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The All Share Price Index (ASPI) reached an all time high on Wednesday before ending the week on 1390 points, 32.2 point or 2.37% up from last Friday's close.

The previous all time high of 1378.8 was recorded 9 years ago March 1, 1994. This increase in ASPI is largely due to increased enthusiasm on Sri Lanka Telecom (SLT) and the debut of Hemas Holdings. However the MPI (Milanka Price Index) slipped 47.4 Points or 1.88 % during the week and ended 2476.8 Points. While investors concentrated on Small caps and selected counters such as SLT and Hemas Holdings, the activity in most blue chips showed decline. SLT and Hemas are yet to be included in the MPI.

The Bourse maintained its strong activity level as the weekly turnover was at a high of Rs.3.12 billion at a daily average of Rs.623.5million. Foreign purchases for the week amounted to Rs.505.5 million while the sales totaled to Rs.696.6 million resulting in a net outflow of Rs.191.1 million. Foreign participation during the week was 19.28% of total activity, which was marginally higher compared to the last 3 weeks.

The attractiveness of the hotel sector declined for the second week. The hotel sector index dipping further 8.4 points to end on 933.66 points.

Among major trades of the week were acquisition of 25.81% stake in Lanka Aluminum Ltd by Rhino Roofing Products Ltd and a 5% parcel (2.2 million) of Sampath Bank at Rs.125.00, both seller and buyer being foreign. Meanwhile Al-Nakib family increased their holding in LMF to 12%.

SLT, Hemas, LMF, Colombo Land, Distilleries were among the heavily traded stocks during the week.

Point of View Rate cut boost the market

While the bourse was about to take a breather during the early part of the week, debut of Hemas and announcement of the interest rate cut held the ASPI. However the Milanka the week week lower, but buying pressure remains strong.

The Central Bank (CB) lowered its Repurchase rate (Repo) by 50 basis points to 7% and its Reverse Repo by 100 basis points to 8.50% from Thursday, narrowing the corridor between the bank's Reverse Repo rate and its Repurchase (Repo).

Among the reasons pointed out by the CB for such a rate cut were, the continued decline in inflation and inflationary expectations, the improvement in the external sector, containment of public sector borrowing and growth in money supply and credit.

Regardless of continuous reduction in Repo rates, the Bank lending rates are still ranging around 13% - 16%, but the Corporates with strong bargaining power now borrow at single digits.

Meanwhile the rate cut has come under criticism from pensioners, the cost of living issue still remains a concern. We maintain our view that the government should look into this issue more seriously, as it indirectly affects the political stability of the country.

A pay hike likely with next Budget.

The next budget is expected to introduce a substantial pay hike to public servants, which would partly reduce the cost of living issue. Meantime this will increase government expenditure, further widening the budget deficit. However we feel that the market would react mixed for such a move as it eases pressure of cost of living on one end, thus indirectly improving political stability.

Continuous upward movement in indices, indicate possibility of market taking a breather but more new investors are now looking at the market, specially due to further declining deposit rates. Therefore we feel that buying pressure would continue, as bargain hunting could dominate the market.

Healthy gains for investors as Hemas makes its debut

Hemas Holdings (HHL) entered the Colombo bourse, almost 100% above its issue price of Rs.50.00 and reached a high of Rs.100.00 before closing the week at Rs.85.50.

While most investors booked a 100% capital gain, others still collected the stock between a price range of Rs.92.00 - Rs.100.00, during first days trading. On Wednesday 3.32 million HHL shares were traded between Rs.90 - Rs.100 contributing Rs.320 million to the days turnover. Hemas represented 49% of Wednesday's turnover.

The initial trading price was mostly driven on sentiment, but the stock price settled down towards the latter part of the week. Our initial target price based on FY2004 earnings stood at Rs.67.50 while a further 25% growth in earnings would result in a 69% improvement in the stock price, thus target price based on FY2005 earnings stands at Rs.84.50. Trading at high multiples compared to its peers Based on the closing price of Rs.85.50, the counter is trading at 12.6x forward multiples of FY2004. This is well above 9.3x multiples of Aitken Spence based on its FY2004 projected earnings. However the stock is trading below JKH forward PER of 22.9x based on FY2004 earnings.

