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Market up, but struggles to surpass all time high

Stock prices moved in a narrow range during the latter part of the week, and closed mixed as the ASPI struggled to edge out the all time high of 1378 points. All Share Index jumped 23 points on Monday but was hovering around 1353-1358 points during the next 3 trading days, before closing the week at 1357.8 Points, 26 points or 1.95% up since last Fridays close. The MPI (Milanka Price Index) moved up 64.8 points or 2.63.% during the week and broke through the 2500 levels and ended the week at 2524.2 Points.

Although Thursday being a holiday weekly turnover was at a high of Rs. 2.5 billion at a daily average of Rs. 624.2 million. Foreign purchases for the week amounted to Rs. 323.9 million while sales totalled to Rs. 396.1 million resulting in net outflow of Rs. 72.2 million. Foreign participation during the week was 14.42% of total activity, which was slightly higher than last weeks 12.5%.

Retail investors continued to drive the rally as many undervalued mid caps were in attraction.

Holding company of Colombo's tallest towers, Overseas Reality (OSEA) was among the top picks as the stock price raised Rs. 8.00 to Rs. 13.50 during the week. SLT, LMF, Overseas Reality, Blue Diamonds Vanik Incorporation were among the heavily traded stocks during the week.

Hotel rally halts

Profit taking in hotel stocks was seen during the week but fundamentally sound counters held their prices, despite the correction. Last week we highlighted strong hotel stocks based on fundamentals. Those stocks in fact have performed strong in the middle of profit taking.

However other hotel counters which reached all time highs largely due to retail participation and bullish sentiment in the market, suffered in the hands of profit taking.

Point of View

Growing issues of Tamils and Muslims discussed The subcommittee on Tamil-Muslim issues met last week to discuss issues confronting the Muslims in different areas of the East. Discussions were more focused to address the micro issues such as problems faced by Muslim traders, disappearances of vehicles and Muslim residents, and land issues. In our last strategy update we highlighted the need to address the sharing of power in the Eastern Province through an Interim Administrative (IA) body, in order to avoid further confrontations between the two factions.

We view last weeks discussions as an initial step towards solving such issues, but would maintain that the IA body should duly address core issues relating to distribution of power and governance of the Eastern Province.

IA proposals yet to be submitted

Regardless of completion of the Dublin talks the LTTE has not disclosed its proposals for an IA body. However it is learnt that the LTTE has agreed on principle to keep its proposals within the present constitutional framework. This we believe is a positive sign towards the progress of the peace negotiations.

Market repercussions are expected. As expected by us, market went through an upward during the week but strong buying pressure halted a slip in indices. The market has presently surpassed a level that's supported by the fundamentals, but the investors should now look to 2004 price targets when selecting their investments. However positive investor sentiment has maintained strong activity in the market. We feel that investors should look for more fundamentally strong undervalued small caps, as trading stocks and should accumulate big caps based on 2004 earnings growth.

Tokyo Cement to issue non-voting shares

Tokyo Cement Company Ltd is to issue non-voting shares to raise funds to settle some of its long-term debt. An ordinary resolution is to be proposed for the issue at a premium and to list them on the Colombo Stock Exchange. The main aim of the issue is to settle part of its long-term loans, which are used mainly in Samudra Cement, which stood at Rs. 1.45 billion as at 30th June, 2003.

The repayment would lead to a decrease in the finance cost, which was at a high of Rs. 40 million.

In addition the company hopes to expand its business by investing in several new projects, which includes power generation, spun pipes, concrete poles, and other pre-cast concrete products. The company hopes to generate its entire power requirement internally, which would require a further 25-30% addition to the current capacity.

Strong Earnings Growth during FY2003/04

Notwithstanding the high finance cost Tokyo Cement has increased its profit attributable to ordinary shareholders by a hefty 38% to Rs. 81 million during the first quarter FY2003/4 financial year. The improvement in the bottom line has been largely due to the growth in consolidated turnover by 14% to Rs. 1.16 billion from Rs. 1.02 billion. Meanwhile Raj Rajaratnam's two funds have gradually picked up the Tokyo Cement stock during the past few weeks. Its Voyager Capital has picked up its first Tokyo Cement shares in the quarter ended 30th September while Explorer capital has doubled its holdings to nearly 1% stake. Institutional giants such as ETF, Central Finance were among other investors.

Counter still undervalued

Currently Tokyo Cement shares are trading at Rs. 155, which is a record high price, compared with price of Rs.106 at the beginning of the year. Net assets per share stands at Rs. 128.20 as at 30th June, 2003, resulting in Price to Book ratio of 1.21, while the Price Earning Ratio is still at a low of 7.75 x (based on annualized earnings of 1Q FY2003/04).

This compared to the market PER of 14.3x and construction sector PER of 12.9x, looks undervalued. Further upswing of the economy and the construction industry indicates that Tokyo Cement has more potential for growth.

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