spen-initiation of coverage
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As at 31 Dec 2012 %
Melstacorp Ltd 40%
Rubicond Enterprises 16% Aberdeen Global As ian fund 7%
Aberdeen Asia Pacific fund 4%
Aberdeen Global As ia pacific fund 7%
0
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115
120
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140
illions
Price volume
Avg. Daily Turnover(LKR mn) 64.5
Market Capitalization (LKR bn) 49
52-week High 136.3
52-week Low 100
Price Movement
1M - LKR119 0.7%
3M - LKR 120 -0.2%
12M - LKR 113.5 5.6%Key facts
Shares outstanding (mn) 406
Free float (%) 36%
Beta 0.8
Trailing Price/Earnings (X's) 12.7
Book value per share 65
Debt to total capital 33.8%
Dividend yield 0.8%
As at 09.04.2013
AITKEN SPENC
Price vs. Volume
Source – Company Annual Report and Filings
Source – Company Annual Report and Filings
Source – Company Annual Report and Filings
Price LKR Volume (000’s)
Long-Term Buy
Price (09.04.13) : LKR 119.8
Target Price : LKR 132
Sector : Diversified
Travis Gomez
Ini
31st Mar 2012 FY09 FY10 F
Net revenue (LKR mn) 29,000 23,795 24,
YoY % 7% -18%
EBIT (LKR mn) 4,112 4,032 3,9
YoY % 13.9% -2.0% -1.
Earnings to Equity (LKR mn) 2,040 2,060 2,5
YoY % 10.8% 1.0% 23.
P/E 4.2 18.1 2
DPS 0.5 0.6
Consistent performance de
We initiate our coverage on Aitken Sp
recommendation in lieu of its investments i
economy including tourism, logistics and po
the uncertainty over the future of the firm’s i
SPEN which commands both foreign instituti
currently trading at a slight discount based
year forward revenue and earnings CAGR of
Highlights
Tourism segment to sustain SPEN
albeit at a slower pace: With the conclu
2009, accelerated growth was witness
exponential growth in foreign tourist
group’s subsidiary; Aitken Spence H
Adaraan brand of hotel chains in Sri L
positioned to capture a sizeable slice of
segment witnessed a revenue growth o
Profit before tax (PBT) growth of 31%
Future direction of the strategic seg
expiration of the firm’s Power Purc
the next 3-4 years is a cause for conc
future direction of the firm. The closure
Embilipitiya in 1QFY12 for maintena
earnings contribution from the strategi
restoration of the revenue stream from
YoY jump in the segments revenue in 9
energy sector in Sri Lanka puts the futur
in question.
Trading at a discount based on absolu
We arrive at a price target of LKR 132 represents a price appreciation potential
against the current price of LKR 119.
attractive from a price earnings (P/E)
against the market and domestic pee
estimates the share is trading at a for
forward P/BV multiple of 1.7x in FY13E
SPEN
Source – Asia Wealth Management Co. (Pvt) Ltd estimate
10
tiation of coverage
11 FY12 FY13E FY14E FY15E
29 30,192 36,164 40,822 44,268
4% 22% 20% 13% 8%
57 5,604 6,074 6,986 8,030
9% 41.6% 8.4% 15.0% 14.9%
36 3,709 3,682 3,897 4,862
1% 46.3% -0.7% 5.8% 24.8%
6.0 12.3 13.2 12.5 10.0
0.7 1.0 1.4 1.4 1.5
ivered..
ence with a Long Term Buy
growth sectors of the Sri Lankan
er distribution counterbalanced by
nvestments in the power segment.
onal and high net worth interest is
n a DCF valuation reflecting a 3-
14% and 9% respectively.
rowth in the post-war context
sion of the 30-year old civil war in
d in the Tourism segment with
rrivals. Under the purview of the
otels (AHUN) its Heritance &
anka and Maldives, SPEN is well
his growth. As a result the leisure
f 26% YoY for 9MFY13 and a
oY for the same period.
ent in question: The impending
asing Agreements (PPA’s) over
ern as it brings into question the
of its long dated 100MW plant in
ce contributed to the decline in
subsector in FY12. Despite the
the plant as evident in the 47%
FY13, changing dynamics of the
e profitability of these investments
e & relative valuation
based on a DCF valuation whichof 10% for the 12-months period
0. The counter is also relatively
erspective, trading at a discount
rs (Annexure 3). Based on our
ard P/E multiple of 13.2x and a
.
s
pril 2013
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2 Asia Wealth Management Co.
36%
15%
44%
5%
Tourism
Logistics
Strategic
Services
Best Corporate Citizen 2012
National green gold award 2012
UNWTO best practices in ecotourism 2011
Best tour operators hall of fame 2012
Top 3 in STING Corporate accountability index 2012
National energy efficiency awards 2012
Location Type Capacity
Completed
Embilipitiya Thermal 100MW
Horana Thermal 24MW
Matale Thermal 24MW
Ambewela Wind 3MW
Matale Mini-hydro 2.5MW
Planned
Bangladesh Thermal 200MWn/a Bio Mass 10MW
Fig 1 – Revenue composition FY12
Source – Company Annual Report and Filings
Fig 2- Leading the way in sustainability..
Source – Company Filings & media articles
Fig 3 - Key brands represented
Currently downsizing its fleet i
wake of low freight rates brou
about by an oversupply of shi
The group has been the local
partner for TNT express for ov
decades
Entered into a joint venture wi
group in FY12
Source – Company Annual Report and Filings
Fig 4 – Diversified Energy Mix
Source – Company Annual Report and Filings
(Pvt) Ltd
Company Overview
From its simple beginnings as merchants
Spence, after an illustrious tenure of over 100
is one of the most-recognized brand name
competent management team, the group has
number of key segments of the Sri Lank Logistics, power generation and inward mone
Tourism
The firm is well positioned to benefit from
island via its investment in its subsidiary;
(AHUN) and associate Browns Beach Hotel
“Heritance” is one of the most sought after
Sri Lanka. Its three resorts Kandalama, A
combined room capacity of approx. 358 roo
luxury with environmental sustainability. Its
has enabled the firm to successfully enter
currently the group operates over 550 rooms
Resorts”. The firm’s commitment towards i
unique experiences to its clients is self-e
Heritance Maha Gedera which provides an
Logistics
The logistics segment which encompasses fr
and integrated logistics services has historical
segment in terms of its contribution towards
revneu CAGR of 9% & earnings CAGR of 22
the disappointing outlook for world trade
FY12 the sector managed to post a revenu
operations of LKR 847 mn; its best perform
the firm’s successful entry into South Afr
opportunities presented at the Hambantota
growth in the coming years.
Strategic
Historically, the firm’s three oil fired therm
bulk of the segments revenue. However, wit
PPA’s of the above plants, the firm has proa
sustainable energy generation sub-segme
currently being made in bio mass and windinvestments expected in the coming years.
years of experience in the operations and ma
expects to extend its services overseas a
finalizing the contracts for the building of tw
in Bangladesh. Hence we expect the returns
the revenues and earnings of this sector in
power management segment under strategic
expect the group’s investments in Garments
but minimal contribution towards the seg
associate investment in Elpitiya Plantatio
make a minimal contribution towards the str
structural weaknesses in the plantations secto
in the
ght
ps
r 3
ith the
Initiation of coverage
and commission agents, Aitken
+ years of operations in Sri Lanka
s in Sri Lanka today. Led by a
ade successful investments into a
an economy, including Tourism,y transfer operations.
the post-war tourism boom in the
Aitken Spence Hotel Holdings
(BBH). AHUN’s signature brand
rands in the resort hotels sector in
ungalle and Tea factory with a
s, are case studies for combining
ommitment towards sustainability
into the Maldivian market and
under its flagship brand “Adaraan
nnovation and providing new and
vident in its recently rebranded
authentic ayurveda experience.
eight forwarding, Courier services
ly been the firm’s most consistent
revenue and earnings recording a
% over a five year period. Despite
and decline in freight rates, in
of LKR 4.7 bn and profit from
nce to date, mainly on account of
ica. We expect this together with
port to account for the segments
l power plants accounted for the
h the impending expiration of the
ctively decided to venture into the
t with a number of investments
power technologies, with further In addition, given the firms long
agement of power plants, the firm
d is currently in the process of
100 MW thermal power plants
from these two ventures to sustain
lieu of the reclassification of the
segment investments. Further, we
and printing to yield a consistent
ent earnings. Further, the firms
s (ELPL.N) is also expected to
tegic segments earnings owing to
.
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Initiation of coverage
3 Asia Wealth Management Co. (Pvt) Ltd
Governance metric* SPEN Peers
No of board members 11 9
No of independent directors 5 5
Board members who own shares 3 5% of independent directors 45% 56%
% of board members who own share 27% 56%
Tenure of board members(Years) 6.7 4.1
Services
Aitken Spence has also managed to tap-in to the inward remittances which are a
vital source of foreign exchange for the economy via a joint venture with
MMBL Money transfer (Pvt) Ltd, the principal agent for Western Union in
Sri Lanka. The opening up of the North & East post war also provides
opportunities for domestic growth with approx. 300 new agents being added in
urban and semi-urban parts of Sri Lanka in 2011/12. The elevator services
segment also falls under the purview of the group’s services segment with the
group being principal agent for OTIS Elevators in Sri Lanka. We expect a
healthy contribution from this sub-segment due to the post-war construction
boom.
