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The Colombo Bourse's two-month rally came to an abrupt halt during the early hours of Tuesday with the LTTE suspending the next round of peace talks in Thailand.

As a result the market lost 24 points on ASPI and 54 points on MPI in the early trading hours on Tuesday but rebounded with buyers returning to the market reducing the day's losses to 8.5 points on ASPI and 17.2 points on MPI.

However, after the initial fall the indices continued to benefit from a rush of buying interest on Wednesday, which continued until Friday in spite of bouts of profit-taking by retail investors. Week-on week the ASPI has gained 4.2 points to close at 817.8 while the MPI gained 27.5 points to close at 1406.

Janashakthi / Dhammika Perera purchase strategic stakes

Institutional and high net worth individuals dominated this week's activity with Janashakthi insurance taking the lead.

They continued to increase their stake in NDB to 8.2% of the issued capital. Janashakthi also bought a 4% stake in Dankotuwa Porcelain, which gained 9% to peak at Rs.17.25 before closing at Rs.17.00.

NDB sold a majority stake of their leasing subsidiary Mercantile Leasing (MLL) to National Savings Bank (19.5%) and Mr. Udeshi (29%). NDB effectively held 60.65% of the issued share capital of MLL before the sale and after the sale they continue to hold 10%.

As a result the share gained 10% to close at Rs. 22.00. Elsewhere Dhammika Perera bought a 47% stake in Hotel Reefcomber necessitating the need for a mandatory offer. Total turnover for the week was Rs. 790.0 million with a daily average of Rs. 197.5 million. Foreign investors were active this week compared to the last few weeks accounting for an inflow of Rs.80.2 million.

Point of View

Chances of war still very remote Anton Balasingham, the LTTE's Chief Negotiator expressed the LTTE leadership's regret at having been compelled to make this decision, but reiterated the LTTE's commitment to seek a negotiated political solution to the ethnic conflict.

We view the exclusion of the LTTE from the international donor conference held in Washington DC, USA on April 14 2003 in preparation for the major donor conference to be held in Japan, as the primary reason for this move.

The LTTE blames the Government and the Norwegians for not selecting an alternate venue for this important preparatory aid conference in order to enable the LTTE to participate in this.

However the US Government organized the conference and they, rather than the Sri Lankan Government, decided on the venue.

The LTTE also states that Sri Lankan troops have not vacated public buildings and the resettlement of displaced people in the North and East has not proceeded as per the ceasefire agreement. Thus the ground situation has not improved despite repeated assurances from the Government.

However the Government has pointed out that these processes have begun and would be completed according to the agreement.

The Sri Lankan Government, in its response has indicated that the above issues should be taken up for discussion at the negotiation table and a pull-out would not help with sorting out the differences.

It is speculated that talks will continue between the Government and the Sri Lanka Monitoring Mission (SLMM) acting as intermediary to sort out the issues at hand.

We feel that this is more a temporary suspension than a complete withdrawal from the talks. Once the pertinent issues are discussed and sorted out, the LTTE could return to the negotiating table. Until then the market could fluctuate based on the responses of different parties.

We still believe that the chances of getting back to a war are remote.

Investors should closely monitor the next response of the Government, LTTE and the international community. Thus, the market is expected to react based on the outcome of such responses. This would result in a volatile market, thus creating an opportunity for bargain hunters to pick up fundamentally strong stocks at cheap levels.

Commercial Bank strengthens the capital structure; raise funds for expansion Commercial Bank is to raise Rs. 3 billion, by way of a debenture issue and a further Rs. 1 billion through a preference share issue next month. This can be viewed as the first of many fundraisers by the commercial banks in the country, as their Capital Adequacy Ratios (CAR) require strengthening once the Foreign Currency Business Units (FCBUs) become 100% risk-weighted assets. Currently Central Bank requires FCBUs to be under 10% risk weighting.

However Commercial with a Tier -1 ratio of 14.94% and a Tier - 2 ratio of 15.07% is comfortably placed in terms of the regulatory requirements. It is evident that Commercial's supplementary capital (Tier-2) is just 4.8% of its core capital (Tier-1). Thus the new issues are expected to boost the Tier-2 capital.

