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Pg | Price Target : LKR78 SHARE PRICE CHART: Hemas Holdings PLC Well positioned to grab untapped market share in the private healthcare sector With its unique strategy of locating the hospitals in sub urban areas with high population density away from Colombo, Hemas will have a competitive advantage over other players who are located in the capital of Colombo. Increased confidence has been seen on He- mas hospitals throughout the past few years especially with high end surgeries succeed- ing at the Wattala hospital. This is further strengthened by the partnership with the Kerala Institute of Medical Sciences for staff training providing an unparalleled experience to customers resulting in improved profitability and revenue. Strong demand for personal care products Despite heavy competition from similar products, Hemas FMCG revenue grew at a CAGR of 19.2% from FY2012-14. With rising per capita income, demand for personal care prod- ucts has been on the rise which saw considerable volume growth as well as price in- creases favoring the manufacturers. We expect this trend to continue in to the future and expect FMCG revenue to grow at a CAGR of 13.3% through FY2015E-17E. Group revenue to grow at a CAGR of 13.9% through FY2015E-17E With the highest contribution to growth arising from the leisure segment. we expect lei- sure segment revenue to grow at a CAGR of 21.5% from FY2014-17E with the new 154 room luxury hotel to be opened in FY2016E. Further, with recent refurbishment carried out in two hotel properties, Club Hotel Dolphin and Hotel Sigiriya, we expect average occu- pancy to improve to 80% by FY2017E from current 75%. The acquisition of J. L. Morison Son and Jones (Ceylon) PLC (JLM) should also contribute to increased revenue. EBITDA to grow at a CAGR of 15% through FY2015E-17E The acquisition of JLM should bring about efficiencies in the manufacturing plants and the distribution network to improve profitability. The divestment of the loss making power sector should also contribute to improved profitability. Valuation We have used the SOTP method as the primary valuation method to arrive at a per share price of LKR78 which is further justified by our EV/EBITDA valuation which gives a per share price of LKR80 based on a EV/EBITDA multiple of 10.1x. Buy Hemas Holdings PLC is a family run diversified conglomerate with business interests in FMCG, healthcare, transportation and leisure. LKR '000 FY2012 FY2013 FY2014 FY2015E FY2016E FY2017E Revenue 21,532,503 26,098,362 32,833,249 29,550,370 34,311,545 38,340,415 EBIT 1,783,950 2,436,994 3,378,598 3,256,852 3,829,979 4,331,622 EBIT Margin 8.3% 9.3% 10.3% 11.0% 11.2% 11.3% Net Profit for equity 1,164,525 1,659,660 2,409,276 2,235,628 2,862,617 3,357,634 Net Profit Margin 5.9% 7.4% 7.8% 8.2% 9.3% 9.6% EPS - LKR 2.45 3.76 4.97 4.72 6.17 7.16 Net Operating Cash Flow 1,507,983 1,863,616 2,895,800 3,872,027 3,511,183 4,246,482 Gearing 15.5% 16.7% 22.9% 16.6% 12.7% 9.8% Price to earnings (P/E) 10.7x 7.2x 13.1x 13.8x 10.5x 9.1x Price to book (P/B) 1.3x 1.1x 2.3x 2.1x 1.8x 1.5x - 10.00 20.00 30.00 40.00 50.00 60.00 70.00 28-Oct-11 28-Apr-12 28-Oct-12 28-Apr-13 28-Oct-13 28-Apr-14 LKR DATE : 23rd October 2014 SHARE INFO: Sector : Diversified Holdings CSE Ticker : HHL.N0000 Price as at 23-Oct-2014 : LKR65 12 Month (High/Low) : LKR65.10/LK32.00 Price Chg (1m/ 1Q/1Y) : 10.2%, 33.7%, 101.2% Market Cap. (LKR) : 32.9b Market Cap. (USD) : 253.7mn Free Float (%) : 28.25% Avg. Daily Vol (1M). : 367,284 Issued Ordinary Shares : 515,290,620 MAIN SHARE HOLDERS: A Z Holdings (Pvt) Ltd : 17.61% Saraz Investments (Pvt) Ltd : 16.77% Bluberry Investments (Pvt) Ltd : 16.65% Amagroup (Pvt) Ltd : 16.65% Employees Provident Fund : 5.29% VALUATION SUMMARY: TTM EPS : LKR4.91 TTM P/E (x) : 13.2x Latest BVPS : LKR28.05 PBV (x) : 2.3x Lead analyst: Nathasha Peiris | [email protected]| Mobile: +94779826558 Co analyst: Tharindu Kaduruwewa | [email protected] | Mobile: +94775924545 Source: Bloomberg, NLE
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Page 1: HHL Initiation Report.pdf

Pg |

Price Target : LKR78

SHARE PRICE CHART:

Hemas Holdings PLC

Well positioned to grab untapped market share in the private healthcare sector With its unique strategy of locating the hospitals in sub urban areas with high population density away from Colombo, Hemas will have a competitive advantage over other players who are located in the capital of Colombo. Increased confidence has been seen on He-mas hospitals throughout the past few years especially with high end surgeries succeed-ing at the Wattala hospital. This is further strengthened by the partnership with the Kerala Institute of Medical Sciences for staff training providing an unparalleled experience to customers resulting in improved profitability and revenue.

Strong demand for personal care products Despite heavy competition from similar products, Hemas FMCG revenue grew at a CAGR of 19.2% from FY2012-14. With rising per capita income, demand for personal care prod-ucts has been on the rise which saw considerable volume growth as well as price in-creases favoring the manufacturers. We expect this trend to continue in to the future and expect FMCG revenue to grow at a CAGR of 13.3% through FY2015E-17E.

Group revenue to grow at a CAGR of 13.9% through FY2015E-17E With the highest contribution to growth arising from the leisure segment. we expect lei-sure segment revenue to grow at a CAGR of 21.5% from FY2014-17E with the new 154 room luxury hotel to be opened in FY2016E. Further, with recent refurbishment carried out in two hotel properties, Club Hotel Dolphin and Hotel Sigiriya, we expect average occu-pancy to improve to 80% by FY2017E from current 75%. The acquisition of J. L. Morison Son and Jones (Ceylon) PLC (JLM) should also contribute to increased revenue.

EBITDA to grow at a CAGR of 15% through FY2015E-17E The acquisition of JLM should bring about efficiencies in the manufacturing plants and the distribution network to improve profitability. The divestment of the loss making power sector should also contribute to improved profitability.

Valuation We have used the SOTP method as the primary valuation method to arrive at a per share price of LKR78 which is further justified by our EV/EBITDA valuation which gives a per share price of LKR80 based on a EV/EBITDA multiple of 10.1x. Buy

Hemas Holdings PLC is a family run diversified conglomerate with business interests in FMCG, healthcare, transportation and leisure.

LKR '000 FY2012 FY2013 FY2014 FY2015E FY2016E FY2017E

Revenue 21,532,503 26,098,362 32,833,249 29,550,370 34,311,545 38,340,415

EBIT 1,783,950 2,436,994 3,378,598 3,256,852 3,829,979 4,331,622

EBIT Margin 8.3% 9.3% 10.3% 11.0% 11.2% 11.3%

Net Profit for equity 1,164,525 1,659,660 2,409,276 2,235,628 2,862,617 3,357,634

Net Profit Margin 5.9% 7.4% 7.8% 8.2% 9.3% 9.6%

EPS - LKR 2.45 3.76 4.97 4.72 6.17 7.16

Net Operating Cash Flow 1,507,983 1,863,616 2,895,800 3,872,027 3,511,183 4,246,482

Gearing 15.5% 16.7% 22.9% 16.6% 12.7% 9.8%

Price to earnings (P/E) 10.7x 7.2x 13.1x 13.8x 10.5x 9.1x

Price to book (P/B) 1.3x 1.1x 2.3x 2.1x 1.8x 1.5x

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30.00

40.00

50.00

60.00

70.00

28-Oct-11 28-Apr-12 28-Oct-12 28-Apr-13 28-Oct-13 28-Apr-14

LKR

DATE : 23rd October 2014

SHARE INFO:

Sector : Diversified Holdings

CSE Ticker : HHL.N0000

Price as at 23-Oct-2014 : LKR65

12 Month (High/Low) : LKR65.10/LK32.00

Price Chg (1m/ 1Q/1Y) : 10.2%, 33.7%, 101.2%

Market Cap. (LKR) : 32.9b

Market Cap. (USD) : 253.7mn

Free Float (%) : 28.25%

Avg. Daily Vol (1M). : 367,284

Issued Ordinary Shares : 515,290,620

MAIN SHARE HOLDERS:

A Z Holdings (Pvt) Ltd : 17.61%

Saraz Investments (Pvt) Ltd : 16.77%

Bluberry Investments (Pvt) Ltd : 16.65%

Amagroup (Pvt) Ltd : 16.65%

Employees Provident Fund : 5.29%

VALUATION SUMMARY:

TTM EPS : LKR4.91

TTM P/E (x) : 13.2x

Latest BVPS : LKR28.05

PBV (x) : 2.3x

Lead analyst: Nathasha Peiris | [email protected]| Mobile: +94779826558

Co analyst: Tharindu Kaduruwewa | [email protected] | Mobile: +94775924545 Source: Bloomberg, NLE

Page 2: HHL Initiation Report.pdf

Pg | 2

Company Overview

Hemas Holdings PLC quoted in 2003, is a family run diversified conglomerate with LKR32.9bn (USD253.6mn) market capi-

talization and focuses on five key sectors i.e. FMCG, healthcare, transportation and leisure. The group was founded as a

pharmaceuticals and trading enterprise in 1948.