Fig 5 – Corporate Governance snapshot
*Based on latest available data
Source – Bloomberg
Group structure
Source – Company Annual Report and Filings
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Initiation of coverage
4 Asia Wealth Management Co. (Pvt) Ltd
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
FY09 FY10 FY11 FY12 FY13E FY14E FY15E
LKR (mn)
13% CAGR
7% CAGR
0
20
40
60
80
100
120
Beginningof
social unrest
MaldivianPM
resigns
MaldivianPM
arrested
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
Industry Overview
Sri Lanka: Explosion in tourist arrivals with a 3 year CAGR of
30% recorded since ending of the conflict: The tourism sector in Sri
Lanka has been the focus of much analysis and discussion subsequent
to the ending of the three decade long civil war in 2009 which
triggered a boom in tourist arrivals. The government has incorporated
this potential source of foreign exchange into its development agenda
dubbed “5 hubs plus tourism” with an ambitious target of 2.5mn
tourist arrivals by 2016E. However, given the persistence of
comparatively high average room rates (ARR) and poor infrastructure,
legitimate questions are being raised with regard to the sustainability
of the tourism sector. We believe that the development agenda for this
sector must be assessed in the context of positioning the economy’s
natural and built resources to suit the needs of the prospective clientele
in an environmentally sustainable manner. This has been the core
strength of the group’s investment in Aitken Spence Hotels (AHUN)
which has never wavered in its commitment towards developing
sustainable tourism both domestically and abroad.
Maldives: Remains a popular destination despite heightened
political risk: Maldives recorded a 3% YoY growth in tourist arrivals
for 2012 due to the volatile situation that prevailed in the archipelagoat the beginning of the year. AHUN has a comparative advantage
relative to competitor hotel chains with more than 75% of its revenue
from the Maldives operations which enjoy comparatively higher
margins.
Relatively overpricedgiven
current tourist mix which
could adversely impact
futureoccu anc rates
Demand drivers
Tourist
arrivals
ARR rates
Exchange
rate
Arrivals for 2012 have met
government expected target
of 1mntourists asper
overnment data
Government policy to limit
forex mkt intervention
would make SL a relatively
attractive tourist destination
Supply drivers
New
entrants
Operating
expense
Regulatory
regime
The improved security
situation in the island has
attracted greater foreign
investments to the sector
Rising fuel, energy and raw
material costs due to
shocks to internal and
external factors
An increased awareness for
the need for eco-friendly
sustainable growth in the
industr
Source – Asia Wealth Management Co. (Pvt) Ltd estimates
Tourism
SPEN tourism segment revenue
While earnings of the tourism sector is unlikely to keep pace with the exuberance surrounding the prospects for the sector,we believe that the depressed exchange rate and the governments investment in physical infrastructure which encompasses
roads, highways, ports and airports and a greater awareness of the environmental impact could ensure the viability of the
sector in the long term.
Outlook for the segment
LKR (mn)
Thousands per month
Source – Sri Lanka tourism board
Source – Bloomberg
Fig 6 – Maldives tourist arrivals; sustained despite
political risks
Fig 7 - Sri Lanka tourist spending
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Initiation of coverage
5 Asia Wealth Management Co. (Pvt) Ltd
-
1,000
2,000
3,000
4,000
5,000
6,000
FY09 FY10 FY11 FY12 FY13E FY14E FY15E
LKR (mn)
13% CAGR
1% CAGR
60
62
64
66
68
7 0
7 2
7 4
7 6
7 8
2004 2005 2006 2007 2008 2009 2010 2011 2012
Sri La nka 's Score W orl d avera ge
# 1 4 8
# 8 9
#113
#113
0
500
1000
1500
2000
2500
1-Apr-11 1-Jul-11 1-Oct-11 1-Jan-12 1-Apr-12 1-Jul-12 1-Oct-12 1-Jan-13
0
50
100
150
200
250
300
350
400
450
2011 2012
Strategic location in a fast growing region: Sri Lanka has beenconferred with a significant geographical advantage with the potential
to become a transshipment hub to fast growing markets such as India. At
present the Colombo port accounts for 15% of all transshipment cargo
with over 80% of the trade originating from India. Considering the
strong trade relations that develop between countries of close proximity,
Sri Lanka has the potential to become a trade gateway to the fast
growing Indian economy. The potential mutual benefits of such a
relationship that have been observed amongst other economies in the
region such as China & Hong Kong, has led the government to identify
the maritime sector as one of the key areas of development under its
“hub concept”. To this end significant investments have been made at
developing the Hambantota port as well as expanding the capacity at the
Colombo port by TEU’s 2.4 mn per annum. This coupled with
efficiency improvements at the Colombo port as indicated by the
improvement in the trade freedom score, Sri Lanka is expected to play a
noteworthy role in the freight forwarding & transshipment sectors.
Short-to medium term outlook for shipping remains bleak : As per
the latest IMF forecasts for the region, despite the more positive growth
outlook expected for the Asian region (6.7% real GDP growth for Asia
in 2012 vs. 3.3% for the world), the significant linkages that persist
between Asia & developed markets has resulted in a slowdown in
shipping activities. Clarkson which prepares the Clarksea index; aleading indicator of shipping activity expects a 0.49% contraction in
throughput for Asia in 2012. This has been reflected to a certain extent in
the YoY decline in the container volumes at the Colombo port for 2012.
(Fig 10). The slowdown has been further aggravated by an oversupply
of shipping capacity which has led to significant declines in freight
rates as indicated by the Baltic freight index. This also prompted a
number of large shipping lines such as Maersk and CKYH to cut their
respective capacities leading to a reduction in transshipment traffic.
Logistics
Source – Asia Wealth Management Co. (Pvt) Ltd estimates
SPEN logistics segment revenue
Outlook for the segment
While the significant cuts in capacity is expected to improve freight rates in the short term, the search for greater economies
of scale by shipping lines could prompt freight rates to reach steady state, albeit at a lower rate in the long term
Fig 8 - Efficiency improvements at Colombo port
Trade freedom score
Source – Economic freedom index
Source – Bloomberg
Fig 9 - Signs of slower activity..
Monthly ship traffic
Fig 10 - Baltic freight index
Source – Bloomberg
Index
Demand drivers
World
Trade
Carrier
capacity
Airfreight
rates
According to Economist
Intelligence Unit,W orld
tradeis expected to avg
6.5% till FY15E
Preference for ultra-large
container carriers with
higher capacities
Threat from airfreight likely
to remain low due to
comparatively high fuel
costs
Supply drivers
Freight
rates
Port
efficiency
Skilled
labour
Balticfreight index
expected to remain at a
depressed level due to
oversu l of shi ca acit
Capacity expansion and
cutting red tape would
improve the overall
attractiveness of Ports
SL’s shipping industry
currently faces a shortage of
skilled labour, likely to limit
ca acit ex ans ion
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Initiation of coverage
6 Asia Wealth Management Co. (Pvt) Ltd
-
5,000
10,000
15,000
20,000
25,000
30,000
FY09 FY10 FY11 FY12 FY13E FY14E FY15E
LKR (mn)
-8% CAGR
19% CAGR
Installed capacity (Mw) 2010 2011 % ChangeHydro 1,383 1,401 1%Thermal -Oil 1,390 1,407 1%NCRE 45 50 11%
Flat tariff LKR/kw 2012 2013 % change
Mini-hydro 13.04 16.7 28%
Wind 19.43 20.62 6%Biomass (dendro) 20.7 25.09 21%Municipal waste 22.02 26.1 19%
53%
47%
1%
Hydro Thermal -oil & Coal NCRE
40%
59%
1%
2010 2011
Recognition of environmental issues driving energy sector
dynamics: The heightened activity in the tourism sector has placed
environmental needs at the forefront of the government’s development
agenda. In addition to increasing the forest cover, the government has
committed itself to meeting 15% and 20% of the country’s energy
requirements by Non-Conventional Renewable Energy (NCRE)
sources by 2015 and 2020 respectively. To this end the government
has a number of generous proposals in its budget proposals for 2013 in
order to attract greater private investments towards the energy sector.
Contemporaneously, the government has explicitly stated in its budget
proposal for 2013 that oil based power strategies are to be
discouraged in the future. This has ramifications for the private
investors in oil based power ventures who contribute to the nationalgrid and may face lower tariff rates in the future.
Limiting factors: large initial outlays and long gestation periods:
While such generous concessions has resulted in an increase in private
investments in renewable energy, NCRE’s still account for less than
1% of total power generated in 2011. This is primarily due to the
significant cost outlay in terms of machinery which has to be
imported. A typical 5MW Biomass power plant requires an initial
outflow of approx.LKR 1.2 bn – 1.5bn. Further while most NCRE
projects remains attractive from an IRR point of view with returns on
investments in NCRE averaging approx. 11% for Sri Lanka, mostinvestors are dissuaded by the long payback periods of such ventures
which can be as much as 15+ years. In lieu of this the government has
further extended its concessions granted to the NCRE sub-segment in
its budget proposal for 2013 in the form of tariff concessions for the
importation of machinery.
