COMPANY REPORT Ceylon Cold Stores (CCS) by zvf19883

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									                                                                                                                    Lanka Securities (Pvt) Ltd

                            COMPANY REPORT                                                                                                                    Date: 21/07/2008

                            Ceylon Cold Stores (CCS)                                                                                                          Strategic – (Rs.112.00)
                            The Elephant Brand
Sri Lanka Equity Research

                                                                                                                                                              Analyst -: Srimal Liyanage

                            Sector                        Beverage, food and Tobacco

                            Market data                                                                                   Food and Beverage leader, Ceylon Cold Stores (CCS) has maintained a
                            ASI                                                                               2,424.7
                            MPI                                                                               2,828.7
                                                                                                                          leading position in Sri Lanka’s Carbonated Soft Drink (CSD) and Ice
                            PE (x)                                                                                8.5     Cream markets with the strong backing from its conglomerate parent
                            PBV (x)                                                                               1.3     John Keells Holdings (CCS is the 57.1% owned subsidiary of JKH)
                            Company data                                                                                  and its long established brand “Elephant House”. The company also
                            12m High / low Price                                            Rs.149.8 / 111.5              has a strong presence in the country’s growing super market industry
                            Avg. daily volume                                                                             through its “Keells Super” super market chain. CCS is estimated to
                               1 month                                                           1,533
                               3 month                                                           1,337                    have a market share of 40-45% in CSD market, 65% in the Ice Cream
                              12 month                                                           1,671                    market.
                            Market Cap. (mn)                                       Rs.2,419.2/US$22.4
                            Shares in Issue (mn)                                               21.6mn
                            BVPS – 30/06/2008                                                Rs.108.8                     Although CCS is highly sensitive to the current economic down turns
                            PBV                                                                   1.0X                    (especially high interests, inflation and unfavorable taxes), resulting in
                            Major shareholders – 31 Mar. 2008
                                                                                                                 (%)      low performance at the bottom level margins, it has a significant long
                                                                                                                          term potential when looking at several strategic aspects. This is mainly
                            John Keells Holdings                                                                46.3      due to its underutilized prime land and takeover potential.
                            Ceylon Guardian Investment Trust                                                    11.6
                            Whittal Boustead                                                                    10.7
                            Ceylon Investments                                                                   8.4      Corporate Structure
                            Genesis Smaller                                                                      3.2

                            Price Volume Chart
                                                                                                                                         John Keells Holdings                            Carsons Group
                              Qty.                                                                            Rs.
                              10,000                                                                          160
                               9,000                                                                          140                                     46.3%                             20.2%
                               8,000                                                                          120
                               6,000                                                                          100                                                 Ceylon Cold Stores
                               5,000                                                                          80
                               4,000                                                                          60
                               3,000                                                                          40
                               1,000                                                                          20
                                   0                                                                          0                           Jaykay Marketing                             Elephant House Farms





                            Y/E 31st March                                                                       2004           2005           2006             2007          2008           2009E         2010E
                            Revenue (                                                                   2,571.4         4,756.5       6,662.0           8,507.9     10,121.8         12,886.5      16,206.3
                            YoY (%)                                                                                4.2            85.0         40.1              27.7          19.0             27.3         25.8
                            Net profit (                                                                (399.4)           (16.4)        201.1             277.0        175.9              73.1         85.2
                            YoY (%)                                                                                 na          (95.9)      1,326.2              37.7        (36.5)           (58.5)         16.5
                            EPS (Rs.)                                                                           (18.5)           (0.8)          9.3              12.8           8.1              3.4          3.9
                            PE (x)                                                                               (6.1)        (147.5)          12.0               8.7          13.8             33.1         28.4
                            PEG (x)                                                                                 na             1.5          0.0               0.2            na               na           na
                            DPS (Rs.)                                                                              2.4               -          0.8               2.4           3.2                -            -
                            Div. yield (%)                                                                         2.1               -          0.7               2.1           2.9                -            -
                            BVPS (Rs.)                                                                            58.2            55.3         63.9              73.6        110.0            113.4         117.4
                            PBV (x)                                                                                1.9             2.0          1.8               1.5           1.0              1.0          1.0