The status of Hemas as the largest private organization in the healthcare industry and the dominant distributor of pharma-

ceuticals, surgical & diagnostic products in Sri Lanka was further strengthened by the acquisition of J. L. Morison Son and

Jones (Ceylon) PLC (JLM) recently. Hemas hospitals focus on the middle income population in suburban areas gaining a

competitive advantage over other players centered in Colombo.

Hemas personal care product range offers trusted products to consumers contributing significantly to growth in group

revenue which are exported directly to 12 countries including Malaysia, New Zealand and Bangladesh.

Hemas is the leader in airline General Sales Agency (GSA) business in Sri Lanka for both passenger and cargo and also

has significant interest in Sri Lanka’s largest ship owning company (Mercantile Shipping Company PLC).

The group, under its leisure segment owns 4 hotels offering diversity to customers which will be further strengthened with

the investment in the luxury 5 star resort expected to commence operations in FY2016E.

The group recently announced the divestment of the power segment (Hemas Power PLC) with the aim of concentrating

on more profitable business ventures.

Figure 1: Business Interests

Source : HHL

Hemas Group

FMCG

Own Brands

International

Contract Manufacturing

Healthcare

Hospitals

Healthcare Distribution

Leisure

Hotels

Destination Management

Transportation

Aviation

Logistics

Maritime

Other

Vishwa BPO

N-Able

Page 3: HHL Initiation Report.pdf

Pg | 3

SWOT Analysis

Strengths Weakness

Opportunities Threats

Position as Sri Lanka’s leading pharmaceutical im-

porter and distributor for over 6 years

Expanded chain of laboratories

Economies of scale from vertical integration

High end surgeries at Wattala hospital and increasing

confidence (increasing surgical patients)

Well trained staff (partnership with the Kerala Institute of Medical Sciences for staff training)

Focus on value-addition, expansion of existing ser

vices and specialization Strong distribution network for pharma Well known and trusted brand in baby care products Owns reputed international hotel brand ‘Avani’

Being located away from Colombo, attracting spe-

cialist doctors can be difficult

Increasing ageing population resulting in higher de-

mand for healthcare (rising longevity and low fertility

rates)

Increasing per capita income resulting in increased

demand

Increasing non communicable diseases

Increasing tourist arrivals and high demand for luxury

boutique type hotels

Govt expenditure on health as a % of GDP at lower

levels cf. region indicating potential demand for private

health care

Competition from other established brands for

FMCG products

Technological changes requiring frequent upgrades to infrastructure

Price regulation by the Consumer Affairs Authority

for pharmaceuticals

Page 4: HHL Initiation Report.pdf

Pg | 4

Investment Highlights

Diversified into growing and profitable segments of the economy

HHL has been operating in key fast growing segments of the economy such as healthcare, pharmaceuticals and person-al care. The well experienced management team of the company regularly assesses profitability and growth aspects of the current segments as well as other rewarding segments of the economy and decides upon the strategies to capitalize on the opportunities available through divestment of unprofitable segments (e.g. Hemas Power PLC, Skynet Worldwide Express (Pvt) Ltd) and acquisition of profitable segments (e.g. J. L. Morison Son and Jones (Ceylon) PLC). This would as-sist Hemas in expanding their portfolio to remain profitable and to offer higher returns to investors.

Healthcare sector to benefit from increasing demand for private healthcare services and lucrative synergies through the acquisition of JLM

With increasing demand for private healthcare in Sri Lanka and its unique strategy of locating the hospitals in sub urban areas with high population density away from Colombo, Hemas will have a competitive advantage over other players who are located in the capital of Colombo. The newly opened hospital in Thalawathugoda should also contribute to in-creased revenue and profitability. Hemas group integrated vertically during FY2014 with the acquisition of J. L. Morison Son and Jones (Ceylon) PLC (JLM) expanding the pharmaceuticals distribution network and the product portfolio. With this acquisition we expect efficiencies in the manufacturing plants and the distribution network to improve. With these improvements we expect healthcare sector revenue to grow at a CAGR of 11.0% over FY2015E-17E.

Strong demand for personal care products

Despite of heavy competition from other similar products Hemas FMCG revenue grew at a CAGR of 19.2% from FY2012-

14. Domestic retail trade grew at a CAGR of 13.3% over the same period suggesting HHL’s ability to outpace the market.

With rising per capita income, demand for personal care products has been on the rise which saw considerable volume

growth as well as price increases favoring the manufacturers. Further, direct exports to countries with capacity for further

demand growth should assist Hemas in expanding volume and revenue further. Hence, we expect FMCG revenue to

grow at a CAGR of 13.3% through FY2015E-17E.

Focus on more profitable segments – divestment of Hemas Power

The company recently entered into an agreement to sell its entire holding in the power generating sector, a healthy move

towards improving profitability of the group. The thermal power plant which contributed to c. 90.0% of the power segment

revenue will cease operations in FY2015E with the Power Purchase Agreement being expired which is unlikely to be re-

newed. The company has already started impairing the assets which resulted in a loss of LKR162mn in FY2014E. With the

divestment, even though there will be a negative impact on the top line, we expect group profitability to improve in the

succeeding years.

Internationally recognized brands to boost leisure sector performance

Hemas leisure sector offers a diverse experience to its customers ranging from luxury resorts to activity oriented. Hemas

portfolio currently consisting of 4 hotels will be widened with the investment in the luxury 5 star resort in the Southern

coast in partnership with the Thailand based renowned Minor hotel group. This will expand the group hotel room count to

550 from current 410 which is expected to commence operations in FY2016E. Further, we expect Club Hotel Dolphin and

Hotel Sigiriya to post improved results which were refurbished during the last year. We expect, leisure segment revenue

to grow at a CAGR of 26.4% from FY2015E-17E and contribution to EBIT to increase to 7.8% by FY2016E.

Page 5: HHL Initiation Report.pdf

Pg | 5

Hemas Healthcare and Pharmaceuticals

Hemas is the largest private organization in the Sri Lankan healthcare industry with the largest distribution network of

pharmaceuticals, surgical & diagnostic products. In addition it operates three hospitals and a chain of diagnostic labora-

tories. The sector contributes to 37% of the group revenue and 42% of the group EBIT.

Hospitals

Hemas operates 3 multi-specialty family hospitals with full international accreditations at Wattala (Hemas Hospital, Watta-

la), Thalawathugoda (Hemas Hospital, Thalawathugoda) and Galle (Hemas Southern Hospital). In addition it operates 11

laboratory and channeling service branches.

Hemas Hospital - Wattala

Opened in 2008, the Wattala hospital is a 100-bed multi specialty general hospital and offers a wide array of services in-

cluding emergency care, ICU, laboratory, CT, MRI, surgery and maternity. Over 150 specialist consultants visit the hospital

and records around 15,000 out-patient visits and 900 in-patient visits per month.

Hemas Southern Hospital - Galle

Opened in 2009 the hospital consists of 50 bed hospital consists of operation theatres, labor rooms, an Endoscopy unit, an

ICU, a modern diagnostic laboratory and a radiology unit.

Hemas Hospital - Thalawathugoda

Openned in 2013 Hemas hospital Thalawathugoda has a 60 bed capacity with around 200 visiting consultants.