Strategic – Power Generation (Largest sub-segment)
Demand drivers
Consumer
demand
Industry
demand
Govt
policy
IncreasingGDPper Capita
strongly correlates with
future energy demand by
households
Government policypromoting energy intensive
sectors such as sugar, steel
etc could bolster demand.
Consistency in the policy to
reduce oil dependence would
ensure sustained demand for
renewable ener sources
Supply drivers
Input costs
Cost of
Machinery
Tariff rates
Fuel prices expected to remain
high while input costs for
renewable may also rise due to
competition amongst suppliers
Tax exemptions grantedcomes as a welcome relief
to producers though LKR
depreciation will play a role
Tariffs rates for renewable
energy maybe maintained at
the current attractive levels
in the short run.
Source – Asia Wealth Management Co. (Pvt) Ltd estimates
SPEN Strategic segment revenue
Outlook for the segment
While the government has invested in non-renewable energy solutions such as Coal power in order to meet short term energy
requirements, in the medium to long term there is a clear signal on the part of the government to shift its energy mix in favour of
NCRE’s in order to achieve its objective of reducing the economy’s oil dependency.
Fig 11 - -Attractive tariff rates
Source – PUBSL
Fig 12 - Increased focus on NCRE’s..
Source – CEB statistical digest 2011
Fig 13 - ..But energy mix remains unchanged
Source – CEB statistical digest 2011
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Initiation of coverage
7 Asia Wealth Management Co. (Pvt) Ltd
With the Central Bank achieving its USD 6bn target for inward remittances for the economy in 2012, the heightened focus
by the government would positively impact the inward money transfer sector in the short to medium term. However, we
caution that structural shifts in the composition of migrant workers and domestic macroeconomic factors must be
accounted for when determining the long term prospects of the sector.
0
100
200
300
400
500
600
700
FY12 FY13E FY14E FY15 E
7% CAGR
LKR (mn)
33%
54%
67%
46%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005 2006 2007 2008 2009
Un sk il le d S ki ll ed
5% 6% 7.8%
0%
10%
20%
30%
40%
50%
60%
70%
2007 2008 2009 2010 2011
Middle East South East asia
26.128.8
22.7
15.2
8.9
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
0.5
0
5
10
15
20
25
30
35
1990/91 1995/96 2002/03 2006/07 2009/10
Poverty headcount % of population Gin i Coeff icient
An integral part of the economic landscape – With close to 1/4th of the
domestic population employed abroad and with private remittances
accounting for over 50% of total exports, the government has correctly
identified the vital role played by inward remittances in earning foreign
exchange in order to meet the economy’s external obligations. To this end a
number of proposals have been brought forth via the government budget
proposal for 2013 in order to encourage foreign workers to use formal
channels of inward money transfers. While this fact coupled with a decline in
the share of Sri Lankan workers living illegally has led to an exponential growth
in remittance growth over the past 5 years, we identify two developing trends
which would impact the long term sustainability of this stable source of foreign
income.
Decline in poverty-led migration – Research by Hettige & Mayer reveal
that the key driver of migration particularly among unskilled and semi-skilled
female workers in Sri Lanka is due to poverty related factors. This has also
resulted in a high concentration of Sri Lankan workers in the Middle East
region. While political risk and safety standards too acts as a deterrent to
migration into the region we believe that the decline in poverty levels in the
island as indicated by official data could result in a slowdown in the growth
rate of annual departures for foreign employment in the long term.
Alongside initiatives to encourage greater inward money transfers, the
government through vocational training and other programs has made an
attempt to increase the skill level of migrant workers in order to enable them
to take up more lucrative jobs further up the value chain. Data published by
the Bureau of foreign employment reveals that the share of skilled male
workers has trended upwards although the reverse can be observed for female
workers. A 33% increase in the number of departures of professional
workers during the 1H2012 was also reported by the Central bank. The
implications of this on inward remittances have been studied by Amjad
(1989) whose studies revealed that the propensity to save is higher amongst
skilled & semi-skilled workers compared with unskilled workers. However
his research also revealed that the incidence of inward remittances was
lower amongst professional workers in comparison to other categories of
employment. Hence we believe that growth in the share of skilled & semi-
skilled workers would be a key indicator of the prospects of the inward
remittances industry.
Services – Money Transfer (Largest Sub-segment)
Demand drivers
Economic
growth
Political
risk
Consumer
awareness
Weaker than expected growth
in Middle-Eastern economies
could result in a slowdown in
remittance rowth
Political uncertainty in the
Middle East could disrupt
money transfers
Greater awareness of the
safety offered by
transferring money through
le al channels
Supply drivers
Governme
nt policy
Setup
costs
Forex
policy
Government promotion
efforts to encourage
migration through formal
channels
Costs involved in setting up
branches in
underdeveloped provinces
Government policy to
simplify procedures for
remittance transactions
SPEN Services segment revenue
Source – Asia Wealth Management Co. (Pvt) Ltd estimates
Outlook for the segment
Fig 15 - Limited impact on job composition
Female departures by job mix
Source – SLBFE
Source – SLBFE
Fig 16 - High exposure to the middle East
% of total foreign employment
Fig 14 - Towards more equitable growth
%Score
Source – CBSL
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Initiation of coverage
8 Asia Wealth Management Co. (Pvt) Ltd
100
105
110
115
120
125
130
135
140
8-Dec-11 8-Jan-12 8-Feb-12 8-Mar-12 8-Apr-12 8-May-12 8-Jun-12 8-Jul-12 8-Aug-12 8-Sep-12 8-Oct-12 8-Nov-12
1HFY13 results reveal
earnings up 35% YoY
Slowdown in container
shipment volumes at
Colombo port
Hotel association
satisfied with govt
2013budget
proposals
Fitch reaffirms SPEN's rating
at AA with negative outlook
SPEN reports highest e ver
PBT of L KR5.5 bn for
FY12, recognising sale of
stake of Colombo South
terminal stake to CMHI
Firm increases its
equity investment in
CINEC to 40%AHUN hotels recognised as
the most energy e fficient
Large transaction of
SPEN's stock which
accounts for 16.4% of
total equity3QFY12 results
released
SPEN enters best tour
operatorshall of fame
SPEN reports 13% growth
in PAT for 1QFY13
SPEN plans to
sell 30% stake of
port project to
China Merchants
Holdings
0
5
10
15
20
25
30
35
40
45
Revenue* COGS** GP Net operating
expenses
EBIT Finance
expense
Finance
inome***
PBT tax expense PAT Minority
ineterst
Net income
47% 18% 18% 16%
Shift in capital
structure towards
the sector average
has resulted in a
lower interest bill
High fuel costs
and exchange
rate volatility
resulting in a
30% YoY cost
escalation
100%12%
36%
15%
44%
5%
Revenue mixPAT mix
48%
13%
19%
20%
Adminex pense:
51% of all
employees
deployed in the
toursim sector
53%
2% 2% 2%4%
29%
Ta x expense
expected to rise
with tax revisions in
maldives and
expiration of tax
shields for power
sector
Financial snapshot – FY12
LKR (mn)
*Revenue net of tax
**COGS = Raw materials & consumables + other operating expenses (direct) + Change in direct inventories
***Includes share of associate company profits
Source - Company Filings
Event timeline (Dec 2011 – Dec 2012)
Price (LKR)
Source – Asia Wealth Management Co. (Pvt) Ltd
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9 Asia Wealth Management Co. (Pvt) Ltd
LKR mn 3QFY13 3QFY12 % Change 9MFY13 9MFY12 % Change
Revenue 9,206 8,124 13% 27,764 21,323 30%
Revenue tax (132) (120) 10% (386) (346) 12%
Net revenue 9,074 8,004 13% 27,378 20,978 31%
Cost of sales* (5,290) (4,710) 12% (16,671) (12,059) 38%
Gross profit 3,784 3,294 15% 10,707 8,919 20%
Other operating income (52) 53 -200% 18 152 -88%
Employee benefits expense (1,041) (917) 14% (2,918) (2,543) 15%
Depreciation and amortisation (354) (101) 250% (1,031) (855) 21%
Indirect operating expenses (1,133) (980) 16% (3,343) (2,916) 15%
Profit from operations 1,203 1,349 -11% 3,435 2,757 25%
Finance income 197 105 88% 590 326 81%
Finance expenses (388) (183) 112% (1,026) (488) 110%
Net finance expense (191) (78) 144% (436) (161) 170%
Profits from associates 62 21 193% 150 65 132%
Profit before tax 1,075 1,292 -17% 3,149 2,660 18%
Income tax expenses (168) (214) -21% (506) (451) 12%
Profit for the period 907 1,078 -16% 2,643 2,209 20%
Minority interest (205) (305) -33% (569) (542) 5%
Earnings to equityholders 702 773 -9% 2,074 1,667 24%
34% 33%
44% 50%
20%15%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
9MFY12 9MFY13
Tou rism S trate g ic Lo gist ics S ervice s
LKR mn 3QFY13 3QFY12 % Change 9MFY13 9MFY12 % Change
Tourism 834 893 -7% 1,801 1,370 31%
Logistics 102 169 -40% 423 628 -33%
Strategic (62) 162 -138% 794 547 45%
Services 44 28 54% 130 116 12%
Total 918 1,252 -27% 3,149 2,660 18%
51% 57%
21%
25%
24%13%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
9MFY12 9MFY13
Tourism Strategic Logistics Services
LKR mn 3QFY13 3QFY12 Change 9MFY13 9MFY12 % Change
Tourism 3,438 2,835 21% 9,320 7,393 26%
Logistics 1,542 1,362 13% 4,383 4,356 1%
Strategic 4,303 3,971 8% 14,223 9,672 47%
Services 132 112 18% 385 356 8%
Total 9,415 8,281 14% 28,312 21,778 30%
Quarterly financial performance
Source: Company Annual Reports & Filings
*Cost of sales = Raw materials & consumables + other operating expenses (direct) + Change in direct inventories
Sector revenue
Revenue Mix
Source – Company Annual Report and Filings
Sector PBT
Source – Company Annual Report and Filings
PBT Mix
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10 Asia Wealth Management Co. (Pvt) Ltd
% of total assets
LKR mn
25%
36%
31%
59%
44%57%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY09 FY10 FY11 FY12 FY13E FY14E FY15E
Tourism Logistics Strategic Services
% of total revenue
31%41%
61% 41%
0%
10%
20%
30%
40%
50%60%
70%
80%
90%
100%
FY06 FY07 FY08 FY09 FY10 FY11 FY12
Tourism Logistics Strategic Services
0
5
10
15
20
25
30
35
40
45
50
FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E
9% CAGR
14% CAGR
Financial analysis
Tourism- Improved security situation bolsters domestic sector investments
In light of the improved security situation in the country which had led to a
boom in tourist arrivals, the firm’s chain of hotels under the Heritance brand
proved to be a popular choice for tourists with the group’s tourism segment
recording a 21% YoY rise in revenue in 3QFY13. The firm is well geared to
meet the expected boom in tourism and is expected to continue to account for a
significant share of group revenue and earnings.