                                                                                                                         LSL Research – CCS – August 2008                                                     1
Sri Lanka Equity Research                                Company Report – Ceylon Cold Stores

Industry Overview – Soft Drink market

CCS is the leader in the CSD market

Sri Lanka’s CSD market is going through the maturity phase of its business cycle and only few
players operate in the industry under an oligopoly situation. CCS’s long established brand
“Elephant House” is the leader with an estimated market share of between 40-45% while world’s
$44bn worth leading brand “Coca Cola” believes to hold a share of 40% in the local CSD market.
With other operators (Maharajah, Pet packaging, Sha Cola Beverages etc.) together enjoying a
share of below 20%. We believe CCS is a “Cash Cow” in the industry, however we do not rule
out the possibility of it becoming a “Dog” since Coke closely hangs behind.

We examine a seasonality impact on CSD products, major factor being the weather condition and
notable sales were reported during the first quarter of each year or the final quarter of the
accounting period. During last three years the industry has recorded an average market growth of
4% per annum and we believe it has slightly dropped due to the low purchasing power of

Sugar is the most sensitive raw material cost on Soft Drink manufacturing

Increasing cost base in a high interest rate and inflation environment adding up taxes are a major
concern over CSD production. Sugar is the major cost component in CSD production and
accounts for around 40-50% of the total production cost of soft drinks. World sugar prices that
fluctuated substantially during last three years showed an increasing trend in 2008 with global
food crisis affecting most of the commodities. Average free market sugar prices have increased
25.7% in 2008 to 13.7 cents /lb.

Sugar fluctuates between US$ cents 10-14/lb

    US$ cents/lb
 Free market

















Sustained high world oil prices have encouraged the use of agriculture-based ethanol and bio-
diesel in the transportation sector. Brazil, the largest sugar producer in the world has increased its
usage of ethanol for motor vehicles. However, upward pressure on prices due to increased
demand was lessened with increased supply from India and Pakistan. India expects a growth rate
of 15% in sugar production of which approximately 4mn metric tones will be exported in 2008. It
serves mainly to Middle East and Gulf countries whilst recently sales have commenced to
Southeast Asia, initially with Indonesia. According to the World Sugar Organization Indian
harvest will improve by 8.3% and peak at 33.1 metric tones in 2008. However in future sugar
prices might increase due to increasing usage of ethanol fuel amidst increasing crude oil prices.

                                 LSL Research – CCS – August 2008                                   2
           Sri Lanka Equity Research                                       Company Report – Ceylon Cold Stores

           Increasing duties is a major concern

           The government introduced an excise duty for all CSD products except “Soda” (Soda is tax free)
           commencing from 23rd March 2002 and carried out several revisions year-to-date (current duty is
           at Rs.6.00 per litre). During initial stages CCS did not pass down the tax burden to the customers,
           however with increasing cost base company now transfers the excise duty to the end customer. In
           FY08 CCS is estimated to have paid around Rs.300mn-400mn as excise duties. It is important to
           note that the government might increase the duty further in their coming budgets.

           Excise duty change on CSD products

            Before 23rd March 2002        -Nil-
            From 23rd March 2002          Rs.4.00 per litre
            From January 2004             Rs.5.50 per litre
            From 18th November 2004       Rs.6.00 per litre

           CCS is to improve margins

           After experiencing reducing margins in FY08 due to increasing costs, CCS now considers to
           improve its margins to its previous levels. The company now transfers the entire duty burden to
           customers and expects to maintain NP margin of CSD business at 10-15%. CCS’s products are
           priced relatively at the same level to its main competitor’s (Coca Cola Beverages) products on a
           per litre basis (earlier CCS products were priced at a discount to Coke and Pepsi). However Coca
           Cola maintains the prices of its 300ml range at a slight premium to CCS’s 400ml product range.