Figure 3: Health Sector Contribution

63%

37%

Group Healthcare

Healthcare vs Group Revenue 58%

42%

Group Healthcare

Healthcare vs Group

EBIT

Hem

as H

ealth

care

Hospitals

Wattala

Galle

Thalawathugoda

Medical Laboratories

Healthcare Distribution

Pharmaceuticals

Surgicals and Diagnostics

Wellness

Figure 2: Healthcare Segment

Healthcare Distribution

Through its fully owned subsidiaries Hemas Pharmaceuticals (Pvt) Ltd, Hemas Surgical & Diagnostics (Pvt) Ltd and J L

Morison Son & Jones (Ceylon) PLC, M. S. J. Industries (Ceylon) (Pvt) Ltd Hemas healthcare distribution segment holds a

market share of 21% and records over LKR9bn turnover. This segment is referred to as Sri Lanka’s leading pharmaceutical

importer and distributor representing more than 25 international and regional pharmaceuticals manufacturers.

Source : HHL Source : HHL

Page 6: HHL Initiation Report.pdf

Pg | 6

The public sector dominates the Sri Lankan healthcare in-

dustry with a wide spread network of infrastructure and es-

tablishments. The private sector on the other hand is still

relatively insignificant, yet exhibits strong demand growth

despite higher cost due to a multitude of factors such as

overcrowding, long waiting times service quality disparities

and the limited availability of medicines in government hos-

pitals.

The private healthcare sector caters largely to high and mid

income earners and individuals with access to medical in-

surance. Accordingly demand for private healthcare stems

from urban areas especially with a significant contribution

from Colombo where disposable incomes are high.

The industry experiences a shortage of skilled work force

and substantial brain drain. Therefore private hospitals are

heavily dependent on visiting specialists to attract patients,

thus has lead to a doctor-centric system rather than institu-

tion-centric. Hence demand is mainly dependent on the

number and quality of the consultants visiting a hospital.

Supply of private healthcare in Colombo largely lies with few

large players such as Asiri, Lanka Hospitals, Nawaloka and

Durdans Hospitals. The private sector’s presence is seen

largely in out-patient care. The industry is relatively capital

intensive, given the high costs of medical equipment, infra-

structure and technology.

Key factors driving competition apart from the number and

quality of resident and visiting doctors include quality of ser-

vices offered, hospital charges and room rates. In this con-

text private hospitals attempt to offer innovative products in

order to differentiate themselves from other players. Moreo-

ver some operators seems to specialize in a particular area

of medicine. Further operators appear to strengthen their

competitive position through consistent capacity expansions

and geographical expansions. Providing appropriate quality

and care to preserve brand name in the private hospital

business is of paramount importance.

The capital intensive nature of the business, brand name

and high startup costs precludes new entrants to a certain

extent and at the same time provides cushion for existing

operators.

Sri Lankan Healthcare Industry

Figure 4: Revenue Shares of Leading Hospitals

Source: Annual Reports

35%

19%

20%

18%

8%

Asiri Durdans Nawaloka Lanka Hemas

2014

0 75 150 225 300 375 450

Nawaloka

Durdans

Asiri Hospital

Asiri Surgical

The Central

Lanka Hospitals

Hemas

Bed capacity

Figure 5: Bed Capacity in Leading Hospitals

Source: Annual Reports, NLE

30,000

32,000

34,000

36,000

38,000

-

300

600

900

1,200

1,500

2009 2010 2011 2012 2013Patients per doctor (LHS)Patients per bed (LHS)Patients per hospital (RHS)

Figure 6: Health Sector Indicators

Source: CBSL

Page 7: HHL Initiation Report.pdf

Pg | 7

Pharmaceuticals Industry

The pharmaceutical market in Sri Lanka is worth approxi-

mately LKR50bn. Around 70% of the market share is held by

the private sector while the remaining market share is held

by public sector institutions. (SLCPI). The local manufactur-

ing accounts for cf. 15% with over 200 products in 2013.

(SLPMA). The Cosmetics, Devices and Drugs Authority

(CDDA) regulates all pharmaceuticals, surgical products,

diagnostic products and health supplements both locally

manufactured and imported.

Since the public sector dominates the healthcare sector, the

main focus of local pharmaceutical manufacturers and im-

porters have been the public healthcare sector. Therefore

competition for government tenders have become fierce.

In addition the popularity in outpatient care of the private

sector and the tendency of people to buy drugs from phar-

macies due to the shortage of drugs in the public hospitals

and service quality disparities, supply of pharmaceuticals to

the private sector also demonstrates growth. In this context

suppliers enjoy relatively more pricing flexibility and bargain-

ing power.

Despite the large number of operators, competitors attempt

to specialize or gain monopolies in particular products. In

addition established operators seems to promote their prod-

ucts through medical practitioners in the industry.

We believe demographic changes such as increasing age-

ing population, rising of chronic diseases, increasing health

awareness will drive demand for healthcare and pharma-

ceuticals. This is further reinforced by the increasing dispos-

able income, overcrowding and inadequate capacity of gov-

ernment hospitals. Further we expect competition in the pri-

vate healthcare sector to rise in the medium term with ca-

pacity expansions especially in urban areas resulting in

downward pressure on prices.

The pharmaceuticals industry would experience modest

growth in volumes due to aforementioned facts and also

face stringent regulations in the medium term.

We expect the doctor centric nature of the industry to contin-

ue supported by powerful unionization.

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

2009 2010 2011 2012 2013Capital expenditure on healthCurrent expenditure on healthImports of medical and pharmaceutical products (govt. & private)

LKRmn. LKRmn.

Figure 7: Health Sector Expenses

Source: CBSL

Figure 8: Non Communicable Diseases Growth

0

0.9

1.8

2.7

3.6

4.5

5.4

1990 1995 2000 2005 2007 2009NeoplasmsMental and behavioural disordersDiseases of the circulatory systemDiseases of the respiratory systemInjury, poisoning and other

Population mn.

Source: Ministry of Health

Figure 9: Aging Population in Sri Lanka

0% 20% 40% 60% 80% 100%

1963

1978

1986

1996

2001

2007

2013

0 - 14 Years 15 - 54 Years 55 Years and Over

Source: CBSL

Page 8: HHL Initiation Report.pdf

Pg | 8

FMCG

Hemas FMCG sector includes a range of well-known and

established products for all age categories in hair care, skin

care, toiletries, fragrances, feminine hygiene, home care and

oral care.

The products are available in nearly 140,000 outlets island

wide ranging from small scale retail stores to large super-

markets. A selected number of Hemas brands are directly

exported to Maldives, Lebanon, Bangladesh, Belize, New

Zealand, Zambia, Malaysia, Pakistan, Australia and Middle

East as well as indirectly exported through Sri Lankan Export

Development Board (SLEDB) approved exporters.

Figure 10: FMCG Sector Contribution

71%

29%

Group FMCG

FMCG vs Group

Revenue67%

33%

Group FMCG

FMCG vs Group EBIT

Major Brands

Brand Description

Baby Cheramy The company’s flagship brand with over 50 years of trusted excellence continues to be market leader and has been the preferred choice of Sri Lankan mothers.

Clogard Re-launched successfully and has recorded significant growth, despite heavy competition and low over all market growth.

Kumarika Maintains position as the market leader in the branded hair oil segment in Sri Lanka which has seen significant demand from the Bangladesh market as well.

Velvet The brand was re-launched as an improved product with dual ingredients to make its proposi-tion more appealing to the consumers, supported by new attractive packaging.

Diva The company’s washing powder continues to provide strong value to the consumers. Diva was re-launched with improved perfume, enhanced washing functionalities and attractive packaging.

PRO Under this new brand name the company launched two variants of ‘Eau De Toilette Spray’ tapping into the premium male fragrances category. Pro hair gel is a well-known for its unique features.

Gold Male fragrance and grooming product range; re-launched to cater to evolving consumer needs.

The Cheramy Touch range This brand has been launched to exploit opportunities in the growing adult Skin Care catego-ry.

Paris, Goya and Capri Female fragrance product range catering to different market segments.

Source: HHL

Contract Manufacturing

Hemas acts as a contract manufacturing partner in the development and manufacture of FMCG products for several

leading companies. This segment has lucrative prospects especially with the trend of supermarket chains promoting own

branded goods.