Logistics- Outlook bleak for short to medium term due to low freight rates
The integrated logistics solutions offered by SPEN in Sri Lanka continued to
outperform relative to a sample of global peers due to its exposure to high
growth segments in Sri Lanka as well as South Africa with revenue CAGR of
14% YoY over a 6-year period. It has managed to maintain an EBIT margin
averaging 15.4% over the period which is above the global peer average of
9%. The firm is currently planning on consolidating its operations given the
weaker short to medium term outlook brought about by slowing global trade
and high fuel costs.
Strategic- Future of power plants: Earnings growth potential in question
The power generation segment is the largest sub-segment within the firm’s
strategic investments which accounted for 59% of group revenue and 45% of
group EBIT in FY09. Since then investments have been channeled towards the
tourism sector with tourism sector accounting for 47% of group EBIT by FY12.
Uncertainty surrounds the future of the firm’s investments in its aging power
plants Namely; Matale & Horana oil fired power plants with a capacity of
24MW each and Embilipitiya with a capacity of 100MW. The sector has
historically made a stable contribution towards EBIT margin which has ranged between 15%-17% over 6 years. The aging plants have also put the reliability
of its plants in jeopardy which saw the closure of its 100MW Ace Power Plant
during the first quarter of FY12 which resulted in the firm incurring penalties
due to a breach of the PPA. However, the management has reiterated that it
remains confident that it will be successful in renewing its existing contracts
with the CEB and is determined that power generation remain one of the
group’s core sub-segment investments and has expressed interest in investing in
the energy-hungry South Asian region. An investment in this sector would
entail a significant future CAPEX expenditure with a long payback period.
Services- strong growth prospects ahead
Performance of the service segment was also sustained with the group recording
an 18% YoY revenue growth in 3QFY13 and revenue CAGR of 7% over a 5
year period. The firm’s exposure to inward money transfer services through its
partnership with Western Union enjoys high gross and operating profit margins
and is expected to benefit from the expected increases in private remittances.
Source – Asia Wealth Management Co. (Pvt) Ltd estimates
Fig 18 - -Revenue mix
Source – Asia Wealth Management Co. (Pvt) Ltd estimates
Fig 19 - Total assets mix: Tilt towards leisure..
Source – Company Annual Report and Filings
Fig 17 - Revenue performance over time
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11 Asia Wealth Management Co. (Pvt) Ltd
ROIC (%)
Fig 22 – Consistent returns
ROIC (%)
23%
28%
25%
0%
5%
10%
15%
20%
25%
30%
-
1,000
2,0003,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E
NOP LA T A djuste d EBITA mar gin
0%
5%
10%
15%
20%
25%
FY08 FY09 FY10 FY11 FY12
Tour ism* Logis tics Strateg ic Services
Fig 23 - ROIC*, Capital employed & EBIT
margin** : Uneven growth
0%
5%
10%
15%
20%
25%
30%
FY09 FY10 FY11 FY12 FY13E FY14E FY15E
WACC
ROIC
0%
5%
10%
15%
20%
25%
0 5 10 15 20 25
Tourism
Strategic
Services
Logistics
58%
18%
58%
6%
24%
Extraordinary items bolster earnings in FY12
While the Gross profit margin witnessed a slight dip in FY12 from 50.3% to
47.2% from the previous year, both the Profit before tax and net profit margins
witnessed a noteworthy increase. This was partly on account of the firm’s
subsidiary: Aitken Spence Shipping’s decision to divest itself of its investment
in the widely discussed Colombo South Container Terminal citing escalating
costs. This was accomplished through the sale of its 30% stake in the venture
to its partner China Merchants Holdings. This resulted in an extraordinary
gain of LKR 655 mn being recorded in FY12. This resulted in the firm
recording its highest ever profit before tax of LKR 5.5 bn and a 46% jump in
earnings to shareholders in FY12.
NOPLAT: Consistent performance
Given the presence of intermittent extraordinary items which makes
comparisons across time difficult, a more prudent indicator of firm performance
is the Net Operating Profit/Loss After Tax (NOPLAT) advocated by
McKinsey which considers only the earnings from core operations. Our
estimates reveal a consecutive increase in NOPAT over the past five years with
a 5 year CAGR of 11%. We expect the trend in NOPLAT growth to be
consistent with a growth in NOPLAT CAGR of 9% over our forecast period.
ROIC: Value creation
Based on the core operations of the firm, we estimate that the firm has managed
to maintain a high return on invested capital (ROIC) over a 5 year historical
period. The firm recorded a ROIC of 24% in FY12 which is over and above the
current discount rate (WACC) of 14%. Hence while we expect margin
expansion to be more modest over our forecast period, we believe that the
earnings potential of existing investments is likely to remain strong.
CAPEX: Reinvestment needs concentrated in tourism & logistics segment
It is clear from fig 22 that Return on Invested Capital (ROIC) has been unequal
across segments across segments and over time. While our measure of ROIC
maybe potentially understating returns as average sector assets are used as a
proxy for invested capital (With the exception of the tourism sector where
AHUN’s ROIC is used as a proxy), nevertheless it is clear that returns on
strategic segment investments has been on a declining trend as the firm’s
investments in its long-dated furnace-oil powered plants reaches the maturity
stage. However, this together with the tourism segment accounts for 82% of the
group’s total assets. Therefore in order for the group to maintain a high earnings
growth rate which in the past has recorded a 26% growth on a CAGR basis
over a 4 year historical period, we expect the group’s capital expenditure in thestrategic and the tourism segment to be maintained at an elevated level.
Fig 20 – NOPLAT: Consistent contribution
from core operations
LKR (mn.)
Source – Asia Wealth Management Co. (Pvt) Ltd estimates
Fig 21 –ROIC: value creation over time
(%)
Source – Asia Wealth Management Co. (Pvt) Ltd estimates
*Based on AHUN’s ROIC
Source – Asia Wealth Management Co. (Pvt) Ltd
Capital employed (LKR bn)
Based on FY12 figures
*ROIC = Sector EBIT *(1- effective tax rate)/ Sector average total assets
**EBIT margin by sector is indicated within their respective bubbles
Source: Asia Wealth management Co. (Pvt) Ltd
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12 Asia Wealth Management Co. (Pvt) Ltd
Column1 FY09 FY10 FY11 FY12 FY13E FY14E FY15E
ROE 14% 11% 13% 16% 14% 13% 15%
Tax Burden 60% 61% 66% 68% 66% 65% 65%
Interest Burden 83% 83% 96% 97% 92% 86% 94%
EBIT margin 14% 17% 16% 18% 17% 17% 18%
Asset turnover 0.87 0.65 0.65 0.68 0.69 0.73 0.75
Equity Multiplier 2.33 2.06 1.92 1.95 2.02 1.91 1.80
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.91.0
5%
7%
9%
11%
13%
15%
17%
FY09 FY10 FY11 FY12 FY1 3E FY14 E FY15 E
A ss et tu rn ov er (X ) R OE( %)
Fig 24 – Efficiency Vs. profitability
Fig 25 - Tax bill expected to trend
upwards
Fig 26 –Financial leverage close to peer
average
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
FY09 FY10 FY11 FY12 FY13E FY14E FY15E
G & S taxes in Maldives
comes into effect
Expiration of
Matale & Horana
PPA's *
Expiration of
100MW
embilipitiya PPA
38%
29%
34%
15%
20%
25%
30%
35%
40%
45%
5 0%
FY09 FY10 FY11 FY12 FY13E FY14E FY15E
Optimal capitalstructure
Peer Average
DuPont analysis
Asset Turnover
Asset turnover is a measure of how efficiently firm’s resources are being
utilized. The firm has historically maintained a high level of reinvestment with
an average reinvestment rate (Capital expenditure plus working capital
requirements) averaging 45% over the past five years. Capital expenditure has
particularly been focused on the tourism sector with the sector assets accounting
for 41% of total assets in FY12. As a result of this asset turnover has
historically been on a downward trend. In anticipation of future investments
in the sustainable energy sector and further investments in the tourism sector,
we expect only a relatively modest improvement in asset turnover from 0.68x in
FY12 to 0.75x by FY15E.
