufacturing plant is located in Ingiriya, Kalutara while its saw mill is located in Padukka. The monofilament extruder and washing plants are located in Horana. The extruder plant has a monthly capacity of 80 tons for PET filaments and 28 tons for PP (polypropylene) filaments while the washing plant has a monthly capacity of 100 tons


Source : Ministry of Tourism Maldives

AHUN Sri Lanka and Maldives Hotels - Capex

Hotel Star Category Rooms Last Refurbishment

Sri Lanka 606

Heritance Ahungalla 5 Star 152 Relaunced in FY06 subsequent to a US$13mn

renovation

Heritance Kandalama 5 Star 152 Dambulla wing refurbishment of 77 rooms and addition

of conference facility in FY13

Heritance Tea Factory 4 Star 54 Refurbishment in FY09 to change property to a

Heritance Hotel

Heritance Ayurveda

Mahagedara

5 Star

64

Hotel was closed for refurbishment from July 2009 to

July 2011

The Sands 4 Star 110 Reopened on 01 May 2012 subsequent to

refurbishment under the new brand The Sands

Hotel Hiltop 3 Star

74 Second stage of renovations to be carried out in FY15

Maldives 612

Adaaran Prestige Vadoo 50 N/A

Adaaaran Meedhupparu 235 N/A

Adaaran Rannalhi 4 Star 132 N/A

Adaaaran Hudhuranfushi 4 Star 195

Source : AHUN Annual Reports

(Rs mn) FY13 FY14 % FY15E % FY16E %

Operating Expenses 8,395.0 8,957.1 6.7 10,512.3 17.4 11,779.2 12.1

Sri Lanka Resorts 2,318.2 2,596.0 12.0 2,961.4 14.1 3,405.2 15.0

Others 103.4 58.6 -43.3 47.1 N/A 54.2 15.0

Maldives 6,977.1 7,259.2 4.0 7,930.4 9.2 8,938.3 12.7

Segmental Operating Expense Analysis

PBT Segmental Forecast

.

Rs mn FY14 FY15E % FY16E %

PBT 3,763.1 4,020.3 6.8 4,762.2 18.5

Sri Lanka - Resorts 742.1 826.2 11.3 957.3 15.9

Others 576.5 636.2 10.4 744.2 17.0

Share of Associate 34.9 45.2 29.6 80.4 77.7

South Asia 2,409.6 2,512.7 4.3 2,904.9 15.6

Valuation Ratios

AHUN KHL

FY15E FY16E FY15E FY16E

MPS (Rs) 79.0 79.0 14.7 14.7

EPS (Rs) 6.6 7.8 1.1 1.2

EPS Growth (%) 9.3 19.1 4.4 8.0

PER (X) 12.0 10.1 13.1 12.0

Gross Dividend Yield (%) 1.7 1.9 0.0 0.0

PBV (X) 1.5 1.4 1.1 1.0

PEG (X) 1.3 0.5 3.0 1.5

Peer Hotel Comparison

.

Hotel Ticker Market Cap

(US$ mn)

TTM PER

(X)

Avg. Daily T/O in 2014 YTD (US$

mn)

Aitken Spence Hotel Holding AHUN 204 13.1 35423

John Keels Hotels KHL 164.4 13.7 8168

Asian Hotels and Properties AHPL 234.7 11.6 12780

Trans Asia Hotels TRAN 145.9 25.6 1192

The Kingsbury SERV 26.8 106.5 5696

Source : IPO Prospectus

Quarterly AEIR Earned, AEIR Paid and NIS (%)

PLC Disbursements (Rs bn) & SL New Vehicle Registrations (‘000)

8

12

16

20

24

4

6

8

10

2Q14 4Q14 2Q15 4Q15 2Q16

NIS - LHS AEIR EarnedAEIR Paid

60

90

120

150

180

10

12

14

16

18

20

2Q14 4Q14 2Q15 4Q15 2Q16

Disbursements - LHS

New Vehicle Registrations

Pre-IPO BPPL Group Structure

LOLC Investments (Pvt) Ltd

26.2%

Infinity Capital (Pvt) Ltd*

50.3%

Hirdaramani Investment Holdings

(Pvt) Ltd 23.4%

B P P L Holdings Limited

100% Beira Brush (Pvt) Ltd

(BBL)