However due to Hemas's poor free float and lack of liquidity we feel that the stock cannot be rated in par with JKH. While maintaining our optimism on Hemas, we also highlight our valuations based on the fundamentals, thus investors taking a Long Term view should accumulate the stock if the counter reaches attractive levels.

Durdans issue oversubscribed

Durdans Hospitals offered 4.5 million voting shares and 6.375 million non-voting shares at Rs.25.00 and Rs.20.00 respectively.

A total of Rs.240 million was raised from the issue, for the purpose of Expansion of infrastructure facilities, Settlement of finances obtained for capital expenditure, Retirement of debt and Purchase of new medical equipment. The issue was oversubscribed on day of opening.

Durdans Hospitals is a leading healthcare provider in the country with over 48 years of experience in the industry. The Hospital mainly caters to the middle and upper middle class population.

Presently the hospital could accommodate 125 patients and operates at an occupancy rate of approximately 95% - 100%. Apart from 28 consultancy rooms, the Hospital also provides Critical Care Services such as Heart Command Centre, Intensive Care Unit, Heart Station, Blood Bank etc.

Long, term expansion on the cards

Durdans is currently drawing plans for a further expansion (the second expansion programme), which would increase the room capacity by 80-100 rooms and improve parking facilities.

Opportunities exist but competition Building Up

Despite strong demand and potential for further growth, most hospitals have shown moderate profits, with the exception of Asiri. The healthcare stocks have under performed the market considerably during the recent past, mainly due to the moderate growth in earnings.

Expansion will not boost revenue immediately

Over the last two years, Durdans has been maintaining an occupancy rate of over 95% out of the available rooms. This indicates that the Hospital is approaching its full capacity and the growth in volumes has been curtailed as the hospital on most occasions has failed to meet the demand.

The new rooms are not expected to be finalized and used in operations for the next 8-10 months, and therefore we feel that the expansion programme would not make a major change to Durdans capacity constraints immediately. However most of the existing operations are now fully functional after refurbishment and therefore we expect the top line to grow by 14% during FY2004 and 20% by FY2005. Finance burden to reduce; But Tax Holiday expires.

After repayment of loans we expect the finance expense to decline by Rs.12 million per annum, largely due to repayment of loans amounting to Rs.83 million. However if the second expansion programme (as referred to above) is expected to be funded mainly through bank borrowings and overall gearing position would once more reach high levels.

As a result the debt to equity ratio could reach 80% -90% and interest cover would become a 2.1x Durdans enjoyed a 5-year tax holiday since 25th June, 1998 and this expired during FY2003. Since the expiry the company's profits would be taxable at 30%, but the brought forward tax losses from previous years, would offset any cash tax payable during FY2004. However we project a tax expense of Rs.9 million for the FY2004, including the deferred taxation. This in fact would become an additional expense starting FY2004.

Earnings to marginaley imrove

We project the earnings to reach Rs. 68 7 million during FY2004, a growth of 10% from the previous year. This is after writing off the IPO expense of Rs.11 million. This will result in an EPS of Rs2.66, a marginal improvement from last years EPS of Rs.2.36. Dividend per Share not expected to be maintained, Durdans have paid a total dividend of Rs.1.27 million (DPS of Rs.1.50) during FY2002 and Rs.5.3 million (DPS Rs.4.18) during FY2003.

However these dividends were paid when the share capital was at a low of 1.27 million shares. Despite paying a 42% distribution on the par value the overall dividend payout ratio has been a poor 8.5% during FY2003.

Therefore we do not expect a 15% distribution on the par value to be maintained in FY2004, as that would constitute a payout ratio of 58%. In our opinion it is realistic to expect a dividend of Rs.0.80 per share with a payout ratio of 26%, considering the company's fund requirements in the near future. Fairly valued in the IPO itself; Room for growth a concern

It is evident that the ordinary share capital has increased by almost 20 times during the last 3 months. In fact the EPS of Rs.58.87 for FY2003 would dilute to Rs.2.36 after the IPO. Based on the issue price and the fully diluted EPS for FY2003, PER for the voting share stands at 10.6x, and we expect this to reduce to 9.4x and 7.9x respectively based on FY2004 and FY2005 earnings forecasts.

Placing the share at a prospective PER of 10.3x, the target price based on FY2004 earnings stands at Rs.27.50 (voting). This will further improve to Rs.33.00 based on the earnings growth in FY2005.

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