           Not for price competition in the CSD market

                             CCS                                                          Coca-Cola Beverages
Product            Volume (ml)  Retail price (Rs.)       cents/litre    Product        Volume (ml)   Retail price (Rs.)   cents/litre
Ginger Beer               1500                   145.0          9.7     Coke                  1500               140.0           9.3
Lemonade                  1500                   140.0          9.3     Fanta                 1500               140.0           9.3
Apple Soda                1500                   140.0          9.3     Sprite                1500               140.0           9.3
Necto                     1500                   130.0          8.7     Portelo               1500               140.0           9.3
Soda                      1500                   115.0          7.7     Lion Soda             1500               115.0           7.7
Orange Barley             1500                   140.0          9.3     Coke                   500                65.0          13.0
Cream Soda                1500                   140.0          9.3     Coke Light             500                75.0          15.0
Orange Crush              1500                   140.0          9.3     Fanta                  500                65.0          13.0
Cream Soda                 500                    65.0         13.0     Sprite                 500                65.0          13.0
Soda                       500                    55.0         11.0     Lion Soda              500                55.0          11.0
Orange Crush               500                    65.0         13.0     Coke ^                 330                80.0          24.2
Necto                      500                    65.0         13.0     Coke Light^            330                85.0          25.8
Apple Soda                 500                    65.0         13.0     Sprite^                330                80.0          24.2
Ginger Beer                500                    60.0         12.0     Coke*                  300                24.0           8.0
Lemonade                   500                    65.0         13.0     Sprite*                300                24.0           8.0
Soda*                      400                    26.0          6.5     Portelo*               300                24.0           8.0
Necto*                     400                    24.0          6.0     Minute Made*           200                30.0          15.0
Ginger Beer*               400                    28.0          7.0     Coke*                  175                19.0          10.9
Dry Ginger Ale*            400                    28.0          7.0     Sprite*                175                19.0          10.9
Ginger Beer^               325                    80.0         24.6     Fanta*                 175                19.0          10.9
Cream Soda^                325                    80.0         24.6
          Unless otherwise stated it is Pet bottles
          * Glass bottles
          ^ Cans

                                                   LSL Research – CCS – August 2008                                       3
Sri Lanka Equity Research                                Company Report – Ceylon Cold Stores

Rising indirect competition

Intense competition from energy drink, fruit drinks and flavored milk products with increasing
concerns over healthy food and natural food products have shifted customers from the CSD
market. Though CCS has already entered the flavoured milk market (pasteurized in packets and
long life in bottles) and energy drink market (Wild Elephant), still it was unable to gain a notable
position in both markets. Red Bull is the leader in energy drink market. Highland, Kotmale,
Fonterra and Lanka Milk Foods command a leading position in the flavored milk industry while
Cargills also has differentiated the market by introducing Milk Shake.

Fruit drinks are the closest substitute to Soft drinks. Cargills and Smak have strong position in the
fruit drink market and Lanka Milk Foods also have entered the business by introducing fruit drink
packs, “Sun Top”.

Emerging green taxes may have an impact

CSD manufacturers including CCS are currently shifting from glass bottles to PET (plastic)
bottles due to lower cost and easy handling. Most of the new CSD categories introduced recently
were in PET bottles. Increasing concerns over environmental pollution and serious opposition
from environmental organizations may result in additional compensations due to environmental
damage caused by wasted plastic bottles were being neglected by companies. Furthermore
emerging green taxes also will result in increased costs for companies (government recently
introduced green taxes on telecommunication companies to reduce the pollution caused by
towers). Therefore we believe CCS should take steps to curb pollution and implement strategies
such as inducing customers to return bottles for recycling. This will also help the company to gain
reputation as a good corporate citizen and avoid negative image from pressure groups and
increasing regulations.

What CCS should do to improve its CSD business?
Should introduce a Cola drink

CCS does not have any direct substitute to its major rival and world famous soft drink Coca Cola.
Currently global brand Pepsi and local brands my Cola and Sha Cola are directly competing with
Coca Cola. We believe my Cola was successful for some extent in penetrating Coke’s market.
Local producer will be in a competitive position compared to Coca Cola or Pepsi since they do
not have to pay any agency fees to a franchisor. We expect CCS to evaluate options to enter the
Coke market. Due to the strong brand image and ability to enjoy higher margins or pricing at a
discount to Coke, CCS’s “Elephant Cola” will add positive contributions to the group.

Should expand its dairy (liquid milk) business

CCS currently has a presence in the flavoured milk business while products are present in the
form of milk packets (pasteurized) and bottles (long life). However availability of products in the
market is minimal. At present Highland, Kotmale and Fonterra dominates the market, however
we believe if CCS increase its production, it would be able to secure a dominant position in the
market due to high customer loyalty. Furthermore it should diversify its dairy products and move
in to new categories such as Milk Shake (Cargills has already introduced). We expect the
company will consider strategies to improve its dairy business soon.

