Watawala’s move to spin off tea business will augment value: stockbroker

By Chandeepa Wettasinghe
Watawala Plantations PLC’s (WATA) decision to segregate its tea business will increase the company’s value significantly due to predictable and higher profits and growth prospects, a stockbroker said.

Bartleet Religare Securities (Pvt) Ltd (BRS) said that the intrinsic value of the company will rise 17 percent to Rs. 41 per share from Rs. 35 per share, which will be an upside of 28 percent from the current market price of WATA shares. WATA shares ended trading yesterday at Rs. 32.60.
 “The proposed segregation would end our discount to the stock as a tea plantation company. We are of the view that tea weakened the overall profitability of the plantation by being a victim of recurring wage issues and productivity shortfalls,” BRS said.

 It added that palm oil and dairy, the segments of business operations WATA will have remaining after the segregation, will have less volatile, and more predictable earnings.

“With an estimated return on equity of 24 percent (post segregation) and higher growth prospects, the counter would attract more interest in our view,” BRS said.

According to BRS, the increased focus of WATA on the remaining two segments will help the palm oil and dairy business expand further.

BRS is expecting palm oil segmental growth to limit to 5 percent in 2018 due to adjustments of duty on crude palm oil prices, which will recover during the latter half of 2018.

It noted that with a majority of the oil palm cultivated now at a mature stage, yields are expected to improve, and demand is expected to grow as well due to increased consumption of edible oil, margarines and personal care products.

Forecasting for 2018-2024, BRS said that Earnings Before Interest and Tax (EBIT) margins for palm oil will range between 46-49 percent, with possible shocks such as sudden downward revisions to palm oil duty or a steep drop in palm oil prices likely to pressure the margins.

Meanwhile, the dairy segment, for which WATA recently entered into a partnership with PADC Holdings to expand its pilot farm into commercial production by the 2019 financial year, will make up around 10-15 percent  of WATA’s bottom line with EBIT margins around 25 percent, BRS said.
For the 2019 financial year, BRS forecasts WATA’s recurring net profits to reach Rs. 1.31 billion through Rs. 3.59 billion in revenue post-segregation, compared to a recurring net profit of Rs. 1.41 billion stemming from Rs. 7.51 billion in revenue pre-segregation.

BRS is valuing post-segregation BRS price per share at Rs. 32.18 based on the price to book value, Rs. 41.22 based on discounted cash flow and Rs. 44.32 based on a price-to-earnings ratio of 8x—which is currently 6.2x.

The Sunshine Group’s Estate Management Services (Pvt) Ltd owns 75.65 percent of shares in WATA, while Dr. T. Senthilverl owns 10 percent of the shares.