100% Beira Enviro Solutions

(Pvt) Ltd (BES)

100% Beira Enterprises (Pvt)

Ltd

BBL manufactures a variety of cleaning tools and brushes using wooden or plastic backs, filled with natural or synthetic fibre

Specializes in the manufacturing of high quality synthetic filaments using recycled PET and virgin polypropylene

Trading arm of BPPL Holdings

Specializes in the manufacturing of wooden backs for brushes using timber (rubber wood). Part of the production is directly exported, while the remainder is sold to BBL

* Infinity Capital (Pvt) Ltd is an investment holding company owned by Dr. Anush Amarasinghe, CEO of BPPL

73%

2%

9%

2% 4%

2% 7%

USA Canada

Australia & New Zealand Europe (Excl. UK)

UK Sri Lanka

Other

Revenue by geography, FY16

Revenue by product, FY16

79%

1%

15%

4% 2%

Brush Exports (Generic)

Brush Exports (Branded)

Wood Exports

Fibre Exports

Local Sales (Tip Top, Wood)

Synthetic Yarn


Competitive Landscape

BPPL faces competition from both domestic and foreign brush manufacturers. The local competitors are either joint ventures or partnerships with foreign companies (eg. Samtessi, Warna) or subsidiaries of listed conglomerates such as Ravi Industries (86% subsidiary of Hayleys – HAYL)

International certifications such as ISO, FSC, LEED etc. and high quality products has enabled Sri Lankan manufacturers to attract foreign clients seeking environmentally friendly, ethical products, thereby providing a competitive advantage over other low cost competitors as demand for such products are on the rise globally

Despite BPPL facing competition in the hand brushes and floor brushes product segments, the Company enjoys monopolistic positions in the specialized segments such as upright brooms manufacturing and fibre extrusion

BPPL also has scale and value chain integration advantage over its domestic peers, being the only brush manufacturer with a backwardly integrated production process

China is one of the largest exporters of cleaning tools to the US market, benefiting from scale and cost advantages. However, high level of quality assurance, documented ethical manufacturing practices, a high level of customization and easy access to rubber wood ensures the competitiveness of BPPLs exports

BPPL’s expertise in the manufacturing of high quality synthetic filaments using recycled PET and virgin polypropylene over the last six years has enabled BPPL to utilize a similar production process to manufacture synthetic yarn for the local fabric manufacturing industry from recycled PET through proprietary research and development





Sri Lanka 606


renovation




Heritance Hotel

Heritance Ayurveda

Mahagedara

5 Star

64


July 2011



Hotel Hiltop 3 Star


Maldives 612









Others 103.4 58.6 -43.3 47.1 N/A 54.2 15.0

Maldives 6,977.1 7,259.2 4.0 7,930.4 9.2 8,938.3 12.7



.


PBT 3,763.1 4,020.3 6.8 4,762.2 18.5


Others 576.5 636.2 10.4 744.2 17.0


South Asia 2,409.6 2,512.7 4.3 2,904.9 15.6

Valuation Ratios

AHUN KHL


MPS (Rs) 79.0 79.0 14.7 14.7

EPS (Rs) 6.6 7.8 1.1 1.2

EPS Growth (%) 9.3 19.1 4.4 8.0

PER (X) 12.0 10.1 13.1 12.0


PBV (X) 1.5 1.4 1.1 1.0

PEG (X) 1.3 0.5 3.0 1.5


.


(US$ mn)

TTM PER

(X)


mn)






Source : Department of Motor Traffic and PLC mgmt.



8

12

16

20

24

4

6

8

10

2Q14 4Q14 2Q15 4Q15 2Q16


60

90

120

150

180

10

12

14

16

18

20

2Q14 4Q14 2Q15 4Q15 2Q16

Disbursements - LHS


72%

0%

22%

4% 1% 0%

79%

1%

15%

4% 2% 0%



Wood Exports

Fibre Exports


Synthetic Yarn

FY2012

FY2016

Revenue composition by geography Revenue composition by product

73%

5%

10% 1% 3% 1% 7%

73%

2%

9%

2% 4%

2% 7%

USA

Canada

Australia & New Zealand

Europe (Excl. UK)