Page 9: HHL Initiation Report.pdf

Pg | 9

FMCG Industry in Sri Lanka

The LKR133bn Fast Moving Consumer Goods (FMCG) mar-

ket in Sri Lanka is highly competitive and fast changing. The

personal care and household care segment is largely domi-

nated by MNCs. The FMCG market growth is mainly driven

by higher disposable income, new channels and choices of

new products for consumers to choose from and important-

ly, price since consumers are very value conscious in this

segment.

The personal care industry growth exceeded food & bever-

age and household care driven mainly by price increases,

while the growth of household care was below the inflation

rate during the past 3 years. The food and beverages seg-

ment experienced a noticeable decline with the increase in

substitutes and changes in lifestyle.

The emerging lifestyle and personal care products, that ap-

peal to younger consumers demonstrates the highest poten-

tial growth. In a trend perspective, the lucrative target of mar-

keters have been the consumers born in the 1980s and

1990s; the reality TV show era since they represent a signifi-

cant 3.5mn of the population and are becoming increasingly

more influential. In addition to being a group with growing

spending power, Millennials tend to be more optimistic than

the average consumer and exhibits the highest consumer

confidence. They also tend to spend more on themselves

when it comes to discretionary purchases.

Further, package size is a primary consideration in the indus-

try. Retailers and companies have been offering products in

medium-sized packs to provide a price-conscious option

when consumers did not have the economic bandwidth to

spend for larger, higher-cost packages. However, in recent

times, consumers tend to use these options less. Moreover,

more and more consumers tend to gradually shift to either

larger or smaller sizes even when prices for smaller packs

increase. Furthermore the value added branding culture

seems to become more prominent with the influence by

social media networks.

We believe the increasing per capita income of the consum-

ers, increasing standards of living of the rural population,

expanding middle income segment in the economy, influ-

ence of social media and massive influx of tourists into the

country would drive the industry growth further.

Figure 11: FMCG Sector

22%

13%

63%

Personal care

Household care

Food and Beverages

OTC products

Source: HHL

Figure 12: FMCG Sector Growth

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

FMCG-All Food &Beverages

HouseholdCare

Personal Care

All Island All Island (R) All Island (U)

Source: HHL

-

50,000

100,000

150,000

200,000

250,000

2012 2013 2014 2015 2016 2017 2018 2019

Per Capita GDP-current prices (LKR)

LKR

Figure 13: Per Capita GDP Growth

Source: IMF

Page 10: HHL Initiation Report.pdf

Pg | 10

Leisure Sector

The Serendib Leisure Group of Hotels and Diethelm Travels-

make up the Hemas Leisure Sector. The Serendib Leisure

group comprises of four hotels. i.e. Avani Bentota, Avani

Kalutara, Club Hotel Dolphin and Hotel Sigiriya and is locat-

ed on the south and west coast and within the heart of the

cultural triangle. Diethelm Travels is the local branch of a

international travel group. The sector accounts for 5% of the

group revenue and 11% of the group profit.

Leisure structure

Serendib Hotels PLC and Dolphin Hotels PLC are subsidiar-

ies of Hemas Holdings PLC. Serendib Hotels PLC is the ma-

jor shareholder of Hotel Sigiriya PLC (Hotel Sigiriya in Dam-

bulla) and also holds a stake in Dolphin Hotels PLC (Club

Hotel Dolphin and Miami Cottages in Waikkal). It also has a

19.9% stake in Jada Resort & Spa (Pvt.) Ltd. (associate)

which owns Avani Kalutara Resort in Kalutara Serendib Ho-

tels’ fully owned subsidiary Serendib Leisure Management

Ltd. manages all of the above properties. Serendib Leisure is

in partnership with Minor International– A Thailand based

hotel group which owns the ‚Avani‛ and ‚Anantara‛ brands.

Hotel Sigiriya

Hotel Sigiriya has 79 rooms 1 restaurant and was last reno-

vated in 2013. It records an average occupancy of 70% in

2013.

Club Hotel Dolphin

Is located in Waikkal, Negombo and is positioned as an all inclusive club hotel that offers a range of sporting and recrea-

tional activities and also allows for time out and relaxation. It is equipped with 151 rooms which include 99 deluxe rooms

and 50 beach villas. In addition it as 2 restaurants and 5 bars. The hotel was renovated in 2013 with new additions such as

a night club and a karoke bar. The hotel achieved an average occupancy of 84% in 2013.

Avani Kalutara

Located in the southwest coast Avani Kalutara is equipped with 105 rooms and was last renovated in 2012.

Avani Bentota Resort & Spa

It is a beachfront accommodation with 75 rooms, 2 restaurants and 2 bars. It was last renovated in 2011. The hotel

achieved an average occupancy of 68% and posted revenue of LKR429mn.

95%

5%

Group Leisure

Leisure vs Group

Revenue

87%

13%

Group Leisure

Leisure vs Group

EBIT

Figure 14: Leisure Sector Contribution

Source: HHL

0100200300400500600700

Avani Bentota Dolphin hotels Hotel Sigiriya

Revenue Gross Profit Net Profit

LKR mn

Figure 15: Top Hotel Financials

Source: HHL

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Pg | 11

Sri Lankan Tourism

Tourism is a fast-developing industry in Sri Lanka and one of

the main sources of foreign exchange earnings. The island

boasts beautiful natural surroundings and historical sites as

its key tourist attractions. It is continuously on the lookout for

ways and means to attract tourists by widening its portfolio

of offerings to include entertainment, recreation, sports,

ayurveda, wildlife, heritage culture and festivals, moving be-

yond the traditional beach and sand focus.

Commendable support from the government is noticeable

by way of infrastructure development and active promotion

of the country as a holiday location. Further, 45 tourism

zones have been introduced by SLTDA as a means of

streamlining the development of the industry and attracting

foreign direct investments.

Significant foreign interest is apparent in the leisure sector

with many international hotel brands entering the country

which will in turn uplift the industry standards and stimulate

healthy competition. Further, this signifies the importance for

existing operators of expertise and international brand pres-

ence in gaining competitive advantage.

Europeans have been the largest source market in the in-

dustry with substantial development from non traditional

markets such as India, China and Middle East which we

believe helps reduce the seasonality experienced in the in-

dustry.

Notably hotel operators attempt to improve online presence

and encourage online reservations. Also seems to enrich

their offerings to include more innovative activities such as

water sports, hot air ballooning and safaris, with the inten-

tion of increasing average stay of tourists.

At present the lack of international grade resorts and com-

paratively higher room rates discourage tourist to visit the

country to some extent and favor countries such as Malay-

sia, Indonesia and Thailand.

Further skilled labor in the industry experiences a shortage

and we expect this to further worsen in the future with inter-

national brands entering the Sri Lankan hotel industry.

Figure 16: Peer Country Tourist Arrivals

0%

5%

10%

15%

20%

25%

30%

0

5

10

15

20

25

30

Srila

nka

Thai

land

Viet

nam

Mal

dive

s

Mal

aysi

a

Indo

nesi

a

Cam

bodi

a

Mill

ion

s

2011 2012 Growth

Arrivals mn Growth YoY

Source: UNWTO

0

100

200

300

400

500

600

WesturnEurope

EasternEurope

NorthAmerica

Asia Australia Other

2012 2013

Arrivals '000

Figure 17: Arrivals by Market

Source: SLTDA

Figure 18: Average Occupancy

0%

20%

40%

60%

80%

100%

Club Hotel Dolphinavg. occupancy

Avani Bentota avg.occupancy

Hotel Sigiriya avg.occupancy

Ancient cities avg. occupancy

Greater Colombo avg. occupancy

Source: SLTDA, HHL

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Pg | 12

The group’s transportation sector’s business portfolio in-

cludes aviation, maritime and logistics services. The sector

accounts for 5% of the group revenue and 18% of the group

EBIT.

Aviation Services

Aviation services include air line representation and out-

bound travel. It represents Emirates, Malaysia, Maldivian

airlines in both passenger and cargo services as well as

Ukraine international, Druke, Alithalia airlines in the passen-

ger only services segment.

In its outbound travel segment Hemas Travels operates trav-

el agencies. The corporate travel services is partnered with

Hogg Robinson Group, an international corporate services

organization headquartered in the UK.

The leisure arm offers both packaged and customized vaca-

tions. It also operates coach tours and is the local agent for

Globus and Cosmos worldwide tours. Further, it is also local

agent for Royal Caribbean Cruise Lines, & Gulliver's Travel

Associates

Passenger arrivals demonstrate a steady increase of 9.2%

CAGR during 2011-13 along with commendable capacity

improvement with several new airlines entering the country.

