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Bourse continues upward momentum amidst profit taking

The Colombo Bourse, which passed the 900 level barrier last week, continued its upward momentum and closed the week at a new record high of 934.7.

However, investors chose to take profits during the mid week which resulted in a 12 points decline in ASPI. However, the correction was shortlived and the market started its climb on Thursday. The MPI, which started the week at 1,629.7, followed the same pattern and gained 116.2 points to close at 1,745.9.

Total turnover for the week was Rs.1.3 billion with an average daily turnover of Rs. 262.2 million. Foreign activity during the week was moderate amounting to a net outflow of Rs.14.9 million. Among the heavily traded stocks were JKH, Hayleys, Commercial Bank, Distilleries and Colombo Land.

Asian Hotels took the lead

Point of View

LTTE for the third time-rejected the Government's proposed interim administration body, requesting more authority. However the constitution of the country does not permit such an administrative body in a legal Framework. It seems quite clear that, the LTTE demands are unchanged despite increased pressure from the international community. The discussions between the Government and the LTTE have reached a crucial point. Both sides now need to make decisive moves in order for the peace process to progress. This adds more uncertainty to the market, but investors seem confident about the recommencement of the talks. Strategic interest in selected stocks has been the main reason for the continuous upward movement in the market.

However we feel that the market could correct itself sooner than later, but the correction may not dip the indices significantly as bargain hunters would continue to look for fundamentally strong stocks at cheap levels.

DFCC results for March Earnings up 32%

DFCC Bank posted a 32% growth in net profits during FY2002/03, compared to FY2001/02. However the Bank's core activities showed negative growth, as both total revenue and net interest income declined. Despite a 10% growth in the loan book, the prevailing low interest rate regime caused a 4% drop in total interest income. Interest expense declined 5% due to the low deposit rates, but was not sufficient to offset the drop in interest income. As a result net interest income decreased 4%, compared to FY2001/02.

Fee Income from SLT IPO, recovery of bad debts, boost other income Non-interest income recorded a 52% growth compared to FY2001/02, as gains from the sale of securities and the fee earned as financial advisor to implement the second stage privatization of Sri Lanka Telecom contributed.

The increase in other income was also due to the recovery of Rs.112 million of bad loans that they wrote off last year.

The cumulative gross provision charged to income for the current period was Rs. 401 million, 23% lower than the previous year. During FY2001/02 DFCC was most affected with provisions, as they wrote-off most of their non-performing advances totaling to Rs.518 million. The new provisions to average loans were 1.9% during the year compared with 2.6% one year ago. We expect the same level of provisioning during the current financial year, as we forecast a total provision of Rs. 400 million for the FY2003/04.

Investment in Commercial Bank more a strategic move DFCC recorded a 16% growth in profit after provisioning but before any share of profits from associates, to Rs.1, 138 billion. DFCC's associate,

Commercial Bank, continued to contribute immensely towards DFCC's profitability, as the share of profits from associates and subsidiaries accounted for 34% of net profits. The 29.91% stake in Commercial Bank is mainly a strategic asset to DFCC, but its contribution towards DFCC's profitability via its associate status is certainly significant. Acquiring Merc Bank

To look for commercial banking opportunities DFCC is believed to be in the process of acquiring MERC Bank to diversify into commercial banking. We feel that the development-banking model cannot be a "stand-alone" model in the future, as it requires support from commercial banking products. DFCC needs to exploit opportunities in cross-selling commercial banking products to its development banking clients.

Despite DFCC commencing such activities in a limited capacity already, we feel that success will be in the medium to long term. MERC bank is still a young enterprise among the commercial banks and real growth could be expected after the current financial year. We have incorporated these changes into our earnings model. The revised earnings estimates stand at Rs. 1.09 billion for FY 2003/04, with forward multiples of 8.5x. We project a 3% growth in earnings for FY2004/05, with a PER of 8.3x. Counter is trading at a 9% premium to its forward book value.

However, due to the uncertainties surrounding its success in generating revenue through commercial banking activities we recommend a Hold.

Tokyo Cement results for 2003

According to FY2003 results of Tokyo (Tokyo Cement Ltd), turnover increased by 32.5% to Rs. 4,145.8 million due to increased contribution from Samudra.

However, gross profit declined by 3% to Rs. 827.4 million due to higher raw material prices (mainly clinker). The increase in other operating income by 303% and decline in distribution expenses by 11.4% resulted in a 6.4% increase in profit from operations. The increase in other operating income was due to the introduction of "Hinode" cement Jaffna start up of ready mix concrete operations.

Even though the profit from operations increased, the 656% increase in finance cost to Rs. 84.7 million resulted in only a 0.6% increase in profit attributable to shareholders to Rs. 304.9 million.