Tax burden
The tax burden is expected to rise in the future due to the expiration of tax
shields in FY13E and FY15E enjoyed by the firm’s investment in thermal
power plants. Further tax revisions in Maldives which accounts for bulk of the
leisure segment’s revenue would further raise its tax burden. This would be
offset to a certain extent by future investments in mini hydro and other
sustainable energy ventures which have in the past enjoyed tax exemptions.
Hence although the government has expressed its commitment to encourage
more sustainable energy ventures in the country, given the budgetary constraints
facing the Ceylon Electricity Board (CEB), we expect such tax concessions to
be maintained at the current rates. Further, given that the tourism sector would
continue to account for the bulk of the firm’s revenue, we project that the
effective tax margin will rise from 14% in FY12 to 18% by FY15E.
Equity multiplier
The equity multiplier measures the proportion of debt financing as a proportion
of the firm’s assets. The firm recorded a debt-to-capital ratio of 33.8% in FY12,
down from a high of 48% in FY08. Our estimates reveal that the optimal capital
structure for the firm based on the cost of capital approach is approx. 30%,
while the peer average of the diversified sector is 25%. We expect the debt-to-
capital ratio to be maintained close to the current level of 33.9% in FY13E
declining to 28.3% in FY15E.
Source – Asia Wealth Management Co. (Pvt) Ltd estimates
A DuPont analysis quantifies our expectations for the firm in terms of number of key metrics. This mirrors our
future outlook for the sector and the firm
Source – Asia Wealth Management Co. (Pvt) Ltd estimates
ROE (%) Asset turnover (X’s)
Effective tax rate (%)
Source – Asia Wealth Management Co. (Pvt) Ltd estimates
Debt-to-capital ratio (%)
Source – Asia Wealth Management Co. (Pvt) Ltd estimates
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13 Asia Wealth Management Co. (Pvt) Ltd
-
1,000
2,000
3,000
4,000
5,000
6,000
0
5
10
15
20
25
30
35
40
45
FY07 FY08 FY09 FY10 FY11 FY12
Invested capital excluding goodwill Total funds invested
Funds Invested (LKR bn) YoY change (LKR mn)
Fig 27 – Shift in preference towards
inorganic growth
Future Outlook
As per company announcements and management disclosures, we believe that
the following sectors would experience the most dynamic changes over our
forecast period .
Tourism: Capacity expansion and new investments expected to continue:
32 new water Villas in the groups Maldivian properties, a 200 room four
stared hotel by the groups associate BBH as well as the re-launching of
Kalutara Ramada resort as “The Sands” are some of the capacity expansion
ventures completed over the year by the group’s subsidiary AHUN.
Uncertainty surrounded the group’s project in Ahungalla to build 55 luxury
Villas as part of a joint venture with the Sixth Sense Group with the firm
recently announcing the termination of the agreement due to delays caused by
changes that took place in the top management of the foreign counterpart.
Strategic: Significant overhaul expected as firm’s energy mix realigns to new
dynamics.
The group, in the event of a non-renewal of the existing PPA agreements may
seek to rebalance its exposure away from oil-fired energy generation and shift
towards more sustainable power solutions in the domestic economy. The firm is
however building on its long expertise in managing oil-fired energy solutions
and is in the process of securing contracts for 2, 100MW power plants in
Bangladesh as per disclosures in the firm’s 2012 annual report. Further, the
management remains confident that it would be successful in renewing its
existing PPA’s while diversifying its operations within the power sub-segment.
Given its successful venture into the bio mass, wind power and other renewable
energy ventures as well as the attractive tariff rates on offer, the management
has expressed its interest in increasing its exposure in this sector with projects
such as a 10MW waste-to-energy project and greenfield projects such as
Solar and wind power under consideration. The strategic sector currently
accounts for 41% of the group assets, and hence any changes in this sector’s
composition would have significant implications for the firm’s profitability and
value.
Logistics: Likely to turn to inorganic growth
With the maturing of the group’s logistics segment we believe that the firm’s
strategy will be to consolidate its position in this segment. In the spirit of the
joint venture the group entered into with CINEC Maritime Campus in FY12,
we believe that the majority of growth in this segment would come from
inorganic growth.
Services: A more focused approach
A more focused approach is being adopted for the services segment and has
prompted the group led to the decision to reclassify the group’s Plant O&M
activity from the Services segment to the strategic segment. While no specific
ventures have been discussed by the management, we expect the group to make
adequate investments in this segment to take advantage of the opportunities in
the money transfer sub segment through the widening of the firms branch
network.
Source – Asia Wealth Management Co. (Pvt) Ltd
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14 Asia Wealth Management Co. (Pvt) Ltd
Key inputs
Model two-stage FCFF
High growth period 5 years
Weighted average beta 0.8
Weighted pre tax cost of debt 8%
Weighted cost of equity 16%
Marginal tax rate 13.8%
Debt-to-capital ratio 27%
Weighted WACC 14%
Terminal EBIT growth rate 4%
Fig 29 – Model assumptions
Fig 30 – Sector assumptions*
Sector Tourism Logistics Strategic Services
Revenue growth 6% 1% 15% 7%
EBIT margin 22% 10% 13% 31%EBIT growth -5% 5% 0% 7%
Reinvestment rate 41% 47% 0% 39%
Sector Beta 0.9 0.6 0.5 0.2
Revenue weight 31% 11% 57% 1%
Fig 31 – Sensitivity analysis
132 12% 13% 14% 15% 16%
2% 151 133 121 105 933.0% 160 139 127 108 96
4% 170 147 132 112 99
5.0% 186 157 141 118 103
6% 205 170 150 124 107
WACC
G r o w t h r a t e
Fig 32 – Price assimilation*
SPEN
LKR 127 136 127 136 127 136
P/E 13.9 14.9 13.2 14.2 10.6 11.4P/BV 1.8 2.0 1.6 1.8 1.4 1.6
FY15EFY13E FY14E
Fig 28 – DCF valuation
LKR mn
Enterprise Value* 67,405
Market value of Debt 17,793
Minority interest 4,959
Cash & Equivalents 7,054
Value of equity 53,683
Number of shares (mn's) 406
Intrinsic value per share 132
Current price 119.8
Upside/downside potential 10%
Valuation
We conclude our survey of SPEN with a discounted cash flow (DCF) model
which has been complimented by a relative valuation approach.
DCF Valuation
A two stage free cash flow to firm (FCFF) method with a five year explicit
growth phase has been used to take into account the accelerated growth
expected in the post war context. While a sum of parts (SOTP) valuation is
considered a more suitable valuation tool for a conglomerate, in the absence of
segment details on working capital, cash positions and contributions from sub-
segments, we believe that a group level valuation is more suitable to our
purposes. Applying a discount factor of 14% based on current market returns
yields a discounted value for equity of LKR 53.7 bn. This implies a per share
intrinsic value of LKR 132. Based on the current price of LKR 119.80 this
implies a price appreciation potential of 10%.
Revenue CAGR higher than historical growth: As highlighted in our sector
analysis we believe that the Strategic and Services segment will grow at a faster
pace over our forecast period while the revenue contribution from the Tourism
segment will be sustained albeit at a more measured growth pace. This
would result in group revenue CAGR of 14% over a three-year time horizon.
EBIT margins preserved: Based on our explicit forecasts for the sector we
believe that EBIT margins will average 17.3% over FY13E-FY15E which is
lower than FY12’s margin due to the absence of any extraordinary items. We
justify a sustainable EBIT growth rate of 4% for the firm which is a blended
average of the firm’s segment weighted average of sustainable growth given the
firm’s exposure to high growth sectors of the economy.
Reinvestment Rate: As highlighted in the financial analysis, a significantchunk of the group’s capex expenditure is directed towards the tourism and
strategic segment. Given that this sector is likely to be an area of focus for the
management we maintain a reinvestment rate (Net CAPEX plus net working
capital requirement) of 92% in FY13E. We expect a slowdown in the Tourism
segment’s returns over time with the tourism sector entering a more
normalized pace of growth which would also result in a lower reinvestment rate
to the historical average of approx. 40% by the end of our explicit period.
Finally assuming that ROIC reverts to its historical ROIC of 22% and a
sustainable EBIT growth rate of 4% we compute the reinvestment rate as 18%.
Price Assimilation
Based on a 52-week historical price movement, SPEN’s stock has been
observed to reach a maximum of LKR 135 over a 52-week time horizon. The
52-week historical price movement implies a price volatility of 6% against a
mean price of LKR 117. This implies a price deviation of LKR 7.06 with the
share expected to reach a price of LKR 127 against the current price of LKR
119.8 in the event of an upward swing with the current price assumed as the
mean.