UK

Sri Lanka

Other

FY2012

FY2016


BPPL does not face any competition in the upright

brooms and fibre extrusion segments

Source: UN Statistics Division, COMTRADE

US Imports of Brooms, Brushes and Mops (US$ mn) US Imports of Brooms, Brushes and Mops from Sri Lanka (US$ mn)

6

7

8

9

10

11

12

13

14

15

16

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

1,100

1,200

1,300

1,400

1,500

1,600

1,700

1,800

1,900

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Industry Overview

According to data released by the United Nations Statistics Division, the US is the largest importer of brooms, brushes and mops with near 22% of market share, valued at US$1.8bn in 2015, (+8% YoY) followed by Germany with 8% and the United Kingdom, France and Japan with ~5% each

Net imports to the United States amounted to US$1.3bn during the same period

In 2010, US broom, brush and mop imports exceeded pre-recession levels and, recording a six-year CAGR of 7% (2010-16)

The household market is assumed to be 85-90% of the global cleaning tools industry, while the remainder is attributed to the professional cleaning tools market

China on the other hand, is the single largest exporter of brooms, brushes and mops to the US market with a 72% share of total imports into the United States (in 2015)

According to United Nations Statistics Division, Sri Lanka exported brooms and brushes valued at US$35mn in 2015 (-5% YoY) (2016 data not released yet)

Meanwhile Sri Lankan broom, brush and mop exports to the US grew +14% YoY in 2016 (vs +10% YoY in 2015) or at a six year CAGR of 11% (2010-16)

The United States will continue to be a vital market due to the non fragmented nature compared to European markets, offering scale advantages

Majority of the local brush manufacturers operate with high environmental and safety standards with FSC certification

In the largely untapped synthetic yarn manufacturing industry, current demand from local fabric manufacturers is estimated to be ~600 tons per month, with the majority of this requirement being imported

Taizhou Yinshan Manufacturing Brushes Co. Ltd (China)

Ningbo East Cleaning Tool Co. Ltd (China)

York Sp.Z. O.O (Poland)

The Libman Company (USA)

Global Competition

Ravi Industries Ltd

Samtessi Brush Manufacturers (Pvt) Ltd

Lanka Brush Exports (Pvt) Ltd

Warna Exporters (Pvt) Ltd

Domestic Competition

The United States will continue to be BPPL’s most strategic

market

Sri Lankan broom, brush and mop exports to the United

States grew +14% YoY in 2016




Recent Financial Performance, 1-3Q17

BPPL reported a net profit of Rs.297mn (+50% YoY) driven by volume growth and margin expansion

BPPL reported revenue of Rs.1,773mn (+21% YoY) during 1-3Q17. Management attributed the growth owing to a +14% volume increase as a result of winning new orders.

Gross profit during the period was Rs.708mn (+35% YoY), expanding its gross margin to 40% in 1-3Q17 (vs. 36% in 1-3Q16) owing to efficiency improvements, better expense management and low raw material costs

Income tax expense for the period has doubled to Rs.64mn. This is due to a lower PAT base and a lower rate tax for 1-3Q16. Since the lower tax rate for export companies of 14% not yet being gazetted the Group has provided for a corporate tax rate of 17.5% for 1-3Q17

BPPL declared an interim dividend of Rs.0.2 per share for 1H17 which was paid on 18 Aug 2016

Group capex amounted to Rs.50mn (+36% YoY) in 1-3Q17





Sri Lanka 606


renovation




Heritance Hotel

Heritance Ayurveda

Mahagedara

5 Star

64


July 2011



Hotel Hiltop 3 Star


Maldives 612









Others 103.4 58.6 -43.3 47.1 N/A 54.2 15.0

Maldives 6,977.1 7,259.2 4.0 7,930.4 9.2 8,938.3 12.7



.


PBT 3,763.1 4,020.3 6.8 4,762.2 18.5


Others 576.5 636.2 10.4 744.2 17.0


South Asia 2,409.6 2,512.7 4.3 2,904.9 15.6

Valuation Ratios

AHUN KHL


MPS (Rs) 79.0 79.0 14.7 14.7

EPS (Rs) 6.6 7.8 1.1 1.2

EPS Growth (%) 9.3 19.1 4.4 8.0

PER (X) 12.0 10.1 13.1 12.0


PBV (X) 1.5 1.4 1.1 1.0

PEG (X) 1.3 0.5 3.0 1.5


.