We expect the segment to grow especially through im-

proved GSA sales supported by increased corporate, incen-

tive and leisure travel. This is well supported by the boom in

the tourist industry, improved disposable income and the

efforts and focus of the government to position Sri Lanka as

an aviation hub through promotions and infrastructure de-

velopment.

Transportation Sector

Figure 19: Transportation Sector Contribution

95%

5%

Group Transportation

Transportation vs Group Revenue

82%

18%

Group Transportation

Transportation vs Group EBIT

Source: HHL

Figure 20: Airline Operations, Growth and Market Share

-60

-40

-20

0

20

40

60

80

- 500

1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500

SriL

anka

n

Emira

tes

Mih

in

Qat

ar

Fly

Dub

ai

Jet A

irway

s

Cath

ay P

acifi

c

Air A

rabi

a

Sing

apor

e

Mal

aysi

an

Oth

er

2012 2013 Growth YoY Market share (2013)

Passenger traffic '000 %

Source: AASL

Figure 21: Flight, Cargo and Passenger Movement

5,500

6,000

6,500

7,000

7,500

0

50

100

150

200

250

2010

2011

2012

2013

Tho

usa

nd

s

International flight movements nos.Cargo movement M.T.Passenger movement nos.

'000 '000

Source: AASL

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Pg | 13

Logistics

The logistics business includes freight forwarding, courier

services, general carries and warehousing. The company

has exited the joint venture with Skynet Worldwide and is in

talks with Hellman Worldwide Logistics for a mutual parting.

We believe the segment is more liner now with ACX interna-

tional focusing on courier services and Hemas logistics fo-

cusing on general carries and warehousing.

Maritime

The sector acts as a shipping agent, provides maritime services and is involved in strategic investments. Far Shipping

Lanka (FSL) acts as the exclusive shipping agent for Far Shipping Lines (FSL) Singapore, a leading feeder service to the

Indian subcontinent. In addition it provides shipping agency services including crew changes, import and export (Sea/Air)

shipments of ship spares, CTM (Cash To Master), ship repairing (ashore and anchorage), periodic and annual inspection

and certification of life saving equipment on board amongst other services to vessels calling at ports at Colombo, Galle,

Hambantota and Trincomalee. Furthermore the group has a strategic investment in Mercantile Shipping PLC.

Globally the maritime industry is yet being impacted by sluggish growth in trade volumes due to the economic situation in

the west and the prevalent over-capacity situation in the industry. However Sri Lankan container handling throughput

exhibits satisfactory development (2.8% in 2013) and we expect this to continue with the expected gradual recovery in the

western economy, government’s pursue towards making the country a maritime hub and Hemas maritime sector being

positioned with strong partnerships such as with Far Shipping Singapore.

Other

Hemas other business includes corporate services, property

development, Financial accounting BPO, information tech-

nology solutions, importing and distributing agro chemicals,

promotional activities and wharf clearing services.

Figure 22: Colombo Port Cargo Handling

58

60

62

64

66

68

2010 2011 2012 2013

0

1

2

3

4

5

Tho

usa

nd

s

Tho

usa

nd

s

Total container traffic (TEUs mn) (LHS)Transshipment containers (TEUs mn) (RHS)Total cargo handled (MT mn) (LHS)

Mn.Mn.

Source: CBSL

Figure 23: Other Sector Contribution

95%

5%

Group Others

Other vs Group

Revenue

5%

-3%

2013

2014Other vs

Group EBIT

Source: HHL

Power

The group divested its investment in Hemas Power PLC to a

consortium of buyers recently. The power segment of He-

mas contributed 20% of the group revenue in FY2014. How-

ever the contribution to EBIT fell to –3% in FY2014 cf. 13% in

FY2013. Changing weather patterns have resulted in long

periods of drought and has lead to the dependence on ther-

mal power in the industry.

Page 14: HHL Initiation Report.pdf

Pg | 14

0%

20%

40%

60%

80%

100%

FY2013 FY2014 FY2015E FY2016E FY2017EHealthcare FMCG TransportationOther Leisure Power

Revenue

Group revenue increased 25.8% yoy in FY2014 to LKR32.8b cf. LKR26.1b in FY2013 crossing the LKR30b mark for the

first time. The acquisition of J. L. Morison Son and Jones (Ceylon) PLC (JLM) during FY2014 contributed significantly to

revenue growth with LKR2.7b.

Highest contributor to group revenue is the healthcare sector (36.7%) which increased 34.4% yoy to LKR12.1b in

FY2014. The growth was mainly attributable to the acquisition of JLM and new revenue from the hospital in Thalawa-

thugoda.

FMCG and Power sectors followed with 29.1% and 19.7% in FY2014 respectively.

The leisure sector revenue declined 4.9% yoy in FY2014 due to 2 hotel properties being closed for refurbishment.

At group level revenue increased at a CAGR of 23.5% with the highest contribution to growth from the transportation

segment.

We expect group revenue to decline 10.0% yoy to LKR29.5b in FY2015E with the divestment of Hemas Power PLC

(which contributed to 19.7% of total revenue in FY2014).

Consequently the revenue share from the healthcare segment should increase to 44.1% in FY2015E from 36.7% in

FY2014 with 8.0% growth yoy.

However, we expect group revenue to increase at a CAGR of 13.9% from FY2015E-17E with the highest contribution to

growth arising from the leisure segment.

We expect leisure segment revenue to grow at a CAGR of 21.5% from FY2014-17E with the new 154 room luxury hotel

to be opened in FY2016E. Further, with recent refurbishment carried out in two hotel properties, Club Hotel Dolphin

and Hotel Sigiriya, we expect average occupancy to improve to 80% by FY2017E from current 75%.

Financial Analysis

Figure 25: Group Revenue

Source: HHL, NLE

Figure 24: Sector Wise Contribution to Revenue

Source: HHL, NLE

-15%-10%-5%0%5%10%15%20%25%30%

0

10,000

20,000

30,000

40,000

50,000

FY2012 FY2013 FY2014 FY2015EFY2016EFY2017E

Revenue (LKRmn) (LHS) YoY Growth (RHS)

Page 15: HHL Initiation Report.pdf

Pg | 15

0.0%

5.0%

10.0%

15.0%

20.0%

FY2012 FY2013 FY2014 FY2015E FY2016E FY2017E

ROE ( Equity holders) ROCE ROA

Profitability

EBIT excluding the gain from change in fair value of

investment property (LKR729mn) and share of profit of

associates (LKR12mn) increased 11.3% yoy to LKR2.6b

in FY2014 with the highest contribution coming from the

healthcare segment (41.6% yoy growth and 31.3% EBIT

margin).

The power sector made an operating loss of LKR75mn

with an impairment charge of LKR576mn upon the Pow-

er Purchase Agreement (PPA) of the thermal power

plant being ceased in December 2014, which is unlikely

to be renewed.

The closure of the 2 hotel properties also contributed to

reduced profitability with EBIT of the segment declining

32.6% yoy in FY2014.

Net profit increased 32.3% yoy to LKR2.6b in FY2014

(including one off items i.e. gain in change of fair value

of investment property of LKR729mn and impairment of

thermal assets of LKR576mn).

The gain in change of fair value of investment property

is attributable to the transfer of land to a joint venture to

commence construction of a hotel.

We expect EBIT to be at LKR3,256mn in FY2015E cf.

LKR3,378mn in FY2014. The reduction is on the back of

change in FV gain of LKR729mn recorded in FY2014.

The divestment of Hemas Power PLC will be beneficial

relating to its effect on profitability eliminating the losses

incurred by the power segment.

ROE and ROA increased to 18.2% and 8.0% in FY2014

respectively cf. 14.6% and 6.8% in FY2013 mainly at-

tributable to increased profitability and increased effi-

ciency of assets. With reduced profitability in FY2015E,

we expect ROE and ROA to decline to 14.8% and 6.5%

in FY2015E and improve thereafter.

0%

2%

4%

6%

8%

10%

12%

0

1,000

2,000

3,000

4,000

5,000

FY2012 FY2013 FY2014 FY2015E FY2016E FY2017E

EBIT (LKRmn) (LHS) EBIT Margin (RHS)

0%

2%

4%

6%

8%

10%

12%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

FY2012 FY2013 FY2014 FY2015E FY2016E FY2017E

Net Profits (LKRmn) (LHS) NP Margin (RHS)

Figure 26: ROE, ROA and ROCE

Figure 27: EBIT

Figure 28: Net Profit

Source: HHL, NLE

Source: HHL, NLE

Source: HHL, NLE

Page 16: HHL Initiation Report.pdf

Pg | 16

Group Property, Plant and Equipment increased 20.2% yoy in FY2014 mainly attributable to the acquisition of JLM.

