Based on impressive performance in the third quarter Horana Plantations Plc (HOPL) is forecast to end the 2010/11 financial year with a profit after tax of Rs. 387 million. This upgrade in earnings outlook is by John Keells Stock Brokers (JKSB).
Here are excerpts from Quarterly Earnings Highlights by JKSB’s Research.
Horana Plantations PLC (HOPL) saw a sharp increase in profits during 3QFY11 to Rs. 135 million compared to Rs. 75 million recorded in the comparative quarter in FY10 on the back of soaring rubber prices and normalised cost of sales after the wage hike adjustments made in the comparative quarters. Earnings grew almost threefold over 2QFY11 which recorded Rs. 49 million in PAT.
Revenue from the tea declined 3% over 3QFY10 consequent to lower production mainly from the high grown segment which accounts to around 85- 90% of the company’s total tea production. This coupled with normalised costs resulted in cost of sales of Rs. 309 million for the segment, a 9% decline Year on year (yoy) but an increase of around 5% over 2QFY11. The segment enjoyed a GP margin of around 14% compared to 9% recorded in 3QFY10.
The rubber segment enjoyed significant gains thanks to soaring rubber prices.
Revenue from the segment grew 24% yoy to Rs. 178 million but revenue growth was limited to just 1.7% over the 2QFY10 due to lower output recorded. The segment too benefited from a 14% yoy reduction in cost of sales while over 2QFY10 cost of sales declined almost 10%. GP margins from the segment improved to 58% from 40% recorded in 3QFY10 and 53% in 2QFY11. HOPL is a manufacturer of latex crepe and sole crepe which fetch higher prices at auctions.
For the cumulative period, HOPL recorded a GP of Rs. 270 million of which 74% was generated by the rubber segment. Other revenue which includes the sale of timber as well as rubber trees also contributed 17% to total GP. Annually the company fells around 15,000 rubber trees.
Rubber prices have soared over the last year the back of reduced supply from major rubber producing nations due to adverse weather conditions while increasing oil prices too have supported the prices. However, locally, given improved weather conditions, we expect supply to recover during the current quarter.
Due to its high exposure to the high grown teas, we expect the segment to experience greater volatility with regard to earnings as high growns are subject to greater price fluctuations compared to low grown teas. Concerns also exist with the expiry of the current wage agreement in March 2011 which if revised upwards, should result in further increases in costs for the segment and lower earnings due to high labour intensity.
The company intends to add around 70 – 80 hectares of rubber per annum during the next couple of years post replanting which we believe would enable HOPL to enjoy higher output given conducive weather.
Given the above, we expect HOPL to post Rs. 387 million in PAT for FY11E which translates to an EPS of Rs. 15.47. Having factored in a 14% increase in cost of sales predominantly from the tea segment in FY12E in the event of a wage hike, we expect the company’s earnings to grow marginally by 6% to Rs. 411 million for FY12E. At a price of Rs. 72.30, the counter trades at a PER of 4.67x FY11E and 4.4x FY12 earnings, a significant discount to the sector.