Issue to support expansion

The main objective of the issue is to raise medium term funds from a non-deposit source in order to strengthen the funding mix and to finance the expansions particularly in leasing and medium term credit. The Bank also expects to improve its liquidity through these issues.

Both issues will be open for subscription from May 5, 2003 and will be closed at the earlier of full subscription or May 27, 2003. The preference shares will yield a dividend of 11.25% p.a. over the next five years. The shares will be redeemed (capital will be repaid) on June 5, 2008. The debentures are classified as Type "A" - Fixed interest rate of 10% p.a. and Type "B" - floating rate of 2% above the three month treasury bill rate.

Fitch assigns SL AA ratings

Fitch Ratings Lanka Ltd (FRL) assigned a SL AA (double A) national rating for the proposed issue of Unsecured Subordinated Redeemable Debentures and a SL AA- (double A minus) national rating for the proposed issue of cumulative redeemable preference shares. The SL AA rating implies a very low expectation of credit risk.

Declining interest rates a concern

Commercial's total interest income has not shown growth due to the prevailing low interest rate scenario. We expect the interest rates to further decline, thus creating a concern towards the Banks' interest based income.

Further funds raised at a higher repayment rate would result in a decline in the profits in the short run, as the growth in revenue may not be seen immediately. We have incorporated these changes to our earnings model and the revised net profit attributable to ordinary shareholders for FY2003 is Rs.1.297 billion, with earnings multiples of 6.5x. This is a growth of 8.8% from FY2002. The earnings for FY2004 are expected to grow by 21% to Rs.1.57 billion.

Bonus issue will improve liquidity of the share

As expected by us, Commercial Bank announced a 1-for-3 bonus issue recently, thus diluting its EPS of FY2002 to Rs.24.50. our forecasted EPS for FY2003 is diluted to Rs.26.60. However the share price is yet to dilute for the bonus issue. As a result of the additional burden of approximately Rs.400 million, due to the interest and the preference dividend, a reduction in earnings is forecasted during the short term.

However we project a higher growth in profitability during FY2004, thus the fundamentals still look positive. We believe that Commercials clean loan book will grow at 18% during FY2003 and the debenture issue and preference share issues would provide additional funds for such growth. Therefore we maintain our Buy recommendation at the current price levels.

Ceylon Grain Elevators: First Quarter Results Update Earnings up 480% CGE group results released for the first quarter of 2003 indicate that the company has made 295% growth in operating profit relative to the same period in 2002. Profit after tax has also shown an encouraging growth of 356%.

However, the turnover has decreased 7%. According to company sources this drop in turnover is due to sales volumes of frozen chicken in 1Q2002 being greater than 1Q2003.

In 3Q2001, the company had excess frozen chicken supplies, which they released to the market at a lower price. In 1Q2003,however there were no excess stocks carried forward from the previous year, as in 2002 and even though the sale price was higher net turnover was less.

The quantity supplied in 1Q2003 was not adequate to meet market demand, which has risen significantly.

The company is looking at increasing supplies in the second quarter. The 12% decrease in cost of sales from Rs.1,247 million to Rs.1,103 million can be due to the lifting of the 14% taxation and customs levy on maize, a main raw material used by the company and lower depreciation in the Rupee.

Profit margins improve

The gross profit margin increased from 5.46% in the corresponding period of 2002 to 9.89% in the first quarter of 2003. The net profit margin is also at 3.76% for the first quarter. The EPS also showed very significant improvement from the negative Rs.0.17 to Rs. 0.63 for the period under comparison.

Expect dividend

We are following the effects of external factors (progress of the peace talks with the LTTE, tourist arrival levels in the first quarter etc.) on the poultry industry and Ceylon Grain Elevators.

Depending on the outcome of these events and our evaluation of the effects, we will further review and if necessary revise our forecasts for CGE.

However, we still expect the company to distribute an attractive high yielding dividend in FY2003 to take advantage of the tax-holiday, which ended in December 2002. We continue to recommend CGE as a buy.

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