Ceylon Grain Elevators (GRAN)

 Activated demand is seen on GRAN. Time to enter the 200 club again after ten years !!!

Background

Principal business activities of Ceylon Grain Elevators PLC (GRAN) are Manufacture & Sale of wide range of Feeds under the PRIMA brand, Poultry &Hatchery Breeder farms, Shrimp farm & Hatchery, Import & Sale of Poultry Equipment Vaccine & Transshipment.

Financial Performance

GRAN's revenues continue to grow during the last six years despite various challenges faced by the industry time to time. This shows the robustness of the business model of the company and the sustainability of the business. Revenue grew from LKR 13.7Bn in 2015 to LKR 17.7Bn in 2019 by a CAGR of 6.6%. 

While revenue grow consistently earnings (profits attributable to shareholders) fluctuates during the same period mainly due to prices of raw materials fluctuation. Company recorded LKR 1.3Bn in 2016 but fell in 2017 to LKR 0.8Bn. But since then the profitability was improving.

9 months ending 30th September 2020 the company reported a revenue of LKR 12.9Bn and a profit attributable to shareholders of LKR 0.6Bn. Given that Q4 is normally the best quarter for the company I expect GRAN to record a revenue of LKR 5.9Bn and a profit of LKR 0.4Bn making the total revenue for FY 2020 to LKR 18.9Bn and a profit of LKR 1Bn. This translates to a forecasted EPS of LKR 16.6.

Ratio Analysis

GRAN's 2020 forecasted ratios are as follows.

EPS - LKR 16.55

NAV - LKR 127

ROE - 13%

At a market price of LKR 160.25 (as at 9th February 2021) the stock was trading at a forward PE of 9.7x and a forward PBV of 1.3x. GRAN share price was trading in the PE range of 22.2x to 13.2x during 2015-2019 period and in the PBV range of 0.6x to 1.4x. Given the much improved condition for equity investments @ CSE now we can see the above valuation parameters are improving and going to make new highs. The good ROE indicates the earnings capability of GRAN now exceeding the returns investors can earn by investing elsewhere such as T-Bills and T-Bonds.

Dividends and cashflows

Since 2015 GRAN was identified as a company with strong balance sheet and cashflows. In 2019 GRAN generated a net cashflow of LKR 1.3Bn and during the 9M of 2020 it has generated a net cashflow of LKR 1.5bn making the total cash and cash equivalents as at September 2020 to LKR 5.8Bn. GRAN DPS was increasing consistently from LKR 1.1 in 2015 to LKR 4.5 in 2019. In 2020 GRAN has declared a first interim dividend of LKR 4.5 and surprisingly announced a second interim dividend of LKR 9.0 making the total for 2020 to LKR 13.5. This surprise move has given a hint to the investors as to what plans were in mind of GRAN's management with regard to the cash pile up. This second interim dividend is likely to give the green signal of GRAN changing their dividend policy in future and may be to distribute about 70% of the earning in the year to come, may be there are chances for another hefty one-off dividend if the management wishes to follow the path set by Chevron Lubricants some time back. With the management moving more towards distributing cash via dividends the pile up on retained earnings will gradually go down making the return on equity (ROE) of the company to increase gradually in the years to come.

Financial forecast 2021

Revenue is expected to further improve in 2021 mainly due to resumption of tourism in Sri Lanka and easing off from covid 19 impact. So a 10% increase YoY will give them a revenue of LKR 20.8n and a bottom line of LKR 1.3Bn which is matching their historical profit level achieved in 2016. Expected EPS would be LKR 22.5 with a dividend of LKR 15.8.

Valuation

GRAN was trading at a price of LKR 160.25 as at 9th February 2021. This was at a forward PE of 9.7x given 2020F and a forward PBV of 1.3x. With the 2nd interim dividend the DY is now 8.4%. The Food, Beverage & Tobacco sector valuation parameters as at 9th February were,

PE ratio - 16.2x

PBV ratio - 2.7x

DY % - 3.2%

If GRANs 2020F valuation matrices applied to these sector ratios then the estimated values of a stock of GRAN would be;

PE based - LKR 268

PBV based - LKR 344

DY based - LKR 422

Based on dividend discount valuation method ( with estimated data set of market return (15%), risk free rate of (5%), GRAN beta value of 1.78 & cost of equity (22.8%) based on CAPM model) GRANs stock price would be LKR 272.

So on average GRAN share price would be LKR 327. If we set a side 25% of this for market inefficiency and other factors GRAN stock can be valued @ LKR 245 with a future upside potential of 47% to the current market price.