(US$ mn)

TTM PER

(X)


mn)






Revenue growth owing to volume increase




8

12

16

20

24

4

6

8

10

2Q14 4Q14 2Q15 4Q15 2Q16


60

90

120

150

180

10

12

14

16

18

20

2Q14 4Q14 2Q15 4Q15 2Q16

Disbursements - LHS


Gross margin expansion due to efficiency improvements and

lower costs

Revenue and recurrent net profit grew at 4 year CAGRs of

10% and 22%

Note: The Company has only disclosed 1-3Q17 and 1-3Q16 financials, * Adjusted retrospectively for capital issues

Full Year Highlights, FY16

Strong track record of business growth – BPPL reported revenue of Rs.2,088 (+8% YoY) during FY16 with the branded brush segment driving revenue growth aided by foreign currency depreciation. With revenue growth at a four year CAGR of 10% and recurrent net profit growth at a CAGR of 22% (FY12-16)

BPPL’s Generic Brush exports amounted to 79% of total revenue in FY16 (vs. 82% in FY15), followed by Wood exports with 15% (vs. 13% in FY15). Branded Brush exports which was introduced during FY16 amounted to 1% of total FY16 revenue

On a geographic basis, USA contributed to 73% of total revenue in FY16 (vs. 70% in FY15) followed by Australia & New Zealand with 9% (vs. 12% in FY15), UK with 4% (vs. 5% in FY15), Canada with 2% (vs. 3% in FY15) and Sri Lanka with 2% (vs. 1% in FY15)

Key Figures & Ratios 1-3Q16 1-3Q17 % YoY FY15 FY16 % YoY

Revenue (Rs mn) 1,464 1,773 21.1 1,931 2,088 8.1

Gross profit 526 708 34.5 569 764 34.2

Operating Profit (Rs mn) 243 377 55.4 361 502 38.9

Net Finance Income/(Expense) (Rs mn) -23 -16 -30.6 -28 -31 7.9

Profit Before Tax (Rs mn) 219 361 64.7 175 331 89.1

Profit After Tax (Rs mn) 199 297 49.8 149 307 > +100.0

Earnings Per Share (Rs)* 0.6 1.0 49.9 0.5 1.0 > +100.0

Gross Profit Margin (%) 36.0 39.9 4.0 29.5 36.6 7.1

Operating Profit Margin (%) 16.6 21.3 4.7 18.7 24.0 5.3

Profit Before Tax Margin (%) 15.0 20.4 5.4 9.1 15.8 6.8

Effective Tax Rate (%) 9.5 17.7 8.2 14.7 7.2 -7.5

Net Debt (Rs mn) N/A 200 N/A 664 396 > +100.0

Capex (Rs mn) 37 50 36.1 215 52 -75.6 Source: IPO Prospectus


Revenue composition by geography, FY12-16 Revenue composition by product, FY12-16

73%

5%

10% 1%

3% 1% 7%

73%

2%

9%

2% 4%

2% 7%

USA

Canada


Europe (Excl. UK)

UK

Sri Lanka

Other

FY2012

FY2016

72%

0%

22%

4% 1%

79%

1%

15%

4% 2%



Wood Exports

Fibre Exports


Synthetic Yarn

FY2012

FY2016


Extensive streamlining of business operations has led to an gross margin expansion of over 700bps to 37% in FY16 (vs. 30% in FY15). Management stated that the margin expansion was owing to operational efficiencies aided by better raw material sourcing, lower freight costs and currency depreciation

Management elaborated that, operational efficiencies result from the Company employing lean manufacturing techniques such as improved factory ergonomics, efficiency based remuneration schemes and proactive machinery maintenance to actively improve efficiency

The Group reported a net finance cost of Rs.31mn in FY16 (+8% YoY)

Group interest bearing liabilities reduced to Rs.411mn as at FY16 (-40% YoY) comprising of short and long term bank loans and bank overdrafts

The Company’s net debt position has improved during FY16 (reduction of -40% YoY) recording a Debt to Equity ratio of 0.24x (vs. 0.55x in FY15)