Source – Asia Wealth Management Co. (Pvt) Ltd estimates
*The average of estimates for the forecast period
Source – Asia Wealth Management Co. (Pvt) Ltd estimates
Source – Asia Wealth Management Co. (Pvt) Ltd estimates
Explanatory note
*The depicted price range is based on the following criteria;
The lower bound is based on an upward growth of 6% based on a 12-month standard deviation of
the stock against the 52-week mean.
The upper bound is the maximum closing price of the stock recorded over the same 12-month
period
Source – Asia Wealth Management Co. (Pvt) Ltd estimates
*Computed based on Two stage FCFF model with 5 year
explicit period
Source – Asia Wealth Management Co. (Pvt) Ltd estimates
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15 Asia Wealth Management Co. (Pvt) Ltd
7.6
12.7
5.1
0
2
4
6
8
10
12
14
Assets in Place Growth assets Trailing P/E
60%
40% 100%
P/E (x’s)
Fig 34 – P/E disaggregation
60
70
80
90
100
110
120
130
140
150
Fig 33 – P/E movementP/E analysis
An analysis of the price movements of SPEN (Fig 33) indicates that it is
currently trading at multiples between 13x and 15x, close to the 52-week
average P/E of 12.8x after having reached a high of LKR 135 (With a PE of
15x) during the 52-week period. This implies a price ranging from a low of
LKR 123 to a high of LKR 142. Using Damodaran’s methodology (Fig 34) of
P/E disaggregation, 60% of the 12-m trailing P/E of SPEN’s value may be
justified by assets in place with the remainder is accounted for by growth
prospects.
Relative valuation
Given the diversity in terms of the operations of local firms classified under the
diversified sector, it is difficult to draw an intuitive conclusion based on relative
multiples. However, it is clear that SPEN is trading at a discount relative to both
the sector and the Market in terms of the P/E and P/BV multiple. The relatively
lower multiples registered by the firm maybe as a result of the uncertainty
surrounding the future of the firms investments in the power generation sub-
segment. Based on our earnings forecasts the implied forward P/E’s of SPEN
for the years FY13E and FY14E to stand at 12.5x and 11.6x respectively.
Source – Asia Wealth Management Co. (Pvt) Ltd estimates
Source – Bloomberg
13x
12x
14x
15x
Price (LKR)
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16 Asia Wealth Management Co. (Pvt) Ltd
SPEN.N FY12 FY13E FY14E FY15EPrice(LKR) 118 118 118 118
EPS 9.1 9.1 9.6 12.0
P/E 12.3 13.2 12.5 10.0
BVPS 61.4 69.1 77.3 87.8
P/BV 1.8 1.7 1.5 1.3
ROE 16% 14% 13% 15%
SPEN trailing P/E 12.7
SPEN trailing P/BV 1.8
SPEN ROE 14%
Market P/E 11.9
Market P/BV 1.6
Market ROE 13%
Sector P/E 15.5
Sector P/BV 1.8
Sector ROE 12% 80 100 120 140 160 180
FCF to firm
Current P/E
Price assimiltation
52-week High/Low
Current Price Intrinsic Price
-
50
100
150P/E
PBVROE
ASI Aitken Spence
-
50
100
150P/E
PBVROE
Hotels &Travels Aitken Spence
Fig 35 – Relative value analysis Fig 36 – Football field analysis
Fig 38 – ASI Vs. SPEN Fig 39 – Diversified Vs. SPEN
80
85
90
95
100
105
110115
120
125
Hotels &Travels AitkenSpence ASI
Priceindex
Fig 37 – 52-week price movement
Valuation Dashboard
Price (LKR)
Source – Asia Wealth Management Co. (Pvt) Ltd estimates Source – Asia Wealth Management Co. (Pvt) Ltd estimates
Source – Asia Wealth Management Co. (Pvt) Ltd research
Source – Asia Wealth Management Co. (Pvt) Ltd research
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17 Asia Wealth Management Co. (Pvt) Ltd
4,479
6,545
8,560
10,050
0
2,000
4,000
6,000
8,000
10,000
12,000
2009 2010 2011 2012
2009 2010 2011 2012
17%
Tourist arrivals (mn's)
Fig 40 – 15% depreciation of LKR in 2012
bolsters foreign interest
0
1
2
3
4
5
6
7
8
9
0
5
10
15
20
25
1 -Jan-0 7 1 -Jan-0 8 1 -Jan-09 1 -Jan-1 0 1-Jan-1 1 1 -Jan-1 2
EBIT Cover
1-Year treasury Bond
Yield(%) (X's)
Fig 41 – Comparatively lower exposure
Fig 42 – Growing interest of private sector
60%
40%
P ub li c P ri vate
57%
43%
2010 2011
Risks to our recommendation
In this section we address risks related to both the group’s earnings and risk to
our recommendation in terms of the expected stock performance and the target
price.
Exchange rate risk
The government’s decision to move away from a fixed exchange rate regime to
a managed exchange rate regime in early 2012 most acutely affects the
tourism and logistics sector. A depreciating LKR would be beneficial to the
tourism and logistics sector which would make the firms overseas operations
more profitable in Rupee terms and its domestic operations more competitive.
However other risks such as low occupancy due to high average room rates in
the case of tourism sector and low freight rates in the case of the logistics sector
may be overriding risks which could dampen revenue & earnings growth.
Further the firm may have to reassess the profitability of its future investments
in the sustainable energy segment particularly with respect to investments in bio
mass, wind and solar power where the machinery would have to be wholly
imported and account for a substantial portion for the initial outlay.
Interest rate risk
While the firm is relatively less exposed to burgeoning finance costs due to the
deleveraging which has been taking place since 2009, the significant volatility
experienced in domestic interest rates ensures that interest rate risk remains a
significant concern for the firm.
Competition risk
The firm’s operations which encompass tourism, logistics and power generation
have been identified as areas of high growth which have experienced significantearnings growth in the past 3 years. The encouragement by the government in
these key areas as part of its “5 hubs + tourism” development plan has
resulted in an increase in competition from both government and private sector
participants. In the case of tourism, the entry of new players both from within
and without challenges traditional hotel services players such as AHUN to
continuously innovate in order to maintain its competitive edge. The logistics
sector is also attracting significant competition due to investments made by the
government and the private sector in increasing port capacity and the
completion of the new port in the South of Sri Lanka. With respect to power
generation, the attractive tax concessions in the renewable energy sector have
attracted a myriad of private sector investments particularly in mini hydro and
bio mass ventures.
Source – Sri Lanka tourist board
Source – Company Annual Report and Filings
Source – CEB electricity digest 2011
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18 Asia Wealth Management Co. (Pvt) Ltd
Pla nt type The rma l Mini Hydro Wind Bio Ma ss
Capacity (kWh) 125,000 2,500 3,000 600
Plant efficiency* 95% 70% 30% 85%
Tariff rates(Kwh)** 13.00 16.70 21.22 25.09
Average revenue ( LKR mn) 13,523 256 167 112
Fig 43 – Discontinuation of thermal powerinvestments poses significant revenue risk
Fig 44– Cost escalation could put margins under
pressure
Hotels tariff structure (HP 3) Current Proposed % change
Fixed Charge (LKR/month) 3,000 3,000 0%
Demand charge (LKR/KVA) 750 1000 33%
Fuel adjustment charge (%) 15 15 0%
Peak (LKR/KWh) 16.4 23 40%
Off peak (LKR/KWh) 8.85 9 2%
Day (LKR/KWh) 12.6 14 11%
Fig 45 – Increasing exposure to tourism could
drag up the group’s risk
Unlevered beta* EBIT Contribution**
Tourism 0.9 48%
Logistics 0.6 7%
Services 0.2 42%
Strategic** 0.5 3%
SPEN 0.6 100%
Business specific risk
Non-renewal of PPA’s
The PPA’s between Ace power (Pvt) Ltd and the Ceylon electricity board
(CEB) are set to expire in 2015/16. The management has also expressed its
intention of venturing into the sustainable energy sector through an investment
in mini hydro and wind power which currently enjoys attractive rates for
electricity generation. However given the pressure on the Ceylon Electricity
Board (CEB) to curb its operating losses, we expect a downward revision in
PPA rates. However if the firm is successful in renewing its PPA’s a
reassessment of our intrinsic value and hence recommendation could take place
given the significant contribution made by these investments to the sector in the
past.
Risk of input cost escalation
Escalations in prices of utilities including electricity, fuel and water continues to
remain a challenge for most sectors of the economy. SPEN is no exception with
regard to its leisure sector investments where heightened competition is
expected to further aggravate the prevailing situation. Our analysis of the
proposed electricity tariff revisions for 2013 leads us to conclude that the
negative impact on the tourism sector is particularly acute. As discussed in the
section on tourism, the high operating leverage associated with hotel services
increase the sensitivity of hotels to such changing cost dynamics. However, the
proactive measures undertaken by the group to promote a more sustainable form
of tourism has improved its operating efficiency. Further, the impact on cost
would be comparatively limited due to the firm’s high exposure to the Maldives
market. Cost factors would also dominate the top line growth of the freight
forwarding sector particularly with regard to air freight. While the government’s
rationale behind promoting Non conventional renewable energy (NCRE’s) is an
attempt to reduce the economy’s exposure to high fuel costs, industry analysts
point out that the lack of a systematic approach towards pricing and
licensing could threaten the viability of this sub sector due to cost escalations.
