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Strong corporate earnings expected to maintain mixed momentum

The All Share Price Index (ASPI) broke through the psychologically important 1400 mark and consolidated on Thursday before ending the week on 1423.5 points, a 33.5 point or 2.41% growth from last week. During the first three days the ASPI was moving in a narrow range but was up by 30 points on Thursday aided by many large volume transactions. The MPI (Milanka Price Index) too was up by 92.1 points or 3.72 % during the week and ended the week on 2568.9 Points.

Despite Friday being a holiday Bourse continued its strong activity level as the weekly turnover was at a high of Rs.3.62 billion at a daily average of Rs.906.2million. Foreign purchases for the week amounted to Rs.642.5 million while the sales totalled to Rs.281.1 million resulting in a net inflow of Rs.361.4 million. Foreign participation during the week was at a low 12.74% of total activity, which was around 7% less than last week.

After a two-week dip the hotel sector index picked up slightly during this week and was up by 30.9 points or 3.31%, before ending the week on 964.6 points.

Among the major trades of the week were the sale of the 22.8 million stake in Asia Capital by Richard Pieris & Company Ltd and the divestment of the shareholdings in Udapussellawa Plantations Limited (UPL, 11.019 million shares at Rs. 10.25) and Hapugastenne Plantations Limited (HPL, 26.717 million shares at Rs. 14.75) by James Finlay Plantation Holdings Limited (JFPHL) to its parent company James Finlay Limited, Glasgow which resulted in daily turnover of Monday and Thursday exceeding the one billion mark.

Asia Capital, SLT, Seylan Bank (Non Voting), NDB, Udapussellawa, were among the heavily traded stocks during the week.

Point of view

LTTE respond positively towards resumption of talks

Last week LTTE broke silence maintained on the resumption of stalled peace talks, as the leadership stressed their willingness to get back to the negotiation table. They are expected to submit the draft proposals for an interim administrative body by the end of the month, and the talks are expected to resume soon after, to discuss co-issues. We believe that a firm announcement on the resumption of the talks could boost the investor confidence further, thus improving the potential for a further re-rating of the market.

Strong corporate earnings expected

As expected the market went through a correction during the early part of the week but soon recovered, as bargain hunters started to re-enter the market. In our view the market should continue the mixed momentum during the coming weeks, backed by strong corporate earnings, which are expected to be released over the next few weeks.

HNB Assurance to go public

HNB Assurance (HNBAL) is a fully owned subsidiary of Hatton National Bank Limited (HNB). Within 2 years from inception, HNBAL has grown, capturing a market share of approximately 1.9%. HNB is offering 10 million shares or 40% of the issued capital to the public at Rs. 12.50 per share, through an Initial Public Offer (IPO). The offer, which is of a size of Rs.125 million, opens on 4th November 2003.

The Company commenced operations on 22nd November 2001 to transact General Insurance business and commenced Life Insurance business from 1st January 2002.

Apart form the head office situated in Colombo, HNBAL has established 10 regional offices during its short history of approximately two years. During its first year of operations the company gained a market share of approximately 1.05% of the General and 0.41% of the Life Insurance market as evidenced by industry statistics published by the Insurance Board of Sri Lanka. (Year 2002) Going forward the company proposes to open five new regional offices (including Trincomalee) by the end of 2003, which would help them to further improve its market share.

Besides expanding the branch network, HNBAL also strongly relies on HNB's powerful branch network to expand and increase its market share. This allows HNBAL to reach a customer base, which represents almost all parts of the country. This in fact provides an opportunity for the Company to reach a rural customer base.

At present HNBAL already derives the bulk of its income from the existing client base of HNB, leveraging on the strong brand identity, vast customer base and extensive distribution network of its parent company.

For the seven-month period ended 31 July 2003, business sourced through the HNB network accounted for 69% of the Gross Written Premium in the General Insurance segment and 74% in Life Insurance segment.

Still in early days

HNBAL is still a minor player in the market with a market share of 1.05% and 0.41% in general and life insurance. According to statistics HNBAL has improved its market share of general insurance market to approximately 1.9%.

It is evident that size of HNBAL's life fund is just 0.09% of the industry, and we believe that the company should look for further growth by cross selling insurance products, through HNB. Meanwhile the potential for considerable growth in general insurance in rural markets still remains limited, but a continued growth in the economy would boost the opportunities for growth.

