Sri Lanka Equity Analytics Markets 7 February 2010 66 views No Comment  Print This Post  Email This Post

Lanka Tiles (TILE: LKR71.75) has recorded a staggering 71% YoY growth in its 3QFY10 net earnings, resulting in an increase in the cumulative 1-3QFY10 net profits by a sharp 27% YoY. This is mainly attributable to the increase in the level of revenue due to the high demand triggered by the international market resulting in an increase of 97% in export sales for the 3QFY10.

TILE, the pioneer floor tile producer in Sri Lanka was incorporated in 1984 to manufacture Ceramic Glazed Floor Tiles as its core business. At present this is the second largest floor tile producer of the country with an approximate market share of 35%.

TILE is operating with a per day production capacity of approximately 9,500 square meters. Approximately 90% of the output is sold locally while the remaining 10% of the output is exported to countries such as Canada, USA, Middle East, Maldives, Australia, New Zealand, Japan and Singapore.

With the favourable economic conditions prevailing in Sri Lanka especially with the downward trend in interest rates coupled with the reconstruction boom in the North and East resulting in an overall improvement in the economy, we project earnings for the FY10E to reach LKR320 mn (up by 11.5%YoY).

Net sales up by a sharp 23% YoY in 3QFY10. TILE’s gross revenue has increased by 20% YoY to LKR875.3 mn in 3QFY10 where the export sales (8% of total sales) recorded a growth of 97% whilst the local sales increased by a moderate 16% YoY. The top line increased by a marginal 2% YoY to LKR2,240.5 mn during the first 3 quarters of FY10 mainly on the back of low sales volumes experienced in the first 5 months which resulted a dip of 6% YoY in 1-2QFY10. After deducting a tax of nearly 10%, the

net sales of the company increased by 23% YoY during the quarter in concern to LKR787.1 mn, resulting a moderate growth of 5% YoY in cumulative 1-3QFY10.

37% increase in 3QFY10 gross profits. Cost of sales of the company has increased by 17% during 3QFY10 whilst the cumulative figure has recorded a dip of 1% owing to cost rationalization exercises coupled with the lower operating levels in the first two quarters of the year. Therefore TILE has marked 37% YoY increase in gross profits in 3QFY10 resulting an 18% YoY growth for cumulative 1-3QFY10 reaching LKR612.4mn.

3QFY10 Operating profit up by 49% YOY. The company has recorded an operating profit of LKR179.7 mn in 3QFY10, up by 49% YoY whilst the cumulative 1-3QFY10 profit has also increased by 23% YoY to LKR386.5 mn. This is directly attributable to the strong contribution from improved gross profits margins coupled with the threefold growth in other operating income as a result of charging interest for delayed payments from dealers and distributors. Even though the total expenses of TILE has increased by 26% YoY during 3QFY10, going forward we believe this would come down significantly owing to the merging of front office operations of TILE and its parent Lanka Walltiles (LWL).


Net earnings of 3QFY10 up by a stunning 71% YoY. Backed by the strong top-line growth, the company has posted a net profit of LKR107.9 mn in 3QFY10 (up 71% YoY) whilst the cumulative 1-3QFY10 net earnings are also up by 27% to LKR227.8 mn despite the lower earnings recorded in 1-2QFY10.

Forecast net profit to grow by 11% YoY to LKR320 mn in FY10E. Backed by the improved economic conditions coupled with the construction boom in the North and East, we project FY10E earnings to reach LKR320 mn (up by 11%YoY). This significant growth in earnings would be mainly from the sale of stocks that were built-up in the FY09 due to adverse economics conditions. Further with the commencement of the developments in the previously war torn North and East and with the revival of the construction industry together with the downward trend in the interest rates, we believe that the earnings of TILE would increase significantly.

Furthermore, with the actions initiated by government to increase the tariff on imported tiles would enable the local producers to gradually acquire market share from the imported tile companies, where TILE would be one of the prime beneficiaries.

In FY11E the earnings of TILE would continue to increase over earnings of FY09 however we project it to be lower than FY10E level. We expect earnings in FY10E to be significantly high as a result of the sale of stocks which were piled up in FY09 due to adverse economic conditions. Therefore, in FY11E the earnings of TILE is projected to reach LKR302 mn (down by 5.9%YoY compared to significant profits
generated in FY10 as a result of the sale of built-up stock).

Future Plans. The Company is considering to expand its current production capacity of 9,500 square meters per day to 11,500 square meters per day, where its factory is operating at 100% capacity at present. This expansion is not expected to be initiated in short-term but will be considered to be implemented in the FY12E
once the economy would be politically stabilized.

Share offers good value on 9.5x forecast FY10E earnings. The share remains attractive on 9.5x forecast FY10E net profit and 10.09x projected FY11E earnings whilst trading at 1.6xPBV. Maintain – BUY

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