BPPL gets bold with groundbreaking IPO

Colombo stock market hasn’t had an Initial Public Offering (IPO) from an export manufacturing firm for several years. The last listing under the manufacturing sector of the CSE was three years ago but that was by a domestic-market oriented Alumex. Prospects for exports have been challenging with the country experiencing two years of negative growth. The market has been in the doldrums for several years with negative return to investors and relatively low activity. In this backdrop, considering an entry into the CSE and that’s too by an export firm can be viewed as very brave.  That appears the character of BPPL Holdings. And the launch of IPO is  with strong conviction and confidence. 

Hitherto lesser known, BPPL says it is one of the largest backwardly integrated brush manufacturers not only locally but in South-East Asia. This feat too little known but should make Sri Lankans proud. 

With a history of around 30 years, BPPL is a leading manufacturer and exporter of cleaning tools such as brooms, brushes and mops. The Group’s backward integrated manufacturing facilities offer flexible cleaning tools for the household, professional, commercial and industrial market segments. BPPL primarily caters its products to USA, Canada, Indonesia, Europe, Australia, New Zealand and India.

The Company has displayed strong financial performance – revenue growth at a four-year CAGR of 10% to Rs. 2.1 billion and recurring net profit growth at a CAGR of 22% to Rs. 295 million in Financial Year 2015/16 (FY16).

IPO

BPLL’s Initial Public Offering (IPO) of 10% stake or 30.685 million shares at Rs. 12 each is now open for public subscription. The official opening is on 7 March. 

According to the Financial Advisors and Managers to the Issue CT CLSA Capital, the IPO is attractively priced at a Price to Earnings Ratio (PER) of 8.5x for FY17E and 7.1x for FY18E, at a discount to the listed industry peers and broader market. The issue price of Rs. 12 is at a 17.0% discount to the fair value of Rs. 14.47.

The Net Asset Value per Share (NAVPS) of BPPL as at 31 March 2016 was Rs. 5.54 (A Sub Division of Shares in the ratio of 55:1 was carried out in January 2016 and a capitalisation of reserves in the ratio of 1:191 was carried out in August 2016; NAVPS is calculated using the post share-split and capitalisation of reserves number of shares for comparative purposes throughout the document). This translates into a Price to Book Value (PBV) of 2.15x, based on the Issue Price. The NAVPS of BPPL as at 31 December 2016 was Rs. 6.33. This translates into a PBV of 1.90x based on the Issue Price.

Infinity Capital Ltd. owns an effective stake of 50.3% in BPPL while LOLC Investments Ltd. and Hirdaramani Investment Holdings Ltd. owns 26.3% and 23.4% of stake in BPPL, respectively. Hirdaramani is the only investor which is part shedding its stake to facilitate the IPO and will retain 13.4% stake post IPO. The other major shareholders stake will be locked for 12 months in compliance with CSE listing rules. Infinity Capital Ltd. is an investment holding company directly owned by Dr. Kanishka Anushal Amarasinghe (50.06% ownership), who is currently the Managing Director of BPPL. 

History

BPPL was established in 1991, with the controlling shareholder being Moosajees Ltd. This was following the transfer of activities from Interbrush Lanka Ltd. (which was established in 1984) into Beira Parawood Products Ltd. and Beira Brush Ltd. (BBL). 

Beira Synthetic Fibre Ltd. (BSF), a company focused on the production of monofilaments for brushes joined the Group in 2003, while Beira Enviro Solutions Ltd., a company that focuses on the manufacture of recycled monofilaments was introduced to the Group in 2010. 

In 2012, Infinity Capital Ltd., Hirdaramani Investment Holdings Ltd., and LOLC Investments Ltd., acquired the Group from Moosajees. In 2013, the company divested BSF and transferred its operations and sold its usable assets to BES in order to consolidate the monofilament extrusion business under a single entity. The Group expects to expand its operations into the manufacture of synthetic yarn for the fabric manufacturing industry in FY19, through BES.

The Group had a workforce of approximately 671 employees as at 31st December 2016.

