Kegalle Plantations profit forecast revised upwards

Friday, 18 February 2011 04:19 - - {{hitsCtrl.values.hits}}

John Keells Stock Brokers (JKSB) has revised upwards the profit forecast for Kegalle Plantations Plc to Rs. 793 million for 2011 Financial Year from a previous estimate of Rs. 725 million.

The upgrade follows the release of third quarter earnings recently. Here are excerpts from JKSB earnings update on Kegalle Plantations Plc (KGAL)

Kegalle Plantations Plc (KGAL) continued to benefit from the steep rise in rubber prices despite a 20% decline in production due to bad weather. The group posted a profit of Rs. 227 million for the 3QFY11 – a yoy growth of 77%, while for the cumulative period PAT rose to Rs. 568 million – a yoy growth of 342%.

The rubber segment was the largest contributor to both revenue and gross profit during the quarter with a revenue contribution of over 60% and a GP contribution of over 85%. Revenue from rubber grew 27% over the comparative quarter, solely due to increasing rubber prices amid declining output. KGAL’s rubber production is dominated by centrifuged latex while it also manufactures sole crepe which is fully exported. GP margins too improved significantly to around 57% during 3QFY11 compared to around 38% in 3QFY10. RSS 1 averaged Rs. 467 during the quarter, yoy increase of 63% while price of latex crepe 1X averaged Rs. 555 growing at 74% yoy.

The tea segment witnessed a marginal decline in both revenue and GP over the comparative quarter in FY10 despite a 15% increase in production. However, the segment posted a profit of Rs. 11 million during the quarter. Revenue from the coconut segment nearly doubled over the previous quarter due to a shortage thereby increasing the segment’s GP contribution by over threefold to Rs. 5.3 million during the quarter.

Other revenue which includes the sale of trees and other minor crops was the 2nd largest contributor to group GP with Rs. 21 million, representing a share of 6.8%.

For the cumulative period, the group allocated Rs. 111 million as field development expenditure. The company’s cash position grew stronger during the quarter with a cash and cash equivalent balance of Rs. 1,037 million, translating into net cash per share of Rs. 27.

Outlook

The recovery of the global economy coupled with rising oil prices and vagaries in weather will more likely result in another commodity boom which will operate well in favour of KGAL. The company, stands well above its peers in the industry due to its heavy exposure to rubber in terms of both revenue and GP supported by its strong Balance sheet and its cash position. Given its strong performance in 3QFY11, we have revised our forecast for KGAL to Rs. 793 million for FY11E from a previous of Rs. 725 million. This translates to an EPS of Rs. 31.74 and a PE of 7.7 times, at a price of Rs. 243.50, indicating a discount of around 30% to the sector.