Net Assets of the group stood at LKR27.75 at the end of FY2014 and LKR28.05 at the end of Q1FY2015.

The gearing ratio stood at 22.9% (excluding overdraft) at the end of FY2014, cf. 16.7% in FY2013 with net additions

amounting to LKR2b during the year.

With the aim of restructuring the balance sheet the company issued 5 year LKR1b debentures at 11.3% (effective

rate). The proceeds will be utilized to pay off existing debt allowing the company to have both fixed and floating rate

borrowings.

The repayment of debt will result in reduced gearing which we expect to lower to 17.0% in FY2015E and improve fur-

ther in the subsequent years.

0%

20%

40%

60%

80%

100%

120%

FY2012 FY2013 FY2014 FY2015E FY2016E FY2017E

Short term Debt % Long term Debt %

Figure 30: Net Assets Figure 29: Debt Composition

Source: HHL, NLE Source: HHL, NLE

Figure 32: Liquidity

0.00

0.50

1.00

1.50

2.00

FY2012 FY2013 FY2014 FY2015E FY2016E FY2017E

Current Ratio Liquidity Ratio

Source: HHL, NLE

Figure 31: Total Debt to Equity

0%

5%

10%

15%

20%

25%

0

10,000

20,000

30,000

FY2012 FY2013 FY2014 FY2015EFY2016EFY2017ETotal Equity (LKRmn) (LHS)Total Debt (LKRmn) (LHS)Total Debt to Capital % (RHS)

Source: HHL, NLE

0.00

10.00

20.00

30.00

40.00

50.00

FY2012 FY2013 FY2014 FY2015E FY2016E FY2017ENet Asset Value per share (LKR)

Financial Position

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Pg | 17

LKR ‘000 FY2012 FY2013 FY2014 FY2015E FY2016E FY2017E Statement of Comprehensive Income Revenue 21,532,503 26,098,362 32,833,249 29,550,370 34,311,545 38,340,415 Gross profits 6,574,778 8,023,271 10,219,439 9,160,615 10,636,579 11,885,529 EBIT 1,783,950 2,436,994 3,378,598 3,256,852 3,829,979 4,331,622 Profit Before Tax 1,521,080 2,409,541 3,047,239 2,891,511 3,607,391 4,174,626 Net Profit 1,261,308 1,935,843 2,560,905 2,430,031 3,180,686 3,689,708 Net Profit for equity holders 1,164,525 1,659,660 2,409,276 2,235,628 2,862,617 3,357,634 EPS - LKR 2.45 3.76 4.97 4.72 6.17 7.16 Statement of Financial Position Total Non-Current Assets 11,853,344 13,059,937 17,630,397 15,483,049 16,925,885 18,521,129 Total Current Assets 10,802,342 12,947,721 16,748,492 17,210,444 19,021,108 21,189,612 Total Equity (with Minority Interest) 12,640,944 14,412,379 17,629,635 18,367,073 21,064,337 24,270,623 Total Non-Current Liabilities 1,938,996 2,803,970 4,327,089 3,410,370 2,994,859 2,704,001 Total Current Liabilities 8,075,746 8,791,309 12,422,165 10,916,050 11,887,798 12,736,117 NAV Per share - LKR 20.67 23.58 27.75 31.59 36.35 42.06 Statement of Cash Flow Net Operating Cash Flow 1,507,983 1,863,616 2,895,800 3,872,027 3,511,183 4,246,482 Net Investing Cash Flow (1,608,823) (1,361,483) (4,662,937) (387,716) (2,401,808) (2,683,829) Net Financing Cash Flow (437,744) 131,349 1,140,803 (1,603,128) (1,077,008) (898,932) Net Change in Cash (538,584) 633,482 (626,334) 1,881,183 32,366 663,721 Growth ratios (%) Revenue YoY 19.2% 21.2% 25.8% (10.0%) 16.1% 11.7% Gross profit YoY 12.6% 22.0% 27.4% (10.4%) 16.1% 11.7% Operating profit YoY 2.5% 36.6% 38.6% (3.6%) 17.6% 13.1% Profit Before Tax YoY (3.1%) 58.4% 26.5% (5.1%) 24.8% 15.7% Net profit YoY (6.9%) 53.5% 32.3% (5.1%) 30.9% 16.0% Net profit- parent YoY -3.8% 42.5% 45.2% (7.2%) 28.0% 17.3% Margins (%) Gross profit 30.5% 30.7% 31.1% 31.0% 31.0% 31.0% EBITDA 11.2% 12.0% 13.0% 13.9% 14.0% 14.1% Operating profit 8.3% 9.3% 10.3% 11.0% 11.2% 11.3% Profit before tax 7.1% 9.2% 9.3% 9.8% 10.5% 10.9% Net profit 5.9% 7.4% 7.8% 8.2% 9.3% 9.6% Turnover ratios (x) Inventory turnover 8.1x 8.2x 7.1x 5.8x 7.2x 7.0x Receivable turnover 4.2x 4.0x 4.2x 3.6x 4.0x 3.9x Payable turnover 3.2x 3.3x 3.3x 2.7x 3.1x 3.0x Other ratios (%) ROE (to equity holders) 11.9% 14.6% 18.2% 14.6% 16.4% 16.6% ROA 5.6% 6.8% 8.0% 6.7% 8.3% 8.9% ROCE 13.1% 15.3% 17.2% 14.9% 16.7% 17.0% Dividend Payout 20.4% 14.6% 15.1% 12.7% 13.0% 11.2% Gearing ( Total Debt to Capital) 15.5% 16.7% 22.9% 16.6% 12.7% 9.8% Current ratio (x) 1.3x 1.5x 1.3x 1.6x 1.6x 1.7x Liquidity ratio (x) 1.1x 1.2x 1.0x 1.3x 1.3x 1.4x

Financial Snapshot

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LKR ‘000 FY2012 FY2013 FY2014 FY2015E FY2016E FY2017E

Revenue 21,532,503 26,098,362 32,833,249 29,550,370 34,311,545 38,340,415 Cost of Sales (14,957,725) (18,075,091) (22,613,810) (20,389,756) (23,674,966) (26,454,887) Gross Profit 6,574,778 8,023,271 10,219,439 9,160,615 10,636,579 11,885,529 EBITDA 2,413,372 3,144,587 4,284,570 4,099,830 4,788,951 5,420,207 Depreciation 629,422 707,593 905,972 842,979 958,972 1,088,585 Operating Profit 1,783,950 2,436,994 3,378,598 3,256,852 3,829,979 4,331,622 Finance Cost (465,269) (370,103) (657,076) (691,058) (548,304) (482,713) Finance Income 202,399 342,650 325,717 325,717 325,717 325,717 Profit Before Tax 1,521,080 2,409,541 3,047,239 2,891,511 3,607,391 4,174,626 Income Tax Expenses (259,772) (473,698) (486,334) (461,480) (426,706) (484,918) Profit for the Year 1,261,308 1,935,843 2,560,905 2,430,031 3,180,686 3,689,708 Equity Holders of the Parent 1,164,525 1,659,660 2,409,276 2,235,628 2,862,617 3,357,634 Non-Controlling Interests 96,783 276,183 151,629 194,402 318,069 332,074

LKR ‘000 FY2012 FY2013 FY2014 FY2015E FY2016E FY2017E

Profit Before Taxation 1,521,080 2,409,541 3,047,239 2,891,511 3,607,391 4,174,626 Net Cash flows from Operations 1,507,983 1,863,616 2,895,800 3,872,027 3,511,183 4,246,482 Net Cash flow from Investments (1,608,823) (1,361,483) (4,662,937) (387,716) (2,401,808) (2,683,829) Net Cash flows from Financing (437,744) 131,349 1,140,803 (1,603,128) (1,077,008) (898,932) Net Increase/(Decrease) (538,584) 633,482 (626,334) 1,881,183 32,366 663,721 Beginning Cash/ Cash Equivalents 1,101,008 561,533 1,194,936 570,587 2,451,770 2,484,136 Ending Cash/ Cash Equivalents 561,533 1,194,936 570,587 2,451,770 2,484,136 3,147,857