The growth of Tokyo is linked to the resurgence of the construction industry in the country. With aid from donors for infrastructure projects we expect a growth in the construction industry in the future. Further the rebuilding of houses and small-scale construction projects in the North-East and other parts of the country would undoubtedly help TKYO record better earnings for FY 2004.

Imported cement still a concern

Lower priced cement imported from India under the FTA, continues to impact the company's bottom line. Tokyo cement has addressed this issue by increasing their product range to cater to different industry segments.

Tax benefits to improve earnings in FY2004.

With the expansionary program Tokyo Cement would be exempted from paying tax for a period of 10 years from FY2003 onwards. At present its subsidiary Fuji enjoys a tax holiday of 10 years.

Ratios still attractive

Based on Friday's closing price of Rs. 99.00 the share is trading at attractive PE multiples of 4.9x. With the book value standing at Rs. 133.00 the share is trading at a discount to its book value with a PBV of 0.73x.

CIC results for FY2002/03

Group results for YE March 31st 2003 of Chemical Industries (Colombo) Limited (CIC) showed a 32.6% growth in turnover to Rs. 7.8 billion over FY 2001/02. Growth was primarily in the agricultural and service sectors while the industrial sector was negatively impacted due to weak export markets.

CIC Feeds (Pvt.) Limited, established in July 2002, accounted for 14% of turnover growth during the year. The Gross profit increased 23.4% while operating expenses increased 21.3% resulting in operating profit increasing by Rs.145 million or 27% to Rs. 682 million in FY2002/03. The company benefited from the prevalent low interest rates and lower depreciation of the SLR. Net profit increased 87.2% to Rs.292 million in FY 2002/03.

Ratio's competitive

EPS for CIC for FY2002/03 is Rs. 31.19 and the DPS is Rs. 4.25. The EPS of 2002/03 shows a 87.8% increase over the fully diluted EPS of 16.61 in FY2001/02. The DPS of Rs. 4.25 dividend gives a dividend yield of 2.8%. The stock is trading at PE multiples of 4.9x based on Wednesday's closing price of Rs.151.75. The stock trading at a PBV of 0.9x is trading at a discount to its book value.

Outlook for FY2003/04

Company expects high levels of revenue growth for FY2003/04. The Paint sector is expected to benefit from higher activity in the construction sector in the country, arising from new development and rehabilitation projects. CIC plans to increase their market share in the Feed sector and are poised to gain from the tax holiday they currently enjoy. The Fertilizer sector is unlikely to make the same level of profits due to the restructuring of subsidies on Urea but increases in market share will result in a higher volume of sales. CIC continues to focus on the agriculture segment with emphasis on research and development.

Aitken Spence earnings up

According to FY2003 results of Aitken Spence Co. Ltd. revenue increased by 55% to Rs. 7.0 billion. This is due to improved top line performance from its infrastructure (power generation) sector. Revenue from the infrastructure sector increased from Rs. 20.1 million to Rs. 1,655.8 million as a result of the Matara Plant being operational the entire year.

The tourist sector recorded a 24% improvement due to the resurgence in tourism in both Sri Lanka and the Maldives. Profit from operations increased by 68.5% to Rs. 1.08 billion. The increase in finance cost, decline in contribution from associates and increase in minority interest payments resulted in a 51.8% increase in profit attributable to shareholders to Rs. 525.0 million. Ahungalle recorded a 25% increase in gross revenue to Rs.2.4 billion. The decline in operating expenses resulted in a 29% increase in profit from operations to Rs.490.1 million. The decline in finance cost and lower losses incurred by associate hotels resulted in a 53% increase in profit attributable to shareholders to Rs.232.7 million.

Revised forecast for FY2004

The outlook for Aitken Spence in FY2004 looks positive. Based on the optimistic outlook for the economy we have made an upward revision of our forecast for SPEN for FY2004. Including the full year contribution from its recently (December 2002) commissioned Horana plant we forecast an 82% increase in earnings from the power sector Rs. 289 million (initial forecast Rs. 274 million).

In the tourism sector we revised our forecast upwards by 14% to Rs. 568.0 million (our initial forecast was Rs. 498.0 million) due to higher expected tourist arrivals. Owing to higher levels of activity in the Colombo Port, we increase the contribution from the cargo logistics sector to Rs. 239.0 million.

With the divestment of its associate UAL (Union Assurance Ltd.) we revised our earnings forecast for the associates downward to Rs. 52.0 million. (Initial forecast was Rs. 77.0). However, including the capital gain made from the sale of UAL we revise upward our forecasted earnings for SPEN to Rs. 851.0 million. (Earnings excluding capital gains are Rs. 701.0 million).

Still under priced

Trading at PE multiples of 9.8x and 1.09x of its historical book value the share is still trading cheaper in comparison to other conglomerates. JKH is trading at PE multiples of 16.0x and a PBV of 2x. HAYL is trading at PE multiples of 14.0x and a PBV of 1.5.

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