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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 | nathasha@nlequities.com| Mobile: +94779826558 Co analyst: Tharindu Kaduruwewa | tharinduk@nlequities.com | 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.

    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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    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 | nathasha@nlequities.com| Mobile: +94779826558

    Co analyst: Tharindu Kaduruwewa | tharinduk@nlequities.com | Mobile: +94775924545 Source: Bloomberg, NLE

  • 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 Lankas 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

  • Pg | 3

    SWOT Analysis

    Strengths Weakness

    Opportunities Threats

    Position as Sri Lankas 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

  • 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 HHLs 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 Lankas 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

    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 sectors 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 companys 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 companys 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-

    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

  • 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

  • Pg | 12

    The groups transportation sectors 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

  • 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, governments 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.

  • 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)

  • 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

  • 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

  • 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

  • Pg | 18

    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

  • Pg | 19

    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

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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.

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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%

  • Pg | 22

    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

  • Pg | 23

    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

  • Pg | 24

    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

  • 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

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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

  • Pg | 27

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