Income Statement

Cash Flow Highlights

Page 19: HHL Initiation Report.pdf

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LKR ‘000 FY2012 FY2013 FY2014 FY2015E FY2016E FY2017E

ASSETS

Non Current Assets

Property, Plant and Equipment 10,283,616 11,293,957 13,571,854 11,424,506 12,867,342 14,462,586 Investment Properties 474,685 578,453 1,683,130 1,683,130 1,683,130 1,683,130 Leasehold Right 94,455 90,592 145,847 145,847 145,847 145,847 Intangible Assets 461,499 436,701 1,333,247 1,333,247 1,333,247 1,333,247 Investment in Associates 179,399 221,325 380,303 380,303 380,303 380,303 Other Non Current Financial Assets 324,069 399,147 457,435 457,435 457,435 457,435 Deferred Tax Assets 35,621 39,762 58,581 58,581 58,581 58,581 11,853,344 13,059,937 17,630,397 15,483,049 16,925,885 18,521,129 Current Assets

Inventories 2,004,989 2,425,137 3,932,906 3,058,463 3,551,245 3,968,233 Trade and Other Receivables 5,854,420 7,047,695 8,523,389 7,978,600 9,264,117 10,351,912 Tax Recoverable 134,306 78,590 126,716 126,716 126,716 126,716 Other Current Financial Assets 361,515 172,919 1,032,714 1,032,714 1,032,714 1,032,714 Cash and Short Term Deposits 2,447,112 3,223,380 3,132,767 5,013,950 5,046,316 5,710,037 10,802,342 12,947,721 16,748,492 17,210,444 19,021,108 21,189,612 TOTAL ASSETS 22,655,686 26,007,658 34,378,889 32,693,493 35,946,994 39,710,742

EQUITY AND LIABILITIES

Equity

Stated Capital 1,600,603 1,600,603 1,600,603 1,600,603 1,600,603 1,600,603 Other Capital Reserves 440,601 409,751 400,289 400,289 400,289 400,289 Other Components of Equity 1,161,253 1,314,477 922,551 922,551 922,551 922,551 Retained Earnings 7,447,822 8,828,511 11,377,081 13,354,824 15,805,209 18,750,611 Equity Attributable to Equity Holders 10,650,279 12,153,342 14,300,524 16,278,267 18,728,652 21,674,054 Non-Controlling Interests 1,990,665 2,259,037 3,329,111 2,088,805 2,335,685 2,596,570 Total Equity 12,640,944 14,412,379 17,629,635 18,367,073 21,064,337 24,270,623 Non Current Liabilities Interest Bearing Loans and Borrow. 1,384,827 2,182,887 3,468,422 2,551,703 2,136,192 1,845,334 Other Non Current Financial Liability 144,518 140,343 158,010 158,010 158,010 158,010 Deferred Tax Liabilities 161,309 193,313 273,418 273,418 273,418 273,418 Employee Benefit Liability 248,342 287,427 427,239 427,239 427,239 427,239 1,938,996 2,803,970 4,327,089 3,410,370 2,994,859 2,704,001 Current Liabilities Trade and Other Payables 5,189,966 5,906,044 7,956,628 7,136,414 8,286,238 9,259,210 Income Tax Payable 63,743 141,591 123,869 123,869 123,869 123,869 Interest Bearing Loans and Borrow. 936,458 715,230 1,779,488 1,093,587 915,511 790,858 Bank Overdrafts 1,885,579 2,028,444 2,562,180 2,562,180 2,562,180 2,562,180 8,075,746 8,791,309 12,422,165 10,916,050 11,887,798 12,736,117 TOTAL LIABILITIES 10,014,742 11,595,279 16,749,254 14,326,420 14,882,657 15,440,118 TOTAL EQUITY AND LIABILITIES 22,655,686 26,007,658 34,378,889 32,693,493 35,946,994 39,710,742

Balance Sheet

Page 20: HHL Initiation Report.pdf

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Du Pont Analysis FY2012 FY2013 FY2014 Sustainable Growth Rate 9.5% 12.4% 15.5% ROE 11.9% 14.6% 18.2%

Financial Leverage 2.14x 2.13x 2.28x ROA 5.6% 6.8% 8.0%

Asset Turnover 1.03x 1.07x 1.09x Profit Margin 5.4% 6.4% 7.3%

Interest Burden 0.85x 0.99x 0.90x Tax Burden 0.83x 0.80x 0.84x Minority 0.92x 0.86x 0.94x

Net profit margin increased to 7.3% in FY2014 from 6.4% in FY2013 as a result of EBIT margin increasing from 9.3% to 10.3%, effective taxation decreasing from 19.7% to 16.0% and the share attributable to minority declining from 14.3% to 5.9% over the same period which counteracted the effect of increasing finance expenses.

Efficiency of assets increased from 1.07x to 1.09x resulting in an increased ROA of 8.0% in FY2014 cf. 6.8% in FY2013. With increased debt utilized to finance the purchase of assets financial leverage increased from 2.13 to 2.28 resulting in a higher ROE of 18.2% in FY2014 cf. 14.6% in FY2013.

Page 21: HHL Initiation Report.pdf

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Valuation

Primary Valuation

We have used the SOTP method as the primary valuation to arrive at a per share price of LKR78. FMCG, healthcare, lei-sure and transportation segments have been valued using the P/E multiples applicable to each segment. FMCG sector is valued using a multiple of 21.1x (discounted average multiple of CARG and NEST), healthcare sector valued at 9.7x (discounted sector P/E), leisure sector valued using a multiple of 12.4x (average of CONN, STAF and PEG), transportation sector valued at 15.7x (discounted P/E multiple of DOCK) and the other segment is valued at the fair value of net assets to arrive at a total equity value of LKR40b.

Sector Valuation method Multiple (x) Equity value (LKRmn) Per share (LKR)

FMCG P/E 21.7 16,921 33 Healthcare P/E 9.7 6,255 12 Leisure P/E 12.0 778 2 Transportation P/E 15.7 6,316 12 Other Net Assets 10,013 19

40,283 78

Secondary Valuation

The derived target price of LKR78 is further justified by our EV/EBITDA valu-ation which gives a per share price of LKR80 based on a EV/EBITDA multi-ple of 10.1x. HHL will trade at a EV/EBITDA multiple of 8.5x in FY2015E cf. the peer average of 11.0x which we believe is not warranted given the growth prospects of the company. HHL revenue is expected to grow at a CAGR of 13.9% from FY2015E-17E fuelled by the expected growth in the healthcare segment. The strength-ened distribution channel and variety of products offered with the acquisi-tion of JLM should boost company revenue and profitability. The leisure segment should also contribute to growth of the company with the new luxury hotel to commence operations in FY2016E. The divestment of He-mas Power PLC, even though there will be an impact to the top line, with the elimination of losses in the power segment we expect EBIT margin to improve to 11.0% in FY2015E and net profit margin to improve to 8.2% from 10.3% and 7.8% respectively. HHL has been able to generate superior returns well above its peers with ROE and ROA standing at 18.2% and 8.0% in FY2014 cf. the peer averages of 10.3% and 5.0% respectively. Hence, we believe HHL should be assigned with a higher multiple of 10.1x to be trading at a price target of LKR80.