This is of particular concern for Dendro and bio mass power generation where
limited supply of raw materials (Primarily Gliricidia) could result in significant
price appreciations which could threaten the viability of the entire industry in
the absence of appropriate regulation.
Lack of diversification
The firm has experienced increasing exposure to the tourism sector over time
and now accounts for close to 36% of the firm’s revenue and 41% of firm assets
in FY12. This has transformed this diversified firm into more of a leisure
sector bet. This entails that SPEN will be overexposed to the risks specific to
the leisure sector, including the threat of new entrants, uncompetitive ARR’s,
high operating leverage etc. This has implications for the discount factor for the
group as the tourism sector has a relatively higher risk exposure as measured
by the beta (Fig 45). However, moving forward we expect the strategic segment
to account for a higher proportion of revenue and earnings over our forecast
period which would mitigate this risk to a certain extent.
*Based on research done on average efficiency of plants
**Based on power sector tariffs applicable for 2012-2013
Source - Asia Wealth management co. (Pvt) Ltd estimates
Source – CEB
Source – Asia Wealth Management Co. (Pvt) Ltd estimates
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19 Asia Wealth Management Co. (Pvt) Ltd
Valuation risk
Modeling risk
Complex organization structure is an inherent weakness in most conglomerates
and SPEN is no exception. While we have not applied any arbitrary adjustment
to the discount factor to take into account the complex operations structure
given the firm’s commitment to move towards a more intuitive organization
structure for its core operations, the possibility of understating the earnings
potential of a firm is an ever present possibility. The lack of information
pertaining to the firm’s investments in subsectors such as printing, garments,
elevator services may not be fully captured in our intrinsic value. However
given that these investments account for only a small portion of total revenue &
earnings we believe that the possibility of a significant understatement of the
firm’s value is unlikely. A further issue relates to the groups significant land
bank categorized as freehold property which as at FY12 was valued at approx.
LKR7 bn. However, as this embodies both genuine freehold property as well as
land utilized for current operations or earmarked for future investments,
disaggregating freehold property proves to be a challenge. Hence we have opted
for the prudent choice and not included the value of freehold property in our cash flow valuation.
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20 Asia Wealth Management Co. (Pvt) Ltd
Profitability ratios FY09 FY10 FY11 FY12 FY13E FY14E FY15E
Revenue growth 6.5% -17.5% 4.0% 22.0% 19.9% 12.9% 8.4%
GP Margin 36.8% 48.4% 50.3% 47.2% 40.0% 41.1% 42.0%
EBIT Margin 14.2% 16.9% 16.0% 18.6% 16.8% 17.1% 18.1%
PBT margin 11.7% 14.1% 15.4% 18.1% 15.4% 14.8% 17.0%
NP Margin 7.0% 8.7% 10.3% 12.3% 10.2% 9.5% 11.0%
Liquidity ratios
Current ratios 1.3 1.3 1.4 1.3 1.6 2.1 2.5
Quick ratio 1.2 1.2 1.3 1.2 1.4 1.9 2.3
Efficiency ratios
Interest cover 3.7 4.1 5.4 8.1 4.4 4.5 6.9
Inventory Cycle (days) 25.8 39.8 44.5 38.8 33.5 34.2 33.3
Receivable Cycle (days) 75.0 85.7 70.1 79.3 110.6 123.0 121.5
Payables Cycle (days) 76.6 120.6 120.2 120.2 120.5 110.8 101.3
Cash conversion cycle (days) 24.2 5.0 (5.5) (2.1) 23.6 46.4 53.5
Gearing ratios
Debt to equity ratio 60.1% 48.5% 41.4% 51.1% 51.4% 39.3% 39.5%
Debt to capital ratio 37.6% 32.7% 29.3% 33.8% 33.9% 28.2% 28.3%
Investor ratios
ROE(%) 14.1% 11.5% 12.6% 16.1% 13.9% 13.1% 14.5%ROA(%) 12.5% 11.2% 10.5% 12.9% 12.0% 13.2% 14.3%
Pre tax ROIC 18.7% 16.4% 15.5% 19.7% 19.1% 19.6% 20.1%
After-tax ROIC 16.9% 14.6% 13.9% 17.0% 16.0% 16.1% 16.5%
Capital turnover 1.5 1.0 1.0 1.1 1.2 1.2 1.2
Asset turnover(X) 0.9 0.6 0.6 0.7 0.7 0.7 0.7
Equity Multiplier(X) 2.0 2.0 1.8 1.8 1.9 1.8 1.7
EPS 5.0 5.1 6.2 9.1 9.1 9.6 12.0
DPS 0.6 0.7 1.0 1.4 1.4 1.5 1.8
Annexure
Source – Asia Wealth Management Co. (Pvt) Ltd estimates
Annexure 1: Quick performance review
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21 Asia Wealth Management Co. (Pvt) Ltd
LKR. mn FY09 FY10 FY11 FY12 FY13E FY14E FY15ERevenue 29,308 24,169 25,144 30,670 36,771 41,506 45,011
Revenue tax (307) (374) (415) (479) (607) (685) (743)
Net revenue 29,000 23,795 24,729 30,192 36,164 40,822 44,268
Cost of sales (18,315) (12,271) (12,281) (15,939) (21,698) (24,031) (25,675)
Gross Profit 10,685 11,524 12,448 14,253 14,466 16,791 18,593
Employee benefits expense (2,217) (2,624) (3,055) (3,580) (2,775) (3,241) (3,579)
Other operating expenses -Indirect (3,456) (3,345) (3,596) (3,989) (3,978) (4,899) (5,312)
Other operating income(expense) 391 150 254 698 241 289 347
EBITDA 5,403 5,705 6,051 7,382 7,953 8,941 10,049
Depreciation (1,260) (1,582) (2,002) (1,711) (1,802) (1,878) (1,943) Amortization & Impairment (31) (90) (93) (66) (76) (76) (76)
Profit from operations (EBIT) 4,112 4,032 3,957 5,604 6,074 6,986 8,030
Finance income 419 289 495 489 780 584 633
Finance expenses (1,125) (987) (731) (694) (1,369) (1,547) (1,169)
Net finance expense (706) (698) (236) (205) (589) (963) (536)
Associate company profits (9) 19 95 64 81 13 37
Profit before tax 3,397 3,353 3,816 5,463 5,566 6,036 7,530
Income tax expense (328) (366) (387) (753) (891) (1,086) (1,355)
Profit for the year 3,069 2,987 3,428 4,711 4,676 4,949 6,175
Minority interest (1,029) (927) (892) (1,001) (994) (1,052) (1,313)Earnings to equityholders 2,040 2,060 2,536 3,709 3,682 3,897 4,862
Income statement
Annexure 2: Financial Statements
Source – Asia Wealth Management Co. (Pvt) Ltd estimates
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22 Asia Wealth Management Co. (Pvt) Ltd
LKR. mn
Non-current assets FY09 FY10 FY11 FY12 FY13E FY14E FY15E
Property, plant & equipment 22,636 23,329 18,525 22,531 23,480 24,281 24,855
Leasehold properties 1,505 1,468 1,359 2,549 2,545 2,540 2,536
Intangible assets 109 154 204 603 603 603 603
Investments 1,187 1,280 3,426 3,470 3,470 3,470 3,470
Finance lease receivables 2,232 1,920 1,280 427 0
Deferred tax assets 74 57 138 210 140 47 0
Other non-current assets 56 56 37 12 0
Non-Current Assets 25,510 26,288 25,940 31,337 31,554 31,379 31,463
Current Assets
Inventories 1,284 1,394 1,608 1,783 2,194 2,305 2,383
Trade and other receivables 5,834 5,344 4,159 8,956 12,961 14,555 14,911
Finance lease receivables due within one year 604 684 0 0 0
Amounts due from associates 161 125 23 6 4 1 0
Current investments 5 5 305 242 242 242 242
Deposits and prepayments 533 490 547 756 1,912 1,266 1,293
Current tax receivable 57 158 122 158 105 35 0
Short term deposits 2,020 2,752 5,059 4,355 3,493 3,684 8,043
Cash & cash equivalents 828 825 736 2,177 3,882 3,224 5,362
Total current assets 10,721 11,093 13,169 19,117 24,794 25,311 32,234
Assets classified as held for sale 149 162 181 149 149 149 149
Total Assets 36,381 37,543 39,290 50,604 56,497 56,840 63,846
Equity and Liabilities
Stated capital 2,135 2,135 2,135 2,135 2,135 2,135 2,135
Reserves 7,228 9,317 11,123 12,544 12,544 12,544 12,544
Retained earnings 7,715 7,442 7,959 10,250 13,364 16,697 20,962
Equity attributable to equityholders 17,078 18,894 21,217 24,929 28,042 31,375 35,640
Minority interest 4,553 4,566 4,161 4,680 5,066 5,460 6,062
Total Equity 21,631 23,461 25,378 29,609 33,108 36,835 41,703
Non-Current Liabilities
Interest-bearing liabilities 6,241 5,157 4,144 5,743 6,703 7,499 8,519
Deferred tax liabilities 198 278 253 429 286 95 0
Employee benefits 238 295 336 388 442 509 590
Non-Current Liabilities 6,677 5,730 4,733 6,559 7,431 8,103 9,109
Current Liabilities
Trade and other payables 3,909 4,191 3,912 6,583 7,738 6,848 7,410
Provisions 458 491 327 109 -
Interest-bearing liabilities within 1 year 1,866 1,541 1,718 2,135 2,271 2,541 2,886
Amounts due to associates 1 3 - 14 9 3 -
Current tax payable 135 147 180 287 120 40 0
Interim Dividend - - - - - - -
Other financial liabilities 58 58 58 58
Other current liabilities 136 150 180 358 187 101 58
Short term bank borrowings 2,162 2,470 2,912 4,867 5,434 2,303 2,681
Current Liabilities 8,072 8,352 9,179 14,435 15,957 11,902 13,035
Total Equity and Liabilities 36,381 37,543 39,290 50,604 56,497 56,840 63,846
Balance sheet
Source – Asia Wealth Management Co. (Pvt) Ltd estimates
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23 Asia Wealth Management Co. (Pvt) Ltd
Market Cap (LKR mn.) P/E Fwd P/E* P/BV Dvd Yield ROE (%) Debt-to-capital (%)
48,760 12.7 13.2 1.8 1.2 15 33.8
211,825 13.3 12.2 2.8 1.2 16 20.0
21,900 14.2 N/A 1.1 1.4 8 46.2
13,293 12.6 11.3 1.5 1.8 13 17.8
14,016 9.9 8.1 1.2 1.8 14 24.6
Median 12.7 11.8 1.5 1.4 13.5 24.6
Average 12.5 11.2 1.7 1.5 13.2 28.5
Annexure 3: Peer comparison
*Based on Bloomberg peer averages
Source – Bloomberg
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24 Asia Wealth Management Co. (Pvt) Ltd
Important Disclosures
Equity Rating Definition
Buy – The stock is expected to deliver an absolute return greater than or equal to 15% within a 12-month time horizon
Long-term buy – The stock is expected to deliver an absolute return less than 15% but greater than or equal to 5% within a 12-
month time horizon. However, we maintain a positive outlook for the stock based on the underlying fundamentals and the future
growth prospects of the firm.
