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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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.
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
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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
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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.
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
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
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
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
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.
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
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-
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.
Pg | 21
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)
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
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
Pg | 25
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
Pg | 26
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%
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