Operational and export success

BPPL said it is well positioned in the international market place serving blue chip customers such as Tesco, Oates, Carrefour and The Home Depot. The Group has maintained strong relationships with some of its clientele for over 15 years. The Group has maintained a strong rapport without losing any of its key customers in the last four years due to its on-time delivery, high quality and commitment to sustainability. BPPL although initially active in the Generic Brush segment, has now expanded its operations in the Branded Brush segment, which focuses on marketing products under their own brands in the Southeast Asian region. BPPL’s operations are carried out at four factory locations in Sri Lanka. The Group has a competitive edge in supplying a wide range of brushware and related products based on customer requirements. BPPL’s versatility of production of wooden and plastic brush heads, recycled or virgin synthetic filaments and natural fibre processing is likely to provide a strategic advantage in the business while it also has potential for growth through new product development capabilities.

BPPL has launched its own brands ‘Tip Top’ in Sri Lanka and ‘Jab’ in Indonesia, owing to the large untapped market for high quality and durable household cleaning tools such as brooms, brushes and mops. The Group also hopes to enter Malaysia in FY19. With the Southeast Asian region experiencing rapid growth in disposable income and the resulting transition to Upper Middle-Income status, the Group believes there is significant growth potential in these markets for branded brushes. BPPL expects its superior packaging and localisation of brands should drive growth in this segment.

Meanwhile, BPPL also intends on expanding its operations into manufacturing of synthetic yarn. Currently, majority of synthetic yarn required for the Sri Lankan fabric manufacturing industry is imported, leaving the industry untapped. BPPL expects to commence its synthetic yarn operations in FY19. BPPL has also successfully completed its initial trial runs. The Group has six years of Polyethylene Terephthalate (PET) based monofilament extrusion expertise and two years of PET recycled bottle washing, both of which are required for synthetic yarn manufacturing. Further, the extrusion process for yarn is similar to monofilaments, an added benefit to the company. 

The company is high on ethics and sustainable operations, which is reflected through its wide range of certifications such as OHSAS 18001 (expired 10 February 2017; renewal audit completed and recommended for certification), Forest Stewardship Council (FSC) (certified on 25 May 2012 valid until 24 May 2017), Leadership in Energy and Environmental Design (LEED) certified factory buildings (certified in September 2010) and ISO14001:2015 (certified on 11 August 2016, valid until 10 August 2019). Demand for environmentally friendly products is on the rise globally, which gives a competitive edge to BPPL.

BPPL’s top management has experience and know-how of the industry with majority of the management team having been with the company for over 20 years. This has helped the Group maintain long standing relationships with several customers across the globe.

Financial Performance

BPPL in FY16 reported a revenue of Rs. 2.1 billion, up 8% from the previous year and at a 4-year CAGR of 10%. The largest revenue generating segment in FY16 was Generic Brush exports (89% of total revenue) followed by wood exports 915%). The US was the highest revenue generating market during FY12-16 with an average contribution of 73.5%. Australia and New Zealand chipped in with 9%.

Given the continued improvements to efficiencies due to streamlining, BPPL recorded an approximately 600bps increase in its recurring gross margin to 36.6% in FY16. Recurring gross profit for the year amounted to Rs. 764.3 million in FY16, up 28.7% YoY. Gross profit improved at a 17.0% CAGR over the period FY12-16, while margins improved over 800bps. The Group recorded EBIT of Rs. 361.3 million in FY16, increasing significantly from the previous year. Over the five-year period FY12-16, the Group reported recurring EBIT growth at a CAGR of 22.7%. The decline in EBIT in FY15 was primarily due to higher costs relating to streamlining all production processes, which has now been completed. The Group also saw margins improving by over 600bps in FY16 from FY12. Meanwhile, recurring EBITDA also grew at a four-year CAGR of 16.6% over FY12-16, and reached Rs. 425.6 million in FY16. Recurring EBITDA margin in FY16 was 20.4%, increasing from 14% in the previous year. 

BPPL reported a finance cost of Rs. 31 million in FY16, up 8.4%. Total borrowings amounted to Rs. 410.6 million, down by 44.3%. BPPL’s net profit attributable to equity holders in FY was Rs. 307 million, increasing significantly from a weaker FY15. Company saw its margins improve by 14.7% in FY16 from 7.7% in FY15. On a recurring basis, net profit for FY was Rs. 295 million up 74% and by 22% at a four year CAGR. 