Hold – The stock is expected to deliver an absolute return less than 15% but greater than -5% within a 12-month time horizon.
Sell – The stock is expected to deliver an absolute return less than or equal to -5% within a 12-month time horizon.
Disclaimer
The report has been prepared by Asia Wealth Management Co (Private) Limited. The information and opinions contained herein
has been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith. Such
information has not been independently verified and no guaranty, representation or warranty, express or implied is made as to its
accuracy, completeness or correctness, reliability or suitability. All such information and opinions are subject to change without
notice. This document is for information purposes only, descriptions of any company or companies or their securities mentioned
herein are not intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an
offer, to buy or sell any securities or other financial instruments. In no event will Asia Wealth Management Co (Private) Limited
be liable for any loss or damage including without limitation, indirect or consequential loss or damage, or any loss or damage
whatsoever arising out of, or in connection with the use of this report and any reliance you place on such information is therefore
strictly at your own risk.
Asia Wealth Management Co (Private) Limited may, to the extent permissible by applicable law or regulation, use the above
material, conclusions, research or analysis in which they are based before the material is disseminated to their customers. Not all
customers will receive the material at the same time. Asia Wealth Management Co (Private) Limited, their respective directors,
officers, representatives, employees, related persons and/or Asia Wealth Management Co (Private) Limited, may have a long or
short position in any of the securities or other financial instruments mentioned or issuers described herein at any time and may
make a purchase and/or sale, or offer to make a purchase and/or sale of any such securities or other financial instruments from
time to time in the open market or otherwise, in each case either as principal or agent. Asia Wealth Management Co (Private)
Limited may make markets in securities or other financial instruments described in this publication, in securities of issuers
described herein or in securities underlying or related to such securities. Asia Wealth Management Co (Private) Limited may
have recently underwritten the securities of an issuer mentioned herein. The information contained in this report is for general
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rights reserved. This report- in whole or in part- may not, except with the express written permission of Asia Wealth Management
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ResearchManager - Research
BalakrishnanNirmalan (94-11)[email protected]
Corporates
han Silva (94-11)5320251Yogini Yogarasa (94-11)5320361
Salesnstitutional Sales
abriMarikar (94-11) 5320224 077 3-576868 sabri@asia
NiroshanWijayakoon (94-11) 5320208 0777-713645 niroshan@NiyazAboobucker (94-11) 5320213 0777-727352 niyaz@asi
ManjulaKumarasinghe (94-11) 5320211 0777 -874310 manjula@
ChelakaHapugoda (94-11)5320240 0777 -256740 chelaka@a
ChamindaMahanama (94-11) 5320223 0777 -556582 mahanama
HiranBibile (94-11) 5320238 0777 -352032 hiran@asia
NiroshanRathnam (94-11) 5320242 0773 -717515 ratnam@as
eevanHett igoda (94-11) 5320220 0773 -691251 eevan@as
arajFouz (94-11) 5320210 0773 -810159 faraj@asiaMiflalFarook (94-11) 5320247 0772-253730 miflal@asi
BranchesCSE Floor CSE,01-04, World Trade Centre, Colombo
Kurunegala Union Assurance Building, No.6,1stFloor,R
Matara E.H.Cooray Building, Mezzanine Floor, No:Matara
Galle Peoples Leasing Building,2nd Floor,No.118
Negombo Asia Asset Finance, 171/1, Station Road, Ne
Moratuwa Asia Asset Finance, No.18, New De Zoysa
Panadura Asian Alliance Building, 293, Galle Road, P
Kandy 132 2/7, Hill City Complex,D. S .Senanayake Street, Kandy.
Ampara Bandula Cinema Shopping complex, No-10Ampara.
Service CentersKiribathgoda Level 2-6,Udeshi City Shopping complex, No 94,Mak
Hambantota Hambanthota Chamber of Commerce, ThangalleRoad,
affna 62/20, First Floor, Stanley Road, Jaffna
AS
Assistant Manager - Research
AmaliPerera (94-11)[email protected]
Economy
DhanushaPathirana (94-11)5320254Travis Gomez (94-11)5320254
Statistician
Nuwan Pradeep (94-11)5320257
Retail Sales
capital.lk ShiyamSubaulla (94-11)532021
asiacapital.lk Pr iyanthaHingurage (94-11)532021 acapital.lk SubeethPerera (94-11)532022
siacapital.lk NelukaRodrigo (94-11)532021
siacapital.lk GaganiJayawardhana (94-11)532023
@asiacapital.lk ShamalPerera (94-11)532021
capital.lk NuwanEranga (94-11)532024
iacapital.lk RomeshPriyadarshana (94-11)532022
iacapital.lk RukshanLiyanage (94-11)532023
capital.lk NathashaMunasinghe (94-11)532023 acapital.lk IreshaFernando (94-11)532023
SharikaRathnayake (94-11)532020
1. ThusharaAdhikari (011)-573512M G Suranjana (011)-576353
ajapilla Rd, Kurunagala. AsankaSamarakoon (037)-562884GayanNishsanka (037)-564271
:24, AnagarikaDarmapala Mw, SumedaJayawardena (041)-567752LalindaLiyanapathirana (041)-567752MaheshaMadurangi (041) -562072
,Matara Road,Galle RuchiraHasantha (091)-562999
gombo. UthpalaKarunatilake (031)-567688
d, Moratuwa.CharithPerera (011)-523866
anadura RanganathWijetunga (038)-567040AsankaChaminda (038)-567040
NilupulHettiarachchi (081)-562850
RadhikaHettiarachchi (081)-562557TharinduPriyankara (081) -562557
3,D S Senanayaka Street, Ravi De Mel (063)-567907
NalakaDhanushka (063)-567907
ola Rd,Kiribathgoda DanushkaBoteju (011)-5634803KasunNavoda
,Hambantota. SherminRanasinghe (047)-5679240SamithEdirisinghe
GratianNirmalan (021)-5671800S.Puviraj (021)-5671801
IA WEALTH MANAGEMENT CO.(PVT) LTD21-01 west tower,
World trade centre,Echelon square,
Colombo 01, Sri Lanka
Initiation of coverage
8 0773-502016 [email protected]
7 0773-502015 [email protected] 7 0714-042683 [email protected]
4 0777-366280 [email protected]
6 0714-084953 [email protected]
9 077-3717558 [email protected]
6 0777368012 [email protected] 8 0772548795 [email protected]
5 077-3413297 [email protected]
1 0777-569266 [email protected] 2 0777359012 [email protected]
9 0777567994 [email protected]
2 0773-688202 [email protected] 9 0773-954994
4 0773-690749 [email protected] 7 0777-105356 [email protected]
5 0773-687307 [email protected] 6 0778-628798 [email protected] 7 [email protected] 8 0773-687027 [email protected]
1 0773-691685 [email protected]
0 0715-120723 [email protected] 7 0713-559552 [email protected]
0 0777410164 [email protected]
7 0773692242 [email protected] 7 0777282586 [email protected] 1 0772-681995 [email protected]
0 0771-520376 [email protected]
0716-270527 [email protected]
0777681866 [email protected] 0775-486869 [email protected]
0777-567933 [email protected] 0775-096969 [email protected]