BW Research Analysis - Tokyo Cement

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BW Research Analysis - Tokyo Cement

Postby Blue Whale » Sun Jul 16, 2017 8:24 pm

Tokyo Cement is recommended as a long term BUY @ CMP
16th July 2017

Tokyo Cement is one of the Country’s main cement suppliers holding around 25% of the market share. The company is seen continuous growth in revenue, though in varying degree of growing percentages, the profitability displays a good degree of volatility over the past six year period.
The revenue has grown by an annual compounded growth of 9.3% over the last six years. Profit after tax grew by a hefty 26.7% compounded growth rate during the same period. This reflects that the company has been able to increase the operational efficiencies over the years to increase the profit margins as cement is a regulated product hence increasing the market prices at will is not possible. The gross profit margin has improved from 18% in 2011/12 FY to 25% in 2016/17 FY whereas profit before tax margin has improved from 5.5% to 11.4% during the same period.
Figure 1
TKYO Figure 1.jpg

Due to the volatility in earnings Tokyo Cement’s ROE was fluctuating during the period however reported an ROE of 26.3% for the year 2016/17. The analysis of the capital structure tells the story that the company has a fairly geared balance sheet and they have maintained a debt/(debt+equity) ratio around 40% for the last 5 year period. This in turn exposes the company towards a moderate interest rate risk and therefore in the current high-rate environment the company should pay higher interest cost in the coming financial year due to the new borrowings made in the last financial year.
Figure 2
TKYO Figure 2.jpg

The share price was trading below Rs40 level until the FY 2015/16 except for the year 2014/15 where the ASPI was gaining. However the share went beyond Rs60/- level in FY 2016/17 due to certain strategic investors taking active positions in the company. The notable shift in top 20 shareholders is that the Nippon Coke & Engineering Co Ltd, the engineering co-partner of Tokyo Cement, shedding the stake continuously while new strategic investors such as Ceylon Investments PLC, Ceylon Guardian Investment Trust, Ube Singapore Holdings Ltd, Norges Bank, Sri Lanka Insurance etc have grabbed the available quantities. Its due to this reason and the growth in earning in 2016/17 drove the share price pass 70/- levels this year. The selling down and collection seems to be still on going. Despite the ups in between the TKYO share has been trading at an average PE of 8x and at an average PBV of 1.4x during the last six year period. These valuation parameters are very close to current sector valuation parameters of PE of 8.6x and PBV of 1.5x.
Figure 3
TKYO Figure 3.jpg

The company has invested heavily in increasing the production capacity by 1Mn MT from the current 1.8Mn MT and for the same reason they have increased the borrowing in the last financial year. The company is expecting a good demand for cement and related products to come from the County’s new infrastructure development projects such as the Western Region Megapolis project and Central expressway project, together with the continuation of the Colombo International Financial City, Southern expressway extension project - Matara to Hambantota and the outer Circular Highway project – phase III in 2017/18 FY.
Based on these trend the forecast for FY 2017/18 will be as follows
Revenue…………….Rs40.7Bn
Gross Profit……….Rs10.2Bn
PAT……………………Rs3.6Bn
EPS…………………..Rs9/-
NAV…………………Rs50/-
DPS………………….Rs2/-

Consequently the following valuations can be arrived for TKYO-N share.
A) Based on sector PE………………Rs77.8
B) Based on sector PBV……………Rs75.1
C) Based on the DCF valuation…Rs105.2
The average fair value of Rs86/- represent a 15% upside potential from CMP in the medium to longer term.
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Re: BW Research Analysis - Tokyo Cement

Postby Shadow walker » Sun Jul 16, 2017 8:27 pm

Thanks BW.. :-bd
Successful Investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time .. ;)


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Re: BW Research Analysis - Tokyo Cement

Postby Blue Whale » Sun Jul 16, 2017 8:40 pm

Shadow walker wrote:Thanks BW.. :-bd

Don't think that you have red it properly :D
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Re: BW Research Analysis - Tokyo Cement

Postby PATHFINDER » Sun Jul 16, 2017 9:53 pm

No words to say :ympeace:
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Re: BW Research Analysis - Tokyo Cement

Postby PAT » Sun Jul 16, 2017 10:32 pm

Many thanks BW for your time effort....... :-bd
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Re: BW Research Analysis - Tokyo Cement

Postby Blue Whale » Sun Jul 16, 2017 10:54 pm

PAT wrote:Many thanks BW for your time effort....... :-bd


Ha ha thanks. There are few in the pipeline that I am working on it. Let's try to get all out one by one ;)
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Re: BW Research Analysis - Tokyo Cement

Postby PAT » Sun Jul 16, 2017 11:16 pm

Blue Whale wrote:
PAT wrote:Many thanks BW for your time effort....... :-bd


Ha ha thanks. There are few in the pipeline that I am working on it. Let's try to get all out one by one ;)


We are waiting...... :-w
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Re: BW Research Analysis - Tokyo Cement

Postby SHARK » Mon Jul 17, 2017 12:28 am

As per AR, some risk of import of what is described by tkyo mgmt as cheap indian cement. And price of cement regulated. Also potential increase of energy cost would be key concern going forward. Tkyo has performed extremely well in difficult circumstances.
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Re: BW Research Analysis - Tokyo Cement

Postby Blue Whale » Mon Jul 17, 2017 6:02 am

Any gain or improvement has to do many things with operating efficiency. The degree of success will deliver the growth for TKYO. Mere revenue growth won't make much for the company. Also the current prices seems very close to its competitive valuations. Hence I recommend it as a long term BUY.
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Re: BW Research Analysis - Tokyo Cement

Postby NC+ » Mon Jul 17, 2017 6:36 am

Thanks BW... Good analysis as always... :-bd
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Re: BW Research Analysis - Tokyo Cement

Postby topcat » Mon Jul 17, 2017 9:13 am

thanks blue. Good one.
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Re: BW Research Analysis - Tokyo Cement

Postby siga » Mon Jul 17, 2017 1:00 pm

Thanks BW :-bd :-bd

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Re: BW Research Analysis - Tokyo Cement

Postby voight » Mon Jul 17, 2017 3:24 pm

Thanks BW
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Re: BW Research Analysis - Tokyo Cement

Postby helloworld » Mon Jul 17, 2017 5:11 pm

Thanks Blue. Good work as always

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Re: BW Research Analysis - Tokyo Cement

Postby Blue Whale » Mon Jul 17, 2017 10:07 pm

Thanks all for the complements. Seems consolidating @ 75/- with a chance to offer couple of rupee discounts as well.
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Re: BW Research Analysis - Tokyo Cement

Postby PAT » Mon Jul 17, 2017 10:21 pm

Blue Whale wrote:Thanks all for the complements. Seems consolidating @ 75/- with a chance to offer couple of rupee discounts as well.


Yes, I think around 72/74 possible....
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Re: BW Research Analysis - Tokyo Cement

Postby Blue Whale » Mon Jul 17, 2017 10:27 pm

PAT wrote:
Blue Whale wrote:Thanks all for the complements. Seems consolidating @ 75/- with a chance to offer couple of rupee discounts as well.


Yes, I think around 72/74 possible....


:ymsmug:
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Re: BW Research Analysis - Tokyo Cement

Postby sashimaal » Tue Jul 18, 2017 10:41 am

Good analysis BW.
However the valuations needs to be considered based on being a foreign favourite as well (i would prefer your DCF valuation compared to the others for LT) .

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