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Buyers take over the market

There were two phases in this week's market activity.

Phase I, which persisted for most of the week was governed by the ongoing geopolitical situation and concerns about the continuity of the peace process and as a result the ASPI declined by 33.8 points to reach a 7-months low of 696.7 (the previous low being 700.0 on August 15, 2002).

Phase II, which originated during the latter part of the week was instigated by a rush of bargain hunting activity.

The pull back saw the ASPI climbing 20.3 points to close the week at 717.0 points while the MPI climbed 46.6 points to close at 1200.3 points.

However, week-on-week indices still remain lower with ASPI and MPI registering a loss of 1% and 2% respectively.

Activity was low with the market recording a total turnover of Rs.227.6 million at a daily average of Rs.45.5 million despite the turnaround.

Meanwhile, foreigners remained net buyers with a net foreign inflow of Rs.27.0 million with foreign buying amounting to Rs.42.4 million.

Sampath Bank 2002 results

Sampath Bank released its results for FY2002, with a 41% growth in profitability compared to the FY2001.

Sampath has shown modest yet significant growth in almost all areas. Interest rates decline, but the growth in loan book moderate The growth in total interest income has not been great, with an increase of only 3.1% compared to 2001.

This is mainly due to the low interest rate scenario, which has been on the decline over FY2002, to the point that it is currently in the single digits.

Despite the low rates, Sampath did not record a considerable growth in its loan book, due to a cautious lending policy.

Widening spreads resulted in a 41% increase in the net interest income.

The reduction in turnover tax too helped the Bank to improve its margins.

Fee based income is a potential area for growth

Other income grew fractionally by 2.2%, as Sampath did not show a significant growth in fee based income.

This is a little disappointing, as we had believed that Sampath has better scope to improve fee income, especially through its internet payment gateway and credit cards.

Provisions up 101%: a strict policy

Sampath Bank has increased its provisions from Rs.201 million to Rs.404 million, up by 101% compared to 2001.

This we believe is a move to clean up the loan book to meet any changes to the provisioning policy of the Central Bank in the future.

The Bank has said that it expects the strict provisioning policy carried out in FY2002 to continue in FY2003 and therefore we have made sufficient changes to our forecasts, in order to incorporate such effects. Sampath, is looking to expand its activities in the leasing market, but has not made considerable progress in this. However, the management were of the view that the expansion would move much quicker than what it had been so far. Our forecast for net profit for FY2003 stands at Rs.578 million, a downward adjustment of 18%. However, the forward multiples still remain attractive at 5.2x.

Sampath is still attractive

Sampath is expected to record growth in ROE over the next two years. New markets in North East and the growth in leasing business should contribute towards an improvement in the earnings.

The share has under performed the market, thus making it undervalued. We recommend a Buy.

TRAN earnings up by 170% while AHOT turns around to record profits Trans Asia Hotel's (TRAN) consolidated turnover increased by a healthy 30% helped by higher apartment and food and beverage revenues.

TRAN's sister company Hotel Lanka Oberoi (AHOT) also increased turnover by a healthy 48% due to higher occupancies in the hotel and higher contribution from Crescat Development.

The company recorded net earnings of Rs. 151.5 million as against a loss of 22.8 million for the same period last year.

Mainly caters to business clients

Over 60% of TRAN and AHOT's clientele consist of business travelers while leisure travelers account for around 24% of occupancies.

According to the company overall occupancy has doubled in comparison to last year and stands at 47%.

The Lanka Oberoi also recorded improved occupancy levels with average occupancy in first nine months of operation at 56% as against 42% last year. This trend is expected to continue during the rest of the quarter, since Jan - March is the peak time for Colombo hotels. In our view in the event of a war in the Gulf there would be considerable drop in leisure tourists arrivals to TRAN and AHOT.

However, business travellers would not be affected to the same level, as the domestic political and economic environment looks positive which remains the key in attracting business travellers to the country.

A major part of business travellers to Sri Lanka come from India and East Asian countries thus we do not expect a major decline in arrivals from this part of the world in the event of a war.

Refurbishment program at a cost of Rs. 200.0 million TRAN is expected to refurbish its lobby area, the library and the two top floors at a cost of Rs. 200.0, which is expected to start in April.

The main reason behind this major refurbishment program is mainly to attract the higher end clientele.

After the refurbishment the average room rate in the executive floor is expected to increase to US $ 150.0 from current US $ 100.0.

According to the company the refurbishment program would not result in closure of the hotel.

AHOT's management agreement with Oberoi to come to an end in March.

The management contract with its hotel property's current managers, the Oberoi chain comes to an end in March 2003. Meanwhile, according to management, the company has received inquiries from a few international chains but a final decision on this has not been made as yet.

TRAN projects net earnings of Rs 175.0 million for FY 2002/03 We expect the current turnover and net profit growth to continue in the final quarter as well due to relatively peaceful environment in the country. Meanwhile at TRAN's food and beverage division is expected to perform exceptionally well in the final quarter.

We estimate net earnings of TRAN projects net earnings of Rs. 175.0 million for FY 2002/03 as against last year's net earnings of Rs. 79.0 million (net profit before deducting deferred tax).

Based on annualised earnings currently the share is trading at PE of multiples of 10.6 x compared with market PER of 11.4 x.

Outlook for AHOT looks promising but much lies with the new managers. Meanwhile, the outlook for the AHOT's performance for the final quarter looks promising. The share is trading at PE multiples of 11.6 x versus market PE of 11.0x. AHOT's book value of Rs. 17.85 yields a PBV of 0.57x.

Point of view:

Buyers were opportunistic during the latter part of the week after the sharp retracement although there was no change to the tension in the geopolitical environment and the calamity in the domestic political arena.

On the domestic front, despite the Government's military confrontation with the LTTE on Monday in the seas of Mullaitivu, the situation seems to be improving.

There is no change to the agenda for the next round of talks to be held from March 18 - 21 in Hakone. However, the increase in dissenting activity by the opposition coalition in the last week clearly indicates the lack of consensus between the Government and the opposition parties on issues of national importance, which could debilitate the ongoing peace process.

The situation looks no better in the global arena as well with the possibility of US delaying or even withdrawing its vote on the troubled UN resolution, since it has become increasingly clear that they will not win in a vote from security council members.

However, while no clear-cut decision has been made so far on the timing of a war with Iraq, we believe that a commencement of hostilities will bring a rally as removing the uncertainty would be a short term positive for the stock market. In the medium term, a reduction in the price of oil would be a major positive.

But looking at the long term picture, the breakdown of the UN process and the willingness of the US to go alone will be a clear setback to global relations, and this will have a knock-on effect on world trade for years to come.

As for Sri Lanka, the trend reversal in the market during the latter part of the week would certainly set the tone for quick rally in the market in the next week as well, particularly if the bombs were to fly.

Nevertheless, we are still not convinced about a continued improvement in the market as the external environment does not support such a move.

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Produced by Lake House
Copyright 2001 The Associated Newspapers of Ceylon Ltd.
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