Over the period FY12-16, BPPL’s EPS grew at a CAGR of 22.3%. In FY16, BPPL reported a return on equity (ROE) of 20.8%. above its five-year historic average of 16.3%. On a recurring basis, ROE for BPPL was 20.0% in FY16 increasing from 14.1% in the prior year. BPPL’s Net Asset Value per Share in FY16 was Rs. 5.57, above an average of Rs. 3.72 over FY12-15.

An increase of over 70% YoY, BPPL declared a dividend per share of Rs. 0.36 in FY16, from Rs. 0.21 in the prior year. This implies a dividend payout of 37.5% in FY16 compared with 38.1% in FY15 (based on recurring EPS). The average dividend payout for BPPL over FY12-16 is 21.2%.

BPPL reported revenue of Rs. 1.5 billion in the nine months ending 30 November 2016, up 21.6% YoY primarily due to higher sales volumes. Meanwhile, BPPL’s CoS grew at only 12.5% YoY, as raw material costs remained low. Driven by lower raw material costs and the benefits of streamlining processes coming through, the Group recorded gross profit of Rs. 618.5 million during the period implying a gross profit margin of 39.9% expanding approximately 500bps YoY.

Net profit for the period amounted to Rs. 253.7 million, up 58.2% YoY and implies a net profit margin of 16.4%.

Future strategies

A. Expansion from an Original Equipment Manufacturer (OEM) to Marketing Own Brands in the Sri Lankan and Southeast Asian Markets

BPPL launched its own brands ‘Tip Top’ and ‘Jab’ in the Southeast Asian markets as the Group expects to benefit from the increase in disposable income in the region. Research suggests that as the region transitions to Upper Middle-Income status, the demand for high quality and durable branded products is expected to increase. Management believes that by localising their brands and through the use of superior packaging which meets international standards, BPPL is well positioned to attract regional customers in the household market.

B. Venture into Extrusion of Synthetic Yarn for the Sri Lankan Fabric Manufacturing Industry

The Group is currently in the process of investing approximately Rs. 675 million for the expansion of its operations to extruding synthetic yarn. The investment would be funded partly using internally generated funds (Rs. 175 million) while the remaining would be funded using debt (Rs. 500 million). Currently, the industry is largely untapped in Sri Lanka, as majority of the synthetic yarn required for the domestic fabric manufacturing industry is imported. Demand for locally produced high quality synthetic yarn is expected to be high as it would provide the fabric manufacturers with a competitive edge on lower lead time and inventory holding costs.

BPPL has six years of experience in PET based monofilament extrusion expertise and two years of PET recycled bottle washing, both of which are required for synthetic yarn manufacturing. Further, the extrusion process for yarn is very similar to monofilaments. The plant is expected to commence operations in FY19E.

Synthetic yarn revenue is expected to amount to Rs. 194.3 million in its first year of operations, increasing to Rs. 351.6 million in FY21E. Contribution from synthetic yarn is expected to be 5.8% in FY19E and is expected to grow to 8.3% by FY21E. Growth in the synthetic yarn business is expected to be driven by BPPL’s first mover advantage within the local industry for the manufacture of synthetic yarn, for which demand would be significant as it reduces the inventory cost and lead time for end customers.

C. Enhanced Operational Efficiencies and Capacity Expansion to Drive Existing Business

BPPL continues to invest in streamlining of its processes and upgrading machinery in order to improve productivity levels while maintaining costs. The streamlining of processes was largely completed in FY16 which have led to significant margin expansion. Meanwhile, BPPL also continues to expand its capacity for its existing business in order to grow in line with its global customers.

Forecasts and outlook

BPPL benefits through dominance in upright broom segment and fiber extrusion segment in the local market and in global markets due to high quality and ethical manufacturing practices as well as easy access to rubber wood compared to Chinese suppliers. BPPL believes there is great opportunities in the future given the nature of the market which allows all players to continuously grow through product differentiation and market development. The company said following lower revenue growth recorded in FY16 due to delays in coming-on-stream of new machinery, we expect a recovery in FY17E as capacity expansion and machinery overhauling has now been completed. In addition to the base effect, BPPL is expected to record revenue growth of 15.6% YoY in FY17E due to growth in the US Brush Sales (generic) market and the introduction of own-brands in Sri Lanka and Indonesia. Revenue is expected to reach Rs. 4,223.2 million in FY21E growing at a CAGR of 15.1% over FY16-21E. Revenue growth of 21.9% YoY in FY19E is expected to be mainly driven by the Synthetic Yarn project commencing its operations coupled with the launch of BPPL’s own brand in Malaysia (in addition to growth in existing business). 

BPPL also said contribution from the USA is expected to decline as BPPL penetrates further in to the Sri Lankan and other Southeast Asian markets with branded brushes. As such, revenue contribution from Sri Lanka and Other (includes revenue from Indonesia, Malaysia and the Synthetic Yarn project) is expected to increase from 9.2% in FY16 to 23.8% in FY21E. Growth in the Branded segment is expected to continue as demand for high quality, durable products is expected to increase in the developing nations with higher disposable income. Revenue from synthetic yarn is expected to support revenue growth from FY19. BPPL’s revenue will continue to be dominated by exports averaging over 95% during the forecast period, primarily generating revenues in USD.

The expected increase in debt from Rs. 410.6 million in FY16 to Rs. 741.9 million in FY17E and Rs. 987.1 million in FY18E is primarily attributable to the funding of the synthetic yarn business. A USD denominated loan of approximately Rs. 500 million will be taken to fund the new project over the period FY17-18E. BPPL incurred finance cost of Rs. 30.9 million in FY16 and finance cost of Rs. 26.5 million is expected in FY17E. 

A decline in interest cost in FY17-18E is primarily owing to the grace period under the terms of the new loan, during which the finance cost is capitalised. Meanwhile, the company’s interest cover is expected to increase from 11.7x in FY16 to 25.7x in FY21E as the company continues to pay its debt, while recording higher earnings. The average interest cover for the forecast period is 21.2x.

BPPL recorded an EBIT of Rs. 361.3 million in FY16 and is expected to increase to Rs. 504.6 million in FY17E up 39.7% YoY. Growth in EBIT is expected to stem from lower raw material costs, currency depreciation and the benefits of efficiency improvements coming through. Furthermore, BPPL also expects its electricity costs to decline over the forecast period with the addition of two bio-mass plants. 

The Group is expected to record an EBIT of Rs. 1,101.7 million in FY21E growing at a CAGR of 25.0% over FY16-21E. Consequently, BPPL’s EBIT margin is expected to expand from 17.3% in FY16 to 26.1% by FY21E with an average EBIT margin of 23.4% for FY17-21E.

Recurring EBITDA for the Group in FY16 was Rs. 425.6 million and is expected to record recurring EBITDA of Rs. 575.7 million in FY17E up 35.3% YoY. EBITDA is expected to grow at a CAGR of 23.4% over FY16-21E with margins projected to grow from 20.4% in FY16 to 28.8% by FY21E at an average of 26.3% for the forecast period. Group recurring net profit margin is expected to increase from 14.1% in FY16 to 22.9% in FY21E. The average expected recurring net profit margin for FY17-21E is 20.1%. Recurring ROE in FY16 of 20.0% is expected to increase to 23.4% in FY17E. Recurring ROE estimate for FY21E is 28.3% while the average for the forecast period is 25.7%.

BPPL is expected to record recurring EPS of Rs. 1.41 in FY17E while it is expected to reach Rs. 3.15 per share in FY21E. Meanwhile, BPPL’s Net Asset Value per Share is expected to reach Rs. 6.53 in FY17E and Rs. 11.91 in FY21E. The company’s dividend payout ratio in FY16 was 37.5%. We forecast a dividend payout ratio of 30.0% for FY17E increasing to 50.0% in FY21E. Based on the Issue Price of Rs. 12 per share, the expected dividend yield for FY17E is 3.5%.

The Board of Directors of BPPL comprises of Sarath Amarasinghe (Chairman), Dr. Anush Amarasinghe (Managing Director), V. Selvaraj (Executive Director/CFO), Prasad Perera (Executive Director), Ranil Pathirana (Non Executive Director), and Independent Non Executive Directors Manjula De Silva, Sharmini Ratwatte and Savantha De Saram.