BPPL’s interest cover was recorded at 11.7x in FY16 is well within the five year average of 11.5x

BPPL’s working capital cycle was 189 days in FY16 with inventory days amounting to 118 days while receivable and payable days amounting to 100 and 29 days respectively

The effective income tax rate was reported at 7.7% for FY16 (vs. 14.7% in FY15), owing to a tax holiday benefit for BES and higher deferred taxes in FY15. However, following the 2016 National Budget, BPPL is subject to a corporate tax rate 12% in FY17 and 14% thereafter

Reported net profit for the period was Rs.297mn (+50% YoY) – largely due to a 390bps expansion in gross margin to 40% in 1-3Q17 (vs. Rs.199mn in 1-3Q16) owing to efficiency improvements and better expense management

Group capex amounted to Rs.52mn (-76% YoY)

Investment Case and Catalysts

Synthetic Yarn Production

BPPL is expanding operations into the largely untapped synthetic yarn manufacturing industry, leveraging on BPPL’s expertise in monofilament extrusion from recycled PET. The Group is expected to invest Rs.675mn over FY17-18E in a manufacturing facility with a monthly capacity of 80 tons, expected to come online in FY19E

Once online, BPPL can supply high quality synthetic fibre at a lower inventory holding cost with significantly lower lead times at competitive prices compared to imports. Management stated that several apparel companies have expressed interest with potential customers including Hayleys Fabric (MGT), Naturub, Teejay Lanka (TJL), Stretch Line, South Asia Textiles and Ocean Lanka

The new plant will also introduce a process to dyeing the synthetic yarn, which reduces the dyeing process for fabric manufacturers, which in turn reduces their cost of production making BPPL’s manufactured synthetic yarn more competitive

BPPL can leverage on its proprietary knowledge and existing supply chains for the collection of used PET bottles for the manufacture of synthetic yarn. As per management, BPPL collected ~1,400 tons of discarded PET bottles in 2016 (>10% of Sri Lanka’s virgin PET imports used for bottling) with a further ~4,030 tons available to be recycled





Sri Lanka 606


renovation




Heritance Hotel

Heritance Ayurveda

Mahagedara

5 Star

64


July 2011



Hotel Hiltop 3 Star


Maldives 612









Others 103.4 58.6 -43.3 47.1 N/A 54.2 15.0

Maldives 6,977.1 7,259.2 4.0 7,930.4 9.2 8,938.3 12.7



.


PBT 3,763.1 4,020.3 6.8 4,762.2 18.5


Others 576.5 636.2 10.4 744.2 17.0


South Asia 2,409.6 2,512.7 4.3 2,904.9 15.6

Valuation Ratios

AHUN KHL


MPS (Rs) 79.0 79.0 14.7 14.7

EPS (Rs) 6.6 7.8 1.1 1.2

EPS Growth (%) 9.3 19.1 4.4 8.0

PER (X) 12.0 10.1 13.1 12.0


PBV (X) 1.5 1.4 1.1 1.0

PEG (X) 1.3 0.5 3.0 1.5


.


(US$ mn)

TTM PER

(X)


mn)






Application of lean manufacturing techniques

resulted in operational efficiencies




8

12

16

20

24

4

6

8

10

2Q14 4Q14 2Q15 4Q15 2Q16


60

90

120

150

180

10

12

14

16

18

20

2Q14 4Q14 2Q15 4Q15 2Q16

Disbursements - LHS


BPPL is subject to a higher corporate tax rate 14% from

FY18E

BPPL’s expertise in monofilament extrusion to augur synthetic fibre yarn

development

Local requirement of 600 tons monthly to be catered

PET Bottle Recycling in Sri Lanka


Imported into Sri Lanka 9,600 tons

30% Value added &

exported 2,880 tons

70% Consumed &

disposed 6,720 tons

40% Recycled 2,690 tons

35% Recycled by

BPPL 960 tons

65% Exported by

others 1,730 tons

60% Available

to be recycled 4,030 tons







Sri Lanka 606


renovation




Heritance Hotel

Heritance Ayurveda

Mahagedara

5 Star

64


July 2011



Hotel Hiltop 3 Star


Maldives 612









Others 103.4 58.6 -43.3 47.1 N/A 54.2 15.0

Maldives 6,977.1 7,259.2 4.0 7,930.4 9.2 8,938.3 12.7



.