Mineral water is an important business

Mineral Water market is comparatively larger than other emerging drinks such as energy drink
and fruit drinks. CCS is seriously considering ways to enter the market. The industry is believed
to be relatively a high profitable business. We expect the company will take immediate steps to
produce Mineral water where American water, Scan, Sha Cola Beverages and Aqua fresh has
successfully positioned their products (they also supply 18.5 litre water bottles for dispensers
used by companies).

                                 LSL Research – CCS – August 2008                                  4
Sri Lanka Equity Research                                Company Report – Ceylon Cold Stores

Industry Overview – Ice Cream market

Sri Lanka’s Ice Cream industry has reached the maturity stage of its life cycle and resulted in less
attractive to new entrants to the industry. Industry maintained an annual average market growth
of between 10-15% during last three years. CCS is the market leader with an estimated market
share of 65% while main competitor Cargills “Magic” believes to have a share of around 30%.

Even though product development strategies such as introducing new flavors were witnessed in
the industry, most sales come from vanilla and chocolate.

Rising cost of milk and sugar will cannibalize margins

Rising whole milk powder prices and fluctuating sugar prices are deteriorating margins and also
largely unavoidable. Cost of milk powder (i.e. skim milk powder) accounts for around 30% of the
total production cost of Ice Cream while cost of sugar accounts for around 18-22%.

World skim milk powder (SMP) prices dropped nearly 32% in 2008 after reaching record high in
mid 2007. Of the main dairy products in trade, SMP prices had risen the most in 2007, which
encouraged suppliers to reallocate milk to produce more SMP, boosting supply and triggering the
sharp correction in prices during 2008. The major reasons for the escalation in milk powder prices
in the world market were the rapid growth in demand for milk powder from China, South East
Asia and oil exporting countries and short fall in supplies from Australia due to drought and
expected short fall in supplies in the US market. Mad cow and Foot and Mouth deceases also
affected the supply due to reduction in cattle.

Skim milk powder trading below 2007 prices

World milk powder appears to be facing considerable uncertainty due to unpredictable supply
side constraints. On the one hand, dairy prices may remain firm, or head up again, under
continued tight export supplies in 2008, due to drought in New Zealand, prohibitive export taxes
in Argentina and a sluggish milk supply responses in Europe. On the other, many countries are
responding to higher prices by stepping up milk production, especially where pasture based
systems predominate, which may prompt several countries to cut imports, dampening the pressure
for world prices to rise.

Uncertainties are compounded by the fact that public stocks in the European Union and the
United States, the presence of which used to be an important feature of dairy markets, are
virtually depleted. Another major uncertainty relates to the high feed grain costs which may soon
constrain growth of supply in feed intensive production systems, encourage conversion of pasture
to crops, and/or induce higher cull of livestock. If world milk production growth slows or turns
negative, dairy product prices may remain high and possibly rise further.

                                 LSL Research – CCS – August 2008                                 5
Sri Lanka Equity Research                                               Company Report – Ceylon Cold Stores

CCS is the undisputable leader in the Ice Cream market

With a high customer loyalty for the “Elephant House” brand, CCS’s Ice Cream is still the
undisputed leader in the industry. Even though Cargills was successful for some extent when
competing with CCS it is limited to city areas mainly due to its strong retail super market chain
(Elephant House products are not available in Cargills super markets). In rural areas Cargills has
failed to gain reasonable customer acceptance (some retail boutiques have retuned Cargills

Comparison of Elephant House Ice Cream with Cargills Magic

                  CCS                                     Cargills
 Flavour       Qty. (ml)    Price (Rs.)      Flavour     Qty. (ml)    Price (Rs.)
 Vanilla              80             22    Vanilla              80             22
                     500            110                        500            110
                   1,000            170                      1,000            170
                   2,000            325                      2,000            325
                   4,000            585                      4,000            585
 Chocolate            80             22    Chocolate            80             22
                     500            115                        500            115
                   1,000            175                      1,000            175
                   2,000            300                      2,000            330
                   4,000            600                      4,000            600

Keells Super retail market chain

CCS owns an established super market chain “Keells Super” through its 100% owned subsidiary
Jay Kay marketing. Keells Super has relative low coverage with 38 outlets in the country
compared to the leading Cargills super markets with 124 outlets island-wide. Keells Super is to
expand its outlets to 50 by end FY09 and expects to add further 10 outlets per annum thereafter.