Bancassurance is the future direction

The current provisions of the Regulation of Insurance Industry Act No. 43 of 2000 constrained the growth of bancassurance activities through the restriction on the payment of commissions to institutions on the sale of insurance products. However the proposed changes to the Insurance Act suggest banks to be recognized as an insurance agent, so that they could earn a commission based on sale of such products. However the time frame for such amendments to the legislation still remains uncertain, thus we do not expect an immediate take off in the bancassurance industry.

Fastest growing business segment

Once the legislative hurdle can be overcome, the prospects for HNBAL look good. Bancassurance is one of the fastest growing business segments in the world. The concept of bancassurance refers to, insurance companies selling their products through a bank, where the bank acts as an agent. Globally, a number of life insurance companies have entered into tie-ups with banks to sell their risk products and banks earn a fee-based income out of it.

Growth in general premia to be driven by motor insurance

HNBAL earned a Gross Written Premium of Rs. 122.2 million in the General Insurance business during its maiden year of operation. Premium income from Life Insurance business amounted to Rs. 35.3 million. The Company recorded a net profit of Rs. 4.8 million during the FY2002, resulting in an EPS of Rs.0.19. We expect the earnings to grow by 3.5 times to Rs.21.7 million during FY2003, improving the EPS to Rs.0.87. The projected EPS for FY2004 is at Rs.1.49, thus making the forward earnings multiples more attractive at 8.4x.

James Finlay divests holdings in plantations to its parent company

On Thursday James Finlay Plantation Holdings Limited (JFPHL) a fully owned subsidiary of James Finlay & Co. (Colombo) Limited divested shareholdings in Udapussellawa Plantations Limited (UPL) and Hapugastenne Plantations Limited (HPL) to its parent company James Finlay Limited, Glasgow.

The total consideration received from the sale of the two shareholdings was approximately Rs.501 million. Earlier James Finlay & Co. (Colombo) Limited invested over Rs.1 billion to acquire the stakes in the two plantation companies and since then invested almost Rs.1.5 billion towards the replanting of Hapugastenne Plantations.

HAPU just turning profitable

Meanwhile Hapugastenne Plantations (HAPU) has just turned profitable recording a net profit of Rs. 19.7m during the 2nd quarter of FY2003, after a dark patch in the plantation sector. Meanwhile Udapussellawa ended with a net loss of Rs. 9.72 m during the same period. Thursday's transactions saw 26.7 million shares of Hapugastenne and 11.02 million shares of Udapussellawa being transferred to the parent company at Rs. 14.75 and Rs. 10.25.

Plans to diversify further into non-tea business

The group's business segments includes, plantation, tea exports and warehousing, as well as non-tea, which includes insurance marketing, environmental services, airline general sales agency, marketing of industrial and Agro chemicals. Over the past strategically Finlays position themselves as a conglomerate mainly into tea, and other businesses providing a resilient cushion to withstand the downturns of the cyclical tea business.

However we highlighted in our Daily Views - 7th March 2003 that the company is looking for breakthroughs in non-plantation business to strengthen its bottom line. The Company resolved that Rs. 500 million generated as proceeds from Thursday's disposals, would be invested in a cold storage, warehousing and distribution centre to service customers in the domestic food distribution chain as well as exporters of sea food, fruits and vegetables.

Negative growth in revenues from tea exports

Most of Finlays tea exports are to Iraq, which has been in a war gloom over the past few months. This resulted in a 3.6% negative growth in tea exports to Rs.1.731 billion in FY2002. However all other sectors contributed positively towards the turnover, as the group turnover grew by 3%. Over all the tea exports to Middle East declined by 500,000 kg during 2002.

Divestment at a loss raises concern by minority shareholders While maintaining our view that Finlays should strategically position itself to attract more revenue from non-tea businesses, we feel that a complete divestment of plantations at such a loss raises concern by minority shareholders, specially at a time when the plantations are turning to become profitable. However we believe that the company should continue to grow its presence in non tea business in order to boost the bottom line in the medium to long term.

Durdans oversubscribed 2.3 times

The IPO of Ceylon Hospitals Ltd. (Durdans) was oversubscribed by 2.3 times on the opening day. The total number of applications received was 3,445 (worth Rs. 406.4 m ) and 3,174 (worth Rs. 136.8m) for voting and non-voting shares totalling up to Rs. 543.17m. The Hospital is yet to announce final basis of allotment but nevertheless mentioned the fact that applicants who have subscribed for a combination of voting and non-voting shares would get priority allotment. Confirmation on this can be expected on or before 29th October. 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 based on FY2004 and FY2005 earnings forecasts. We maintain our price targets on FY2004 earnings at Rs. 27.50 (voting). This will further improve to Rs. 33.00.

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