PBT 3,763.1 4,020.3 6.8 4,762.2 18.5


Others 576.5 636.2 10.4 744.2 17.0


South Asia 2,409.6 2,512.7 4.3 2,904.9 15.6

Valuation Ratios

AHUN KHL


MPS (Rs) 79.0 79.0 14.7 14.7

EPS (Rs) 6.6 7.8 1.1 1.2

EPS Growth (%) 9.3 19.1 4.4 8.0

PER (X) 12.0 10.1 13.1 12.0


PBV (X) 1.5 1.4 1.1 1.0

PEG (X) 1.3 0.5 3.0 1.5


.


(US$ mn)

TTM PER

(X)


mn)






Initial results from Indonesia shows promise




8

12

16

20

24

4

6

8

10

2Q14 4Q14 2Q15 4Q15 2Q16


60

90

120

150

180

10

12

14

16

18

20

2Q14 4Q14 2Q15 4Q15 2Q16

Disbursements - LHS


72%

0%

22%

4% 1% 0%

79%

1%

15%

4% 2% 0%



Wood Exports

Fibre Exports


Synthetic Yarn

FY2012

FY2016

Revenue composition by geography Revenue composition by product

73%

5%

10% 1% 3% 1% 7%

73%

2%

9%

2% 4%

2% 7%

USA

Canada


Europe (Excl. UK)

UK

Sri Lanka

Other

FY2012

FY2016


Heavy dependency on the US market

Highly sensitive to exchange rate movements

Issue is attractively priced at 8.8x FY17 PER at our estimates

Own Branded Products

BPPL’s strategy is to make inroads into the household market directly though their own branded products

Indonesia is a key market for BPPL in the branded brush space due to a larger population and growing affluent and middle income segments.

As per management, revenue from branded sales in Indonesia has grown to Rs.19mn during CY16 (vs. Rs.7mn during CY15) with volumes of 102,912 units (vs. 46,560 units in CY15). Management also indicated plans to increase capacity to meet additional demand

BPPL has 25% market share in the local branded cleaning products space through Tip Top

Management further stated that the branded brush segment contributes near 3% of total revenue during trailing ten months. A significant improvement from 1% in FY16

BPPL also plans to expand into the Malaysian market by FY19E

Investment Risks, Challenges

Heavy dependency on the US market, which amounts to over 70% of revenue. A slowdown in the US economy or changes to import regulations in the US could adversely affect BPPL

Competition in the global market from countries such as China, Taiwan, Poland and Germany due to depreciation of local currency and lower lead time may result in a competitive advantage over BPPL

The company is susceptible to changing crude oil prices through its exposure to raw materials such as polypropylene

BPPL is highly sensitive to exchange rate movements as over 95% of its revenue and ~30% of its cost of sales is incurred in foreign currency. Further as at FY16, ~49% of the Group’s borrowings were denominated in US$

Outlook & Valuations

FY17E net profit forecast at Rs.419mn (+37% YoY) largely due to penetration in the local and Indonesian markets, lower raw material costs and continuing rupee depreciation against the dollar. Meanwhile, net profit forecast at Rs.497mn (+19% YoY) for FY18E and Rs.620mn (+25% YoY) for FY19E amid further penetration into the local and Southeast Asian markets and cost savings from the commissioning of the solar and bio-mass power plants

Revenue forecast at Rs.2,380mn (+14% YoY) for FY17E owing to capacity expansion and growth in Generic Brush sales in the US and growth from own-brands in Sri Lanka and Indonesia. FY18E and FY19E revenue forecast at Rs.2,655 (+12% YoY) and Rs.3,105 (+17% YoY) respectively, with growth driven by further penetration of own brands coupled with the synthetic yarn project commencing operations in FY19E

FY17E gross margin forecast at 39% (+190bps YoY) largely due to lower raw material costs, efficiency improvements and continuing rupee depreciation against the dollar. Meanwhile, gross margin forecast at 39% (+90bps YoY) for FY18E and 40% (+50bps YoY) for FY19E amid cost savings from the solar and bio-mass power plants (contributing ~Rs.30mn or 33% of BPPL’s total electricity cost, in electricity savings each year)