CCS should consider expanding its retail chain continuously in order to match Cargills’s island
wide presence. We believe Keells super will gain a fast customer acceptance due to its high brand
image. This is expected to have synergies on CCS’s F&B products with not only improved sales
but with margin of scale. This will also help the company to regain its former consumers who
shifted to Cargills products due to unavailability of products.

Super market concept is gaining customer interest

 Players                                    No. of Outlets(approx.)
  Cargills / “ Food City”                                       *124
  Ceylon Cold Stores / “ Keells Super “                            38
  LAUGFS / “Sun up”                                                16
  Kshashtriya / "Magna"                                             9
  Richard Peiris & Co. / “Arpico”                                   7
* Inclusive of approx. ‘Express’ outlets mainly at Lanka IOC filling stations, one outlet of Cargills “Big City”

CCS recorded a loss in 1Q09

CCS recorded a net loss of Rs.5.5mn in 1Q09 as opposed to a net profit of Rs.46.4mn in 1Q08.
Even though revenue increased 21% YoY to Rs.2,923.3mn in 1Q09 in the back oh higher sales
volumes, the escalating cost base has affected the group profitability margin. Significant price
pressure on key raw materials (sugar and milk powder), wages, fuel combined with the high
inflationary environment in the country has eroded the margins and resulted in a diminishing
bottom line. GP margins of the group dropped to 11.3% in 1Q09 from 15.6% in 1Q08 while OP
margins declined to 1.7% in 1Q09 from 4.8% in 1Q08.

                                          LSL Research – CCS – August 2008                                         6
   Sri Lanka Equity Research                                             Company Report – Ceylon Cold Stores

   CCS’s key manufacturing sector (i.e. CSD and Ice Cream) was the most affected reporting a 56%
   YoY decline in its 1Q09 net profit to Rs.25.2mn. Net revenue from the segment increased only by
   4% YoY to Rs.1,173.0mn. On the other hand CCS’s retail (i.e Keells Super) business was also
   affected by high operating expenses and reported a net loss of Rs.30.7mn in 1Q09 as opposed to a
   net loss of just Rs.3.8mn in 1Q08.

   Administrative expenses increased 13% YoY to Rs.112.3mn while the rise in selling and
   distribution costs stood at 8% YoY to Rs.211mn during the quarter. Finance expenses jumped
   27% YoY to Rs.49.3mn in 1Q09 due to increasing interest rate environment in the country.
   However the company managed to reduce its short term debt including bank OD and there by
   partly resulted in net debt to equity declining to 50.5% in 1Q09 from 65.3% in FY08.
   Furthermore improvement in gearing position can be largely attributed to the revaluation surplus
   of Rs.679.8mn in FY08.

   Despite the negative bottom line, cash generated from operations increased 19.6% YoY to
   Rs.510mn in 1Q09. Capex decreased 63% YoY to Rs.98.9mn due to more focus to reduce debt.
   Capex during the quarter was mainly on super market operations (i.e. Rs.82.6mn).