LKRmn

Enterprise Value (current) 34,708 EBITDA 2015E 4,100 EV/EBITDA (x) 2015E 8.5 Target multiple (x) 10.1 Target EV 34,708 Market cap. Intrinsic value 41,266 No of shares (mn) 515 Value per share (LKR) 80

EV/EBITDA ROE FY2014 ROA FY2014

HHL 8.47x 18.2% 8.0% JKH 17.62x 11.0% 6.5% SPEN 7.43x 12.2% 6.3% CTHR 10.45x 7.5% 2.3% Average 11.83x 10.2% 5.0%

Page 22: HHL Initiation Report.pdf

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Appendix 1: HHL Share Price Movement Vs. ASPI

0

50

100

150

200

250

300

1/4/2010 1/4/2011 1/4/2012 1/4/2013 1/4/2014ASPI HHL

LKR

Source: Bloomberg, NLE

-

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14

LKR

14.2x

12.4x

10.5x

8.7x

6.9x

5.0x

Source: Bloomberg, NLE

Appendix 2: P/E Band Chart

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Appendix 3: Subsidiaries, Associates and Joint-Ventures

FMCG Eff. holding Voting Principal activities

Hemas Manufacturing (Pvt) Ltd 100% 100% Manufacture of FMCG Products

Hemas Marketing (Pvt) Ltd 100% 100% Trading & Distribution of FMCG Products

Hemas Trading (Pvt) Ltd 100% 100% Import and sale of Food Products

Hemas Consumer Brands (Pvt) Ltd 100% 100% Trading of FMCG Products

Unicorn Investment (Pvt) Ltd 100% 100% Reserch and Development Services

J L Morison Son & Jones (Ceylon) PLC 89% 89% Importing and distribution of consumer products

Healthcare Eff. holding Voting Principal activities

Hemas Pharmaceuticals (Pvt) Ltd 100% 100% Distribution of Pharmaceutical Products

Hemas Surgical & Diagnostics (Pvt) Ltd 100% 100% Distribution of Healthcare Products

Hemas Hospitals (Pvt) Ltd 83% 83% Hospital Services

Hemas Southern Hospitals (Pvt) Ltd 83% 83% Hospital Services

Hemas Capital Hospital (Pvt) Ltd 83% 83% Hospital Services

Hemas South Colombo Hosipitals (Pvt) Ltd 83% 83% Hospital Services

Hemas Clinical Research Services (Pvt) Ltd 100% 100% Support Services of Clinical Trials

J L Morison Son & Jones (Ceylon) PLC 89% 89% Importing and distribution of Pharmaceuticals and medical aid

M. S. J. Industries (Ceylon) (Pvt) Ltd 89% 89% Manufacturing and Trading Pharmaceuticals

Leisure Eff. holding Voting Principal activities

Leisure Asia Investments Ltd 100% 100% Investment Holding Company

Serendib Hotels PLC 51% 51% Operating a Tourist Hotel and Investment 'Holding Company

Hotel Sigiriya PLC 32% 51% Operating a Tourist Hotel

Dolphin Hotels PLC 39% 51% Operating a Tourist Hotel

Miami Beach Hotel Ltd 33% 51% Operating a Tourist Hotel

Serendib Leisure Management Ltd 51% 51% Operating a Tourist Hotel

Jada Resorts & Spa (Pvt) Ltd 20% 20% Operating a Tourist Hotel

Diethelm Travel Lanka (Pvt) Ltd 60% 60% Destination Management Services

Diethelm Travel The Maldives (Pvt) Ltd 49% 49% Destination Management Services

Hemtours (Pvt) Ltd 100% 100% Destination Management Services

Conventions Asia (Pvt) Ltd 100% 100% Event Management

Mowbray Hotels Ltd 89% 89% Hotel Property

PH Resort & Spa (Pvt) Ltd 50% 50% Hotel Property

Page 24: HHL Initiation Report.pdf

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Appendix 3: Subsidiaries, Associates and Joint-Ventures

Transportation Eff. holding Voting Principal activities

Forbes Air Services (Pvt) Ltd 100% 100% GSA Emirates Airline

Hemas Air Services (Pvt) Ltd 100% 100% GSA Malaysian Airline

Hemas Travels (Pvt) Ltd 100% 100% Travel Agent

Hemas Aviation (Pvt) Ltd 100% 100% Airline Representation

Exchange & Finance Investment (Pvt) Ltd 100% 100% Airline Representation

Discover the World Marketing (Pvt) Ltd 100% 100% Airline Representation

Far Shipping Lanka (Pvt) Ltd 100% 100% Shipping Agents

Hemas Transportation (Pvt) Ltd 100% 100% Shipping Agents

HIF Logistics (Pvt) Ltd 49% 49% Freight Forwarders

ACX International (Pvt) Ltd 49% 49% Courier Services

H & M Shipping (Pvt) Ltd 50% 50% Crew Boat Servicing

Hemas Maritime (Pvt) Ltd 100% 100% Break Bulk Casual Callers & Cargo Handling

Hemas Logistics (Pvt) Ltd 57% 57% General Carries & Warehousing

Hemas Integrated Logistics (Pvt) Ltd 57% 57% General Carries & Warehousing

Other Eff. holding Voting Principal activities

Hemas Corporate Services (Pvt) Ltd 100% 100% Corporate Secretaries

Hemas Developments (Pvt) Ltd 100% 100% Property Development

Vishwa BPO (Pvt) Ltd 100% 100% Financial & Accounting BPO

Peace Haven Resorts Ltd 100% 100% Hotel Property

N-able (Pvt) Ltd 100% 100% Enabling Information & Technology Solutions

J L Morison Son & Jones (Ceylon) PLC 89% 89% Importing and distribution of Agro Chemicals

M. S. J. Promotional Services 89% 89% Promotional Activities

M. S. J. Cargos (Ceylon) (Pvt) Ltd 89% 89% Wharf Clearing Activities

M. S. J. Hotels (Ceylon) (Pvt) Ltd 89% 89% Hotel Industry

M. S. J. Foods (Ceylon) (Pvt) Ltd 89% 89% Food and Beverage

M. S. J. Tours (Ceylon) (Pvt) Ltd 89% 89% Transport Services

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Appendix 4: Board of Directors

Board Member Mr. H N Esufally Non-Executive Chairman He assumed responsibility as CEO in January 2001, and

was appointed Chairman in November 2013.

Mr. Steven Enderby Executive Director / CEO He joined Hemas to head up the group efforts in mergers and acquisitions and strategy. He was appointed to the board of management of Hemas Holdings PLC in May 2013. Steven took up the office of Deputy CEO and Director of Hemas Holdings PLC in November 2013 and was ele-vated to the status of Group CEO on 1st April 2014.

Mr. A N Esufally Non-Executive Director He serves as Chairman of Serendib Hotels PLC and Dol-phin Hotels PLC.

Mr. I A H Esufally Non-Executive Director He is the Chairman of the transportation sector and on the board of Mercantile Shipping PLC. He was elected as Chairman of Hemas Power PLC in April 2012 and also serves as a member of the audit committee.

Mr. M E Wickremesinghe Chairman - Audit Committee Mr. M A H Esufally Executive Director Chairman of Hemas Hospitals (Pvt) Ltd and Hemas Phar-

maceuticals (Pvt) Ltd. Mr. P K Mohapatra Chairman Remuneration Commit-

tee He sits on the Board of 15 publicly quoted as well as pri-vate companies in India, South Asia, USA and Europe.

Mr. R Gopalakrishnan Chairman Nominations and Gov-ernance Committee

He currently serves as Director of Tata Sons Ltd and also serves as the Chairman of four Tata companies.

Mr. Dinesh Weerakkody Independent Director He currently serves as Chairman of Commercial Bank of Ceylon.

Dr Anura Ekanayake Independent Directo Mr. Malinga Arsakularatne Executive Director/ Chief Financial

Officer

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Appendix 5: Shareholder Information

Top 20 Shareholders Holding

A Z Holdings (Private) Limited 17.61%

Saraz Investments (Private) Limited 16.77%

Blueberry Investments (Private) Limited 16.65%

Amagroup (Private) Limited 16.65%

Employees Provident Fund 5.29%

Hsbc Inttl Nom Ltd-Ssbt-National Westminster Bank PLC 1.89%

Hsbc Inttl Nom Ltd-Ssbt-National Westminster Bank PLC 1.22%

Murtazaali Abidhussen Hassanaly Esufally 1.15%

Husein Nuruddin Esufally 1.13%

Jacey Trust Services (Private) Limited-Account No-2 1.12% Hsbc Inttl Nominees Ltd-Jpmcb-Scottish ORL SML TR GTI 6018 1.00%

Lexinton Holdings (Private) Limited 0.96%

Sri Lanka Insurance Corporation Ltd-Life Fund 0.92%

Jacey Trust Services (Private) Limited 0.89%

Employees Trust Fund Board 0.86%

Imtiaz Abidhusein Hassanally Esufally 0.86%

Anverally And Sons (Private) Ltd - A/C No.1 0.82%

Hsbc Inttl Nom Ltd-Jpmcb-Pacific Assets Trust PLC 0.59%

Cocoshell Activated Carbon Company Limited 0.58%

J B Cocoshell (Pvt) Ltd 0.58%

93%

7%

Resident

Non Resident

91%

9%

Institutional

Individual

Figure 35: Shareholding Figure 36: Shareholding

67.7%

28.2%

3.6%

Controlling Interest Public Holding

Directors Shareholding Close Family Members

Source: HHL

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Contact Us

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