Group operating margins forecast at ~21% levels for FY17-19E (vs. 17% in FY16), with the addition of higher margin branded products, process efficiencies aided by continuing local currency depreciation

Net finance cost forecast at Rs.26mn (-16% YoY) in FY17E due to the retirement of debt during 1Q17 - 1-3Q17. A US$ denominated loan of ~Rs.500mn will be taken to finance the new project over FY18-19E. FY18E finance cost forecast at Rs.30mn (+16% YoY) and at Rs.50m (+66% YoY) for FY19E due to the expiry of the grace period under terms of the new loan, the finance cost is capitalized

Following the 2016 National Budget proposals, BPPL is subject to a corporate tax rate 12% in FY17E and 14% thereafter

At current forecasts, BPPL is trading at PERs of 8.8x for FY17E, 7.4x for FY18E and 5.9x for FY19E, at a discount to the overall market PER of 10.4x whilst offering above average growth prospects. Further the share offers attractive ROEs of 23-25% and dividend yields of 5-7% though the relatively illiquid and small cap nature of the stock may be a deterrent to some investors. We believe investors may find favour in BPPL at current valuations, given it provides investors exposure to a company with the potential to move from a pure play brush manufacturer into a material sciences company in the medium term – Subscribe

CT CLSA SECURITIES (PVT) LTD A Member of the Colombo Stock Exchange

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A CT HOLDINGS GROUP AND CLSA GROUP COMPANY

Trading & Sales

Lasantha Iddamalgoda [email protected] +94 11 255 2295 +94 77 778 2103 Dyan Morris [email protected] +94 11 255 2320 +94 77 722 4951 Manura Hemachandra [email protected] +94 77 261 4797 Rosco Todd [email protected] +94 77 262 7233 Dhammika de Silva [email protected] +94 77 356 2699

Arusha Michael [email protected] +94 77 395 6765

Nuwan Madusanka [email protected] +94 76 858 9722

Research

Sanjeewa Fernando [email protected] +94 77 742 7439 Chayanika Ranasinghe [email protected] +94 77 237 9731 Yasas Wijethunga [email protected] +94 77 053 2059 Ryan Jansz [email protected] +94 11 255 2290 Rasika Nanayakkara [email protected] +94 11 255 2290 Shahan De Silva [email protected] +94 11 255 2290 Devni Perera [email protected] +94 11 255 2290

Consultant / Sales

Rohan Fernando [email protected] +94 11 255 2297 +94 76 778 2101

Disclaimer : This document has been prepared and issued by CT CLSA Securities (Pvt) Ltd. on the basis of publicly available information, internally developed data and other sources, believed to be reliable. Whilst all reasonable care has been taken to ensure that the facts stated are accurate and the opinions given are fair and reasonable, neither CT CLSA Securities (Pvt) Ltd. nor any director, officer or employee, shall in any way be responsible for the contents. CT CLSA Securities (Pvt) Ltd. may act as a Broker in the investments which are the subject of this document or in related investments and may have acted upon or used the information contained in this document, or the research or analysis on which it is based, before its publication. CT CLSA Securities (Pvt) Ltd., its directors, officers or employees may also have a position or be otherwise interested in the investments referred to in this document. This is not an offer to buy or sell the investments referred to in this document. It is not intended to provide professional, investment or any other type of advice or recommendation and does not take into account the particular investment objectives, financial situation or needs of individual recipients. Before acting on any information in this publication/communication, you should consider whether it is suitable for your particular circumstances and, if appropriate, seek your own professional advice, including tax advice. The markets in which CT CLSA Securities (Pvt) Ltd. operates may not have regulation governing conflict of interest over preparation and publication of research reports (including but not limited to disclosure of perceived or actual conflict of interest) as may be found in more developed markets. Please contact your investment advisor / analyst should you require further information over the relevant regulation and particular disclosure over perceived or actual conflict of interest.

BPPL Holdings Limited · A CT HOLDINGS GROUP AND CLSA GROUP COMPANYEQUITY REPORT TITLE | Date 2PER (X) The Business Established in 1991, BPPL Holdings Limited (BPPL) is a leading

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