   1-3Q08 Financials

                                     Group                     Soft Drinks & Ice Cream               Super Markets                       1Q09        1Q08            %      1Q09        1Q08        %         1Q09       1Q08             %
Revenue                   2,923.3      2,417.1        20.9    1,173.0     1,127.6       4.0     1,750.3      1,289.5       35.7
Cost of sales           (2,593.6)    (2,039.6)        27.2    (836.5)     (757.8)      10.4   (1,757.1)    (1,281.8)       37.1
Gross profit                329.7        377.5      (12.7)      336.5       369.8     (9.0)        (6.8)          7.7   (188.3)
Other op. income              57.0         40.4       41.1        15.1         9.5     58.9         41.9         30.9      35.6
Administrative exp.       (112.3)        (99.5)       12.9      (62.8)      (62.0)      1.3       (49.5)       (37.5)      32.0
Distribution exp.         (211.0)      (195.9)         7.7    (196.5)     (183.4)       7.1       (14.5)       (12.5)      16.0
Other op. exp.              (12.8)        (5.6)      128.6       (7.9)       (2.7)   192.6         (4.9)        (2.9)      69.0
Operating profit              50.6       116.9      (56.7)        84.4      131.2    (35.7)       (33.8)       (14.3)     136.4
Finance exp.                (49.3)       (38.9)       26.7      (37.3)      (35.2)      6.0       (12.0)        (3.7)     224.3
Profit before tax              1.3         78.0     (98.3)        47.1        96.0   (50.9)       (45.8)       (18.0)     154.4
Income tax                   (6.8)       (31.6)     (78.5)      (21.9)      (39.1)   (44.0)         15.1          7.5     101.3
Net profit                   (5.5)         46.4    (111.9)        25.2        56.9   (55.7)       (30.7)       (10.5)     192.4

GP Margin (%)               11.3         15.6                    28.7        32.8                 (0.4)          0.6
OP Margin (%)                 1.7         4.8                     7.2        11.6                  (1.9)        (1.1)
NP Margin (%)                (0.2)        1.9                     2.1         5.0                  (1.8)        (0.8)
Effective tax (%)          523.1         40.5                    46.5        40.7                 33.0         41.7

   Enhanced value in the underutilized land bank

   Following the transfer of CCS’s all production operations to a 26.15 acre site in Ranala it resulted
   in an 8 acre bare land in Colombo 02 (5 acres free hold and 3 acres leasehold) which is currently
   used as a non income generating car park for JKH staff.

   Details of the lease hold land in Slave Island is as follows – JKH A/R, FY07

                             Lease period                    Rental
     Property 1                Annual lease     Rs. 26,365 per annum
     Property 2     97 years from 1-1-1927         Rs. 380 per annum
     Property 3     99 years from 1-2-1926       Rs. 2,400 per annum

                                              LSL Research – CCS – August 2008                                          7
Sri Lanka Equity Research                                Company Report – Ceylon Cold Stores

Even though Sri Lanka’s land prices have increased drastically with limited underutilized
properties in the heart of Colombo, it is valued at Rs.933.2mn (including 94,655 Sq. Ft. building)
in the books (revalued in FY2008). We estimated the current market value of the property will be
worth around Rs.1,268.6mn (Rs.1,192.8mn for free hold property - Rs.1.5mn per perch and we
have given a zero value to the leasehold property since the lease period will end in less than
20yrs). Even though the plans are yet to be finalized, we expect JKH to either transfer the
property to its property development arm, utilized it for the BPO business or sell the property and
utilize the contributions to expand its core operations. In addition contributions can be also
utilized for settling its gearing.

CCS will record diminishing performance if it maintains the status score

We expect CCS to record a net profit of Rs.73.1mn in FY09E (-58.5% YoY), however expected
to increase 16.5% YoY to Rs.85.2mn in FY10E. Group revenue is expected to increase 27.3%
YoY to Rs.12,886.5mn and 25.8% YoY to Rs.16,206.3mn in FY09E and FY10E respectively.

Drop in performance can be directly attributable to reducing margins in the F&B business, which
is expected to record a net profit of Rs.35.8mn (-70.7% YoY) in FY09E. The segment’s
profitability will further get affected by increasing key raw material costs and expected to record
a marginal net profit of Rs.9.8mn (-72.7% YoY) in FY10E. We believe revenue from soft drinks
contributes around 60% to the total group revenue and balance 40% is from the Ice Cream

CCS’s super market chain is expected to contribute positively to the bottom line with plans to
improve its number of outlets from 38 to 50 by end FY09 and 10 outlets per annum thereafter.
Capex is unlikely to be high despite retail expansions as the premises are expected to be rented
out or leased out. We anticipate net profit of super markets to decrease 30.5% YoY to Rs.37.3mn
in FY09E and however expected to increase 102.4% YoY to Rs.75.4mn due to scale advantages
from 50 outlets operating during the whole period. Revenue is expected to increase 40.3% YoY
to Rs.8,188.6mn in FY09E and 34.3% YoY to Rs.10,994.6mn in FY10E.

