Colonial Motors forecast to race to Rs. 144 m earnings in FY11 after 579% growth in 3Q

Colonial Motors Plc (COLO) is forecast to see its earnings rise to Rs. 144 million in the Financial Year 2010/11 (FY 11) following the impressive 579% growth achieved in the third quarter.

This forecast is made by John Keells Stock Brokers in an earnings update on COLO. Here are excerpts.

Colonial Motors Plc, known as the ‘Land Rover Company’ holds the franchise for Land Rover since 1948, the oldest franchise in the South Asian Region. It is the sole agent for Land Rover in Sri Lanka and specialized in the field of Motor Engineering, particularly in Land Rover. The COLO group comprises of Colonial Motors Plc and its fully owned subsidiaries Carplan Limited, KIA Motors Limited, and Union Investments Limited. The company owns 220 perches of prime free hold land in Colombo.

Financial performance 3QFY11

COLO’s earnings registered a significant 579% YoY growth for the 3QFY11 to reach a cumulative Rs.84m. This reflected a growth of over 376% YoY for the nine months, mainly on the back of strong revenue growth of 287% YoY recorded during the period driven by augmented KIA vehicles sales, which accounted for over 70% of the group’s revenue.

A sharp reduction of 97% YoY of distribution costs led cumulative distribution costs to decline by 47% as a result of reduced marketing expenditure on the back of higher demand for COLO’s vehicles.

Administration costs grew sharply during the quarter, reflecting a growth of 111.7% compared to the comparative period last year.

COLO recorded a significant reduction of 46% YoY of finance expenditure on the back of lower interest rates and retiring debt by utilising cash generated through a rights issue during 2QFY11. However, the results indicate a 9% increase in the finance expenditure for the 3QFY11 over that of 2QFY11.

The company’s gross profit margin improved from 36% achieved in 3QFY10 to 38% during the current quarter. Its operating profit margin has declined marginally due to higher administration costs despite savings on distribution costs.

KIA Brand new vehicles

KIA sales were promising during the nine months and recorded a ten-fold volume growth. This is mainly on the back of the tariff reduction, which led the prices to decline by 30% on average compared to prior prices as well as the introduction of new KIA models. The new ‘Sportage’ model accounted for a majority of KIA vehicle sales and new orders. The current demand for KIA vehicles is about 30-40 units per month, when compared to only 1-2 units demand per month prevailed prior to the duty reduction.

KIA SUVs accounted for an estimated market share of over 20% of brand new SUV sales of year 2010. The strong demand for a KIA SUV was assisted by its higher quality, which is on par with any Japanese or European make, lower price, unique designs, availability of spare parts, and higher resale value (with the development of the second hand market).

However, the revenue growth of this segment was curtailed during the period due to supply constraints which stretched the average lead time (from order till delivery) to four months. As a result, most of the orders are not yet realised as sales and majority of them are expected to realise during the first two quarters of FY12.

Land Rover

The company has sold over 10 units of reconditioned Land Rovers during the first three quarters of FY11 in contrast to no sales done during the last year’s comparative period. All the sales were recorded after the duty reduction. Land Rover vehicle sales significantly dropped post war due to lack of demand from the Armed forces. The Land Rover customer base dominates Government Institutions, Ministers, Armed forces and as well as businessman and bank executives.

Spare parts sales

The company is one of the four key suppliers of TATA, Leyland and TVS spare parts to the National Transport Board. The performance of the spare parts segment was outstanding during the first three quarters as sales soared with the commencement of public passenger transportation connecting the

Northern and Eastern provinces post war (where TATA and Leyland busses dominates the government public bus transportation in these areas). In addition, revenue growth was facilitated by the expansion of dealer network, which now comprises of 45 dealers scattered island wide. The company expects to double the dealerships during FY12.

Valuations

With a strong pick up in vehicle sales with the realization of already booked vehicles during 4QFY11, we expect COLO to post Rs. 144m in earnings for FY11 with a corresponding EPS of Rs. 15.78. The counter is currently trading at a PER of 19x based on FY11 earnings at a market price of Rs.301.50 per share.