Financial Times

1Q profit up at CTC, no decline in fags despite price hike
First quarter earnings at Ceylon Tobacco Company (CTC) have risen 12 percent to Rs 243 million despite a Rs 100 million foreign exchange loss, while no fall in sales is anticipated although cigarette prices were raised after an excise duty hike.

Brokers Asia Securities have raised CTC's 2005E net profit forecast by 13 percent to Rs 1,212 million, up 12 percent year-on-year. "Although earnings growth is unlikely to accelerate significantly due to overall flat market growth, CTC remains one of the market's best dividend plays," the brokers said in a report.

CTC has consistently maintained a dividend payout ratio in excess of 90 percent during the past few years. "Assuming a 95 percent dividend payout ratio in 2005E amidst only modest capex requirements, CTC offers an attractive dividend yield of 12.9 percent, well above prevailing Treasury yields," Asia Securities said.

"CTC's results are particularly impressive in the context that the company has charged approximately Rs 100 million as foreign exchange translation losses on its foreign currency deposits due to the appreciation of the Sri Lankan rupee in 1Q20005."

CTC's total net cash position was Rs 2 billion as at 31 March 2005, or Rs 10.7 per share. Excluding the foreign exchange loss, CTC's 1Q2005 net profit was actually up 58 percent YoY to Rs 344 million amidst a well contained rise of only five percent in its operating costs.

The brokers said that despite steep excise duties that amounted to 71 percent of CTC's 1Q2005 gross revenue, CTC is expected to report reasonable earnings growth due to the price inelastic nature of demand, its monopolistic position, strong value chain management and continuing productivity enhancement.

"While excise duties were raised further in April 2005, the company has already passed these increased duties onto consumers, with no material decline in sales anticipated." Although the threat posed by illegal and counterfeit cigarettes will likely increase with higher excise duties, detection of unauthorized products by law enforcement authorities has apparently improved amidst active lobbying and marketing by CTC.

Back to Business