CCS trades at a premium to earnings, however future appreciation is possible

Even though CCS currently trades at a premium to current earnings, we believe JKH will take
immediate actions to implement strategies to yield high returns on its investment. If JKH could
not reach its targets they might evaluate possible options to divest CCS. Considering the strong
brand value and its high land potential, a strategic deal could take place at a higher value than its
current market price. Current book value per share of the company is Rs.108.8 and if real value of
the Slave Island property is realized Net Asset value is expected to increase to Rs.124.3 per share.

Calculation of Net Asset Value

                            Value per Perch (       Land area (Perches)    Total Value (
Free hold                             1.5                           795.2              1,192.8
Lease hold                            0.2                           505.6                75.8
Total value                                                                            1,268.6
Book value                                                                              933.2
Surplus                                                                                 335.4

Surplus Per share (Rs.)                                                                 15.5
Current BVPS (Rs.)                                                                     108.8
Restated NAV (Rs.)                                                                     124.3

                                 LSL Research – CCS – August 2008                                      8
                                                                                Group                                         Soft Drinks & Ice Cream                                      Super markets
                                            FY08       FY09E           %       FY10E         %        FY08      FY09E           %     FY10E         %        FY08      FY09E          %     FY10E         %
                                   Revenue               10121.7    12,886.5      27.3      16,206.3     25.8     4,286.4     4,697.9        9.6    5,211.7     10.9     5,835.3     8,188.6      40.3   10,994.6     34.3
                                   Cost of sales         -8697.3   (11,540.3)     32.7     (14,716.1)    27.5    (3,012.1)   (3,528.7)     17.2    (3,959.1)    12.2    (5,685.2)   (8,011.6)     40.9  (10,757.0)    34.3
                                   Gross profit           1424.4     1,346.2       (5.5)     1,490.2     10.7     1,274.3     1,169.2       (8.2)   1,252.6      7.1       150.1       177.0      17.9      237.6     34.3
                                   Other op. income        192.3       172.4     (10.3)        191.3     11.0        66.3        60.4       (8.9)      66.3      9.8       126.0       112.0     (11.1)     125.0     11.6
                                   Administrative exp.    -409.3      (483.0)     18.0        (550.6)    14.0      (255.2)     (301.1)     18.0      (343.3)    14.0      (154.1)     (181.8)     18.0     (207.3)    14.0
                                   Distribution exp.      -704.5      (808.3)     14.7        (888.4)     9.9      (667.8)     (768.0)     15.0      (844.8)    10.0       (36.7)      (40.4)     10.0      (43.6)     8.0
                                   Other op. exp.            -52       (61.4)     18.0         (70.0)    14.0       (37.2)      (43.9)     18.0       (50.0)    14.0       (14.8)      (17.5)     18.0      (19.9)    14.0
                                   Operating profit        450.9       165.9     (63.2)        172.6      4.0       380.4       116.6     (69.3)       80.8    (30.7)       70.5        49.3     (30.1)      91.8     86.2
                                   Finance exp.           -181.6       (64.7)    (64.4)        (79.8)    23.4      (163.1)      (52.7)    (67.7)      (63.4)    20.4       (18.5)      (12.0)    (34.9)     (16.4)    36.4
                                                                                                                                                                                                                                                                  Sri Lanka Equity Research

                                   Profit before tax       269.3       101.2     (62.4)         92.8     (8.3)      217.3        64.0     (70.6)       17.4    (72.7)       52.0        37.3     (28.4)      75.4    102.4
                                   Income tax              -93.4       (28.1)    (69.9)         (7.7)   (72.7)      (95.0)      (28.1)    (70.4)       (7.7)   (72.7)        1.6         -     (100.0)        -        -
                                   Net profit              175.9        73.1     (58.5)         85.2     16.5       122.3        35.8     (70.7)        9.8    (72.7)       53.6        37.3     (30.5)      75.4    102.4
                                                                                                                                                                                                                             Forecasted Profit and Loss Account

                                   GP Margin (%)           14.1         10.4                     9.2                29.7        24.9                  24.0                   2.6        2.2                   2.2
                                   OP Margin (%)            4.5          1.3                     1.1                 8.9         2.5                   1.6                   1.2        0.6                   0.8
                                   NP Margin (%)            1.7          0.6                     0.5                 2.9         0.8                   0.2                   0.9        0.5                   0.7
                                   Effective tax (%)       34.7         27.8                     8.3                43.7        44.0                  44.0                  (3.1)       -                     -

LSL Research – CCS – August 2008
                                                                                                                                                                                                                                                                  Company Report – Ceylon Cold Stores
Sri Lanka Equity Research                             Company Report – Ceylon Cold Stores

Appendix 1 – Assumptions for the forecast

   •   Assumptions are made assuming that company will maintain the status score.

Food & Beverages

   •   CSD market is expected to grow by 4% P. A. during next two years.
   •   Ice Cream market is expected to grow by 12% in FY09E and 8% in FY10E.
   •   We expect the company to revise its product prices (CSD and Ice Cream) to maintain the
       GP margins.
   •   Sugar prices are expected to increase by 30% YoY in FY09E and in FY10E it is expected
       to increase by 12% YoY.
   •   World Skim Milk powder prices are expected to decline by 30% YoY in FY09E and will
       increase 12% YoY in FY10E.
   •   Other production costs are expected to increase by 10% YoY in FY09E and 8% YoY in

Super Market

   •   Keells Supermarket chain will enhance to 50 out lets by end FY09E and expand further
       to 60 units by end FY10E.
   •   Average revenue per out let is expected to grow by 18.5% YoY in FY09E and in FY10E
       is expected to grow further by 14% YoY.

                             LSL Research – CCS – August 2008                             10
                              LANKA SECURITIES (PVT) LIMITED
                              A joint venture between First Capital Securities Corp. Ltd (Pakistan),
                              Bank of Ceylon & Merchant Bank of Sri Lanka.
                              (Member of the Colombo Stock Exchange)
                              5th Floor, No.86, Galle Road, Colombo 03.
                              Tel         : +94 (0) 11 5576757, +94 (0) 11 2431138.
                              Fax         : +94 (0) 11 5576767.
                              Website :

SALES                                                         RESEARCH
Kosala Gamage………………………5576774                                 Srimal Liyanage.....…………………..5576757                                 
Eardly Kern.........................................5576757   Thakshila Francis...…………………..5576757                                             Chinthana Hatangala………………...5576757
Buddhika Payoe……………………...5512240                                             OPERATIONS
Prabash Wanigatunge………………..5512282                            Wasantha Hewavitharana..…………..5576757                                
Nishantha Joseph…………………….5512274                              FINANCE
Chanaka Mendis……………………..5512249                               A. Pathmasiri…………………….......5576757                                
                                                              Priyanga Perera..…………………......5576757

BRANCHES                                                      Matara
                                                              Ground Floor, DPM Building,
Galle                                                         #59A, Anagarika Dharmapala Mawatha,
1st Floor, South Ceylon Hotel Building,                       Matara. Tel: 041 4928493.
#06, Gamini Mawatha,Galle.                                    Fax: 041 4390841.
Tel: 091 4937124.                                             Contact person: H. Crishantha Lal
Fax: +091 4384279.
Contact person: S.W.G. Chandika                               Negombo
                                                              Colombo Stock Exchange Branch office
Kandy                                                         1st Floor Jude City Building,
Colombo Stock Exchange Branch office                          #142, Green’s Road, Negombo.
“Ceybank House”                                               Tel: 031 4929671 / Fax: 031 4874736.
#88, Dalada Veediya, Kandy.                                   Contact person: U. Kumara.
Tel: 081 4939206.
Fax: 081 4481772.                                             Ratnapura
Contact person: M. Faizan                                     1st Floor, Leo Building,
                                                              #173/2/1, Bandaranayaka Mawatha, Ratnapura.
Kurunegala                                                    Tel: 045 4926940 / Fax: 045 4360726.
Colombo Stock Exchange Branch office                          Contact person: Erandika Ranasinghe
1st Floor, Union Assurance Building,
#06, Rajapihilla Mawatha, Kurunegala.                         Wellawatte
Tel: 037 4934067.                                             1st Floor, B.O.C. Super Grade Branch,
Fax: 037 4692105.                                             #149, Galle Road,Wellawatte.
Contact person: Lesley Randeniya                              Tel: 011 4323312 / Fax: 011 4443621.
                                                              Contact person: S. Ranjan.

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