Brokers unanimous: Buy Laugfs shares

Thursday, 4 November 2010 07:01 - - {{hitsCtrl.values.hits}}

There is consensus within broking community that the Rs. 2.5 billion Initial Public Offering (IPO) of Laugfs Gas Ltd., official opening of which is today, must be subscribed to.

At least three broking houses released analysis of the IPO recommending buy. They were Acuity Stockbrokers, Asia Securities and NDB Stockbrokers.

Laugfs is offering 75 million Ordinary Voting shares at the rate of Rs. 23.00 and 52 million Ordinary Non Voting shares priced at Rs. 15.00 to be listed on the Diri Savi Board of the Colombo Stock Exchange.

Upbeat analysts predict an oversubscription of over 20 times whilst others put it at over 10%. “We expect LGL to report net earnings of Rs. 826.3mn in FY2010/11 recording a 56.4% growth and

Rs. 1.17bn in FY2011/12 recording a 45% growth in Net Profits with a Return on Equity of 18%. The valuation range for Laugfs on PBV multiples ranging from 1.5 to 3.5 on FY2011/12 values gives the share a valuation of Rs. 23.92 to Rs. 55.80 and a value of Rs. 36.24 to Rs. 48.32 on PE multiples of 12x to 16x and an intrinsic value of Rs. 38.66 on DCF basis,” Acuity said.

“The IPO price is attractive on the basis of offering a Price to Book value of 1.4x on the voting share and 0.9x on the non voting share carrying a PE of 10.8x on the voting share and 7.03x non voting (FY2010/11) and 7.6x and 4.5x FY2011/12 respectively, compared to the Power and Energy sector which currently trades at a PE of 31.2x and PBV of 1.9x, the stock has strong potential for growth and value appreciation in the secondary market,” it added.

Asia Securities in its analysis said “Based on both the valuation methods, both the classes of voting and non-voting ordinary share generate good value at its offer price of LKR23.0 and LKR15.0 respectively.

With the upturn in the economy after the cessation of war, all the eight initial public offers (IPOs) since then have been oversubscribed.

Hence, the investor appetite for LGL remains fairly strong. Therefore, strong upside for both the types of shares could be expected in the short-medium term. SUBSCRIBE.”

NDB Stockbrokers said it has assumed a revenue growth rate of 20% for FY10/11 keeping in line with the expected growth of the industry. NP margin is assumed at 13.83% which is comparable to margin recorded in FY09/10 (after adding back the finance cost and tax).

A tax at a rate of 20% was considered as the concessionary tax rate is expected to increase in April 2010.

“Accordingly, we estimate an EPS of Rs. 2.02 for FY10/11 with a forecasted net profit of Rs.783 mn,” NFB added.

“In the absence of an ideal proxy, we have considered Chevron Lubricants Plc (LLUB) as a comparative company for the P/E based valuation. LLUB is predominantly engaged in the business of importing, blending, distributing and marketing of lubricant oils. Thus both LLUB and LGL use refined products of crude oil as the raw material for their respective operations. At present LLUB trades at a forward P/E of 13X based on earnings for FY10. Hence a forward P/E of 13X is appropriate for LGL. Thus we estimate the intrinsic value at Rs.26.00. The trailing P/E at Rs.26 is 20X.

The above mentioned risks create an uncertainty over the long term profitability. However the investor sentiment appears to be strong. Thus it may result in satisfactory short term gains in the secondary market. BUY,